BY JAMES H. DAVIS
Doing a simple Google Search on succession in family business results in an astounding 113,000,000 results! There is clearly a lot of advice on the subject. However, despite the supply of articles, books and advisors, the demand for help with leadership succession continues.
Every incumbent family business leader knows the time will come that they, or their family, must decide who will replace them. It is one of the most important and risky decisions the leader will make.
Research shows that 70% of family businesses fail to make the transition from the first to the second generation and 90% fail to make it to the third. With all the advice out there, why is there so much failure in succession from one generation to the next?
Perhaps it is because one “size” or strategy does not fit every situation. Every family business and family have a unique legacy and context. Approaches to succession that work in one situation may not generalize to others easily because the context and players are unique to each situation.
The challenge we face is that we want to keep both the family business and the family itself whole and strong before, during and after the leadership transition. The problem is that a succession strategy that may be perfect for the business may not be good for the family and a strategy that may be perfect for the family may not be good for the business. The difficulty is that balance between the two may not be possible or even required depending upon the business and the family.
At a recent car wash association meeting, I met with three very successful, first generation car wash chain owners. Each had two children. The first had one child who was well trained, motivated and prepared and his second child was not motivated and ill-suited for the business. He knew succession needed to go to the first child but didn’t know what to do about the other child. The second car wash owner had two children. Both were well educated, successful with different divisions in the family business and both were ready, willing and able to be the successor. The third had several children, but none had any abilities or interest in taking over the family business. Three very strong, first generation family businesses and three completely different succession strategies are needed.
In every one of these businesses we could come up with strong succession strategies that would be great for the business. There are models and prescriptions that fit each of the business situations. Likewise, we could develop succession strategies that would ensure strong family relationships for each. If we don’t consider both the family and the business in family business succession, we are doomed to failure!
There are three principles that need to be considered for strategic succession planning that are necessary for a successful balance.
A strategic plan is forward looking and is created well in advance of execution. For succession to be successful it must begin early and follow a deliberate process. Recent research has found that as many as 70% of global family businesses do not have a formal succession plan (Babson, Nov. 5, 2019). I noted in at the beginning of this article that 70% of family firms fail transitioning from the first to second generation. An interesting parallel!
Typical transition strategies include gifting to the family member, ownership recapitalization into stock, developing a trust annuity, making a bequest, installment sale, making a buy-sell agreement or an ESOP. These all take time to effectively develop and successfully execute. They all have impact on both the business and the family. Whatever the succession strategy, it must be done objectively, strategically and as transparently as possible with the family members. This will help both the business and the family physically and psychologically prepare for the change.
It is difficult to walk away from something you have spent your life building! Often the leader’s identity is wrapped up in the business, it defines them, it is who they are. A number of recent studies have examined gerontocracy in family business. Gerontocracy is oligarchical rule in which the business is ruled by elders. I once attended a family business board meeting with a 90-year-old CEO/Chairman who was on oxygen with his nurse in attendance. His very capable 70-year-old son had been working in the family business for 50 years waiting for years to take control of the family business. That is gerontocracy.
I have seen family businesses that say they have gone through succession and, yet, the older generation comes into the office every day and holds regular status conference meetings. Titles may have changed, but succession has not occurred.
When succession occurs, it must really occur! The new leader was selected because they have the ability, integrity and benevolence necessary to be trusted. Well planned succession gives opportunity to build trust and competency in the new business leader. While succession always involves risk taking in a relationship, well planned succession should mitigate the risk and make letting go less stressful. It is difficult for the next generation to successfully lead unless they are given the authority to drive the organization!
There are those who argue that succession strategy must be developed objectively and in the best interests of the business if the business is to survive and thrive. That may be true if it were only the business, but this is a family in business.
Family dynamics can either help or hinder a successful leadership succession in the business. Challenges may emerge from unexpected members of the immediate and extended family. While the entire family does not need to be involved in the decisions about the succession strategy and its execution, keeping them informed about the resolutions and processes is important. The ultimate objective is to keep both the family and the business together and healthy. If those are in shape, there is the possibility that the symbiotic relationship between the two will work to the benefit of both!
Leadership succession in family business is inevitable, it is certain to happen and impossible to avoid. When family business leaders approach it strategically and formulate a transparent plan, considering both the business and the family, the likelihood that both will survive and thrive the transition is much higher. It does not have to involve conflict, pain and suffering! It can be energizing and a time of joy as the older generation moves on to new opportunities and the next generation takes the helm and guides the family enterprise to new heights. It’s all in the plan!
James H. Davis is a Buehler Endowed Professor of Management at the Jon M. Huntsman School of Business, Utah State University.