Part 3 of the "Process-Oriented Approach to Family Business Succession Planning" Blog Series
As I continue advocating a process-oriented approach to succession planning in the context of a family-owned business, my thoughts necessarily remain with the owner, and a careful examination of his or her goals. The views and concerns of the departing owner will have, perhaps, the most profound impact on the process.
In my last post, I focused on clarifying the current owner’s attitudes toward ownership succession. However, determining who will actually operate the business and guide its success into the future is an equally important part of the process. Can efficient and effective management of the enterprise be accomplished with talented family members? Should management, instead, be left to key employees? Or, will it be necessary to look beyond family and current employees to find the talent necessary for the business to thrive? Understanding, defining, and filling the relative roles and responsibilities of the individuals upon whom the future success of the business relies are critically important.
Step 1: Understand the Skill-Set that is Being Replaced
Before we can reach a conclusion regarding the future generation of business management, however, it is first necessary to thoroughly understand the skill-set that is being replaced. To begin, ask the following questions:
- Is the departing owner responsible for the strategic direction of the business?
- Does he or she serve important roles in financial and administrative management, operations, or sales and marketing?
- Are there special relationships with customers, clients, vendors, suppliers, government or regulatory officials, community leaders, or a board of directors or advisors that must be transitioned?
In reality, it may take several individuals to replace the skill-sets that have developed or evolved over the years and that will essentially be lost by the retirement of senior leadership.
Step 2: Access the Strengths and Weaknesses of Potential Replacements
The fact that they are better positioned to choose successors more objectively is one of the greatest luxuries those charged with transitioning business management outside of the closely-held or family-owned business context enjoy. Their focus is based almost entirely on finding individuals who possess the desired skill-sets. In the closely-held or family-business context, however, many of the candidates are considered almost by default because of kinship or a history of employment. For the good of the business, however, it is still necessary to assess the skills and weaknesses of any potential replacement. And beyond skills, particularly in the case of family members, it is important to consider other factors such as:
- How will the successor view his or her relationship to the business?
- Is he or she a steward, or an entrepreneur?
- Does the successor possess appropriate communication skills and a suitable leadership style?
- Will it be necessary to educate or train the intended successor to compensate for perceived deficiencies?
- Will it be necessary to develop and rely upon the skills of other members of the management team to supplement the efforts of a family owner/operator?
- If multiple family members are to be involved in the operation of the business, has the impact of sibling rivalry and nepotism been adequately addressed?
On the other hand, if key employees are essential to the success of the business, an entirely different set of issues may be considered, particularly if they will not be offered an ownership stake. Of course it is still important to develop these key employees so that they will succeed in their respective roles. But in order to alleviate any perceived concern over their status outside of the controlling family, it is important that the necessary business organization, structure, and processes are in place to support the activities of the key employees. It is also necessary to develop appropriate compensation and benefit structures to attract, reward, and retain important contributors to the success of the business. And perhaps most important, the key employees must be vested with adequate authority to compliment their responsibility, and clear lines of authority must be supported by the remaining family members in order to sustain the success of the transition.
Finally, and unequivocally, I cannot stress enough that the needs of the business must come first when considering the issue of management succession. It may be necessary to look beyond family members and employees to find the next generation of management. The decision to do so may be difficult, but in the long-run, may be necessary to protect the interest of all of the stakeholders.
Next up—Cash-flow and Financial Planning. Stay tuned!
Read other posts in our "Process-Oriented Approach to Family Business Succession Planning" Blog Series:
Part 1: Effective Business Succession Planning: A Call to Action
Part 2: 18 Must Answer Questions for Family Owned Business
Part 4: Identifying the Business Owner's Goals - Cash Flow and Financial Planning
Part 5: Identifying the Business Owner's Goals - Taxes
Part 6: Business Succession Planning: Keeping Your Buy-Sell Agreement Relevant
Part 7: Business Succession: Who Are the Stakeholders and How Can You Satisfy Them?
Part 8: Don't Let the Failure to Communicate be Your Business Succession Plan's Downfall