The Next Generation in Your Business:

A Succession "Geiger Counter"

By David M. Paradise, Ph.D.

President, Family Business Resource Center dparadfbrc@aol.com

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. Every business needs a succession plan. It is the equivalent of a will or an estate plan for the business.

 Succession planning in family business is complicated and difficult. Emotions, subjective criteria, and family history often factor heavily in the decision-making process about who gets what role in the family business. 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 decisions.

When family businesses and closely-held partnerships confront the succession process, a significant portion of the interested parties can become embroiled in a range of conflicts because they do not have a well-developed succession plan. When the assets involved are substantial, these succession crises make industry headlines. These disasters make us cringe, but they are, unfortunately, common. And many are predictable and preventable. The way to prevent conflicts is by developing a workable succession plan.

Grooming a Successor---Early

One of the most important facets of succession planning is deciding who the next leader will be, and spending ample timeŠ preferably yearsŠ grooming the person. Unfortunately, many businesses rely too much on the founder's persona. So if the founder dies, there is high risk that the business will, as well. To address this serious challenge, start documenting all procedures, policies, and key assets and resourcesŠ all necessary information so that the business will not skate into an insurmountable crisis if the founder or current CEO /president were “hit by a bus” and the business system went into a state of shock.

 Successful succession planning also includes a thoughtful determination as to what leadership qualities and skills the next leader should possess. Identifying qualified candidates based on specific criteria is indispensable to the process. Discuss the criteria with potential candidates, including their interests in running the business. Devising an evaluation process and setting goals for the candidates can make it easier over time to choose the best one. Allowing candidates to lead projects so their performance as leaders and their ability to engage with employees and customers can be assessed is an important piece of the due diligence leadership puzzle. If no one shows appropriate interest and appropriate leadership qualities and skills, it may be necessary to recruit the successor/leader from outside the business or to sell.

 Communication is Key

The key to effective succession planning is communication. As in real estate where value depends on “location, location, location,” succession planning requires “communication, communication, communication.” Because succession planning in family business and partnerships is often very difficult emotionally, many avoid the problem. Often the parties believe that talking about these problems will lead to conflict that is damaging to the relationships and the business. But avoidance does not resolve the problem. However, since the participants have emotional reactions, the process must be monitored and addressed in a satisfactory manner so that the conflicts are managed and resolved. In some situations, it is advisable to engage an objective third party facilitator who understands the challenges and can help manage the succession process.

 In other words succession does not just happen. It requires careful planningŠeveryone involved needs to become part of the team, planning together so the succession process develops smoothly and effectively.

 Trust, Respect, and Recognition

A central requirement needed for accomplishing the goal of a successful transition is sufficient trust, respect, and recognition of the needs for the participants. The older generation needs to trust that the asset will be preserved. If the older generation is worried that a lifetime of hard work might be dissipated by the next generation, there will not be sufficient trust to proceed to a fruitful conclusion of the plan.

 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 believes 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.

 For example, a mid-size, light manufacturing, third generation entity was stymied because the second generation wanted to protect asset valuations by not investing in new projects and equipment. Their motto was, “a penny saved is a penny earned.” The third generation, however, wanted to enter into new business sectors, taking some risks it judged reasonable. For several years the two generations were out of alignment, resulting in significant business and inter-generational tensions. As a result, buy-sell agreements were not implemented; shareholder valuations were the articulated focus for the conflicting parties.

 When the level of trust by either party is insufficient, negative reactions are bound to surface. Reluctance of the older generation to give up control may be greeted by the second generation with disappointment, suspicion and cynicism. On the other hand, because the aging process itself entails the loss of power, strength, and authority, the older generation may experience the transition of power as a loss of virility. For its part, the younger generation may feel that there is emotional resistance to passing the torch.  e next generation may express its frustration and annoyance with the pace of change, doubting that success in gaining real, meaningful, and complete ownership will be achieved.

 To address these obstacles, the family and business team that wants to move the succession process forward might consider addressing the following list of obstacles to business succession planning. In going through the list of these ten prevalent obstacles, the participants will be helped to think about and discuss issues that they otherwise might choose to minimize and gloss overŠto their own detriment.

 Ten most prevalent obstacles to family business succession planning: *

1. Ineffective expression of feelings and wants

2. Differences are seen as a liability rather than an asset

3. Indirect communication

4. Entitlement

5. Scarcity – “There isn't enough to go around”

   1. Financial bottom line

   2. Emotional bottom line

6. History of conflicts, disappointments, frustrations

7. “Other-Oriented” when it comes to change -- blaming others and expecting them to change

8. Control

9. Lack of forgiveness

10. Lack of appreciation, recognition, and love

 As an exercise, I have recommended and facilitated that the parties start with the first obstacle: ineffective expression of feelings and wants. When some parties express their feelings or wants ineffectively, they are gently assisted in elaborating on their concerns so that the parties understand the meaning and context more fully, and the process is not deprived of sufficient information. Progress may then flow more smoothly. Similarly, if the parties talk privately to the corporate attorney or estate-planning attorney, without some direct communication among themselves, the parties are helped to see that some important differences may be obscured or seen as obstacles rather than as differences that can be positively woven into the process and outcome.

 Each of the above obstacles may be benefited by some review. In so doing, the ability to discuss differences in a respectful, friendly manner reinforces positive relationships. As a consequence, this helps determine the succession process and the outcome. This means that the alternative, where the parties blame the other side, expecting the other side to change, is experienced as only complicating the succession process, since blaming blocks the succession change process and the final resolution/outcome.

 Only when each party takes responsibility for resolving the unavoidable process of succession, can a difficult condition become a resolvable collaboration opportunity. In the end, the goal is not only to understand each side's positions and come to a successful resolution that works well enough for the interested parties over the long haul, but to preserve both the business asset and the family/partnership relationships.

*Tom Hubler, Family Business Review,  vol.  XII,  no.  2, June 1999.

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: Strong Families Make

Strong Businesses. www.paradisefamilybusiness.com

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