by David M. Paradise, Ph.D
Ten Most Prevalent Obstacles To Family-Business Succession Planning
Poor Expression of Feelings and Wants
9. "Other-Oriented" when it comes to change - blaming others and
expecting them to change.
Business succession is the transfer of assets, capital, contacts, power, skills, and authority from one generation of ownership to the next. Family business succession has the dual goals of preserving the business and the family. Because of this, every business needs a succession plan. It is the equivalent of a will or an estate plan for the business.
Succession planning in family businesses is complicated and difficult. Often emotions, subjective criteria, and family history factor heavily in the decision making process about who gets what role in the family held firm's succession process. By way of contrast, publicly held companies face fewer emotionally charged issues when it comes to succession planning. By and large, companies with a broad base of owners are mandated to use rational criteria in making business and profit-driven decisions.
Critical to Continuity of the Business
In the best of circumstances, a transfer of authority from one person or group to another is accomplished without any tension. Those involved understand and enthusiastically embrace the new power structure.
In another set of conditions, there are disagreements within the family and among key employees or suppliers and advisors surrounding the succession plans, but the disagreements are manageable. Conflict does not evolve into serious, irreversible, unresolvable hostilities.
The third typical outcome to the family business succession process is
where the decision and the interested parties become embroiled in a whole
range of family conflicts. When the assets involved are substantial, these
succession crises make the industry headlines. These disasters make us
cringe, but they are, unfortunately, common. And many of them are predictable
and preventable. The way to prevent conflicts is by developing a workable
Communications is Key
At times, selling is the best choice. For example, if there is no qualified successor, or if family conflict is too unmanageable. A business owner may say, "My family is more important than the business; if it causes problems between my sons, I'll sell."
Because succession planning in family business is often very difficult emotionally, many families avoid the problem. Often families believe that talking about these problems will lead to conflict that is damaging to the family and the business.
In fact the reverse is true. Since the participants will have emotional reactions, the process must be monitored and addressed in a satisfactory manner so that the conflicts are managed and resolved.
Succession does not just happen. It requires careful planning. Everyone involved needs to become part of the team and plan together so that a succession process develops.
Trust, Respect and Recognition
At the same time, the second generation needs to trust that they will have respect, power and decision-making authority. Included here is the need for some new on-the-job training and experience. This usually means that the second generation will not only do some things differently, but will make some mistakes in judgment and execution. If the next generation is worried that it will always be second-guessed and judged imprudent there will not be sufficient trust to proceed to a successful conclusion of the plan.
When the level of trust by either party is insufficient, negative reactions are bound to emerge. Reluctance of the older generation to give up control may be greeted by the second generation with disappointment and suspicion, and cynicism. On the other hand, because the aging process itself entails the loss of power, strength, and authority, the older generation may feel the transition of power is a loss of virility. For its part, the younger generation may feel that there is an emotional resistance to passing the torch to the next generation. The next generation may express its frustration and annoyance with the pace of change, doubting that success in gaining real, meaningful ownership will be achieved.
For many family firms, the challenge for the second generation is being able to buy out the first generation. The older generation may view the family business as the vehicle for financing its retirement at the same time that the next generation needs to use the money for its current and future needs. Therefore, not only is adequate liquidity necessary, but the two generations have to agree on the expenditures for that money. Once again, the family business faces the challenge of balancing the needs of the business with the needs of the various constituencies in the family.
To accomplish this balancing act with its business and emotional components
in a timely fashion, all the family business members will need good communication
skills. If some parties express their feelings or wants poorly, the process
will be deprived of meaningful information. Similarly, if the parties
talk privately to the corporate attorney or estate-planning attorney,
without some direct communication among themselves, important differences
may be obscured or seen as obstacles rather than as differences that can
be positively woven into the process and outcome.
Put differently, has the family acquired the ability to engage in "friendly confrontation?" Friendly confrontation is putting issues on the table in a friendly way instead of hiding them. This means all parties express feelings, wants, fears and ambivalence clearly and directly.
One issue that often requires friendly confrontation is who should be the successor. To achieve a successful succession, the current ownership needs to address the question: Is there an interested and competent successor?
What if there are several competent successors, how will the successor
be chosen? Who will make the decision? Will there be open discussion about
the skills and other characteristics that are relevant to the choice of
successor? Often birth order, personal temperaments, and perceptions of
who is "special" and so forth, run deeply. The emotions of envy,
jealousy, and other forms of sibling rivalry may be expressed directly
"Dad Always Liked You Best"
When potential successors want their parents¹ approval, and each demands that only one person be chosen for a particular role, everyone will experience stress. The scenario can be further complicated when one sibling has left the business for other pastures only to find at a later date that he/she has a desire to return to the family business. The sibling who has remained faithfully at the family business may feel he/she has greater knowledge of the particular business, especially after putting in "sweat equity," often at a lower compensation rate. The sibling who wants to return may feel he/she has acquired additional skills that will be invaluable for the family business.
Special needs such as verbal, social, mechanical skills (or lack thereof)
may suggest that one or another son or cousin may become the leading candidate
to fill the owner¹s shoes. On the other hand, failings such as addiction
to alcohol, gambling, and/or drug dependency may influence the ultimate
choice of successors.
Daddy's Little Girl?
In 2003, few women choose a career in the family auto body business. However, a recent national family business survey** found,
The Survey goes on to note,
At the moment, we can only speculate whether women could have a similar set of expectations regarding the family auto body business.
Resolving Conflicts Together
For all these and other potential rivalry issues, the ability to discuss differences in a respectful, friendly manner that reinforces relationship will also determine the succession process. This means that the alternative, where the parties blame the other side, expecting the other side to change, only complicates the succession process, since blaming blocks the succession change process.
Only when each party takes responsibility for its own part of the problem and helps solve its own contributions to the impasse, can a difficult condition become a resolvable collaborative opportunity. In the end, the goal is not only to understand the other side¹s position, but also come to a successful resolution that works well enough for the interested parties over the long haul.
In summary, as noted at the beginning of this article, all family businesses need a succession plan. At times, selling is the best choice (for example, if there is no qualified successor, or if family conflict to unmanageable). However, if there is a qualified successor and the differences among those parties are manageable, the communication process will be excellent and the outcome can be very successful and invigorating for family and the business.
David M. Paradise, Ph.D., is founder and president of the Family Business Resource Center, Newton Centre, MA, a firm that specializes in consultation that facilitates family and business development. For more information on the firm go to www.paradisefamilybusiness.com or contact Dr. Paradise at: email@example.com.
**The Raymond Institute Survey solicited responses to over 100 questions from 38,000 family businesses. Companies were at least 10 years old, had annual sales of over $1 million and had at least two officers or directors with the same last name. Exactly 1,143 surveys were returned. Mass Mutual Financial Group supported the Survey. Joseph Astrachan, Ph.D., a principal of The Family Business Consulting Group, Inc. and director of The Cox Family Enterprise Center at Kennesaw State University lead the research team that included experts from Loyola University Chicago Family Business Center and Babson College. The survey builds on previously conducted family business surveys from 1993-1995 and in 1997. It can be found at www.raymondinstitute.org/surveyresults.html.
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