Succession planning is a critical aspect of any business, but it takes on a unique level of importance and complexity in family-owned enterprises. Unlike publicly traded companies where leadership changes may involve professional executives with no emotional ties to the business, the family businesses we work with intertwine personal relationships with professional roles. The process of transitioning leadership requires careful planning, clear communication, and an understanding of both business and family dynamics.
Why Succession Planning Matters
Family-owned businesses are the backbone of many economies worldwide, representing a significant portion of the private sector. However, the survival rate of family businesses across generations is startlingly low. Research shows that only about 30% of family businesses make it to the second generation, and a mere 12% make it to the third. These statistics highlight the need for effective succession planning to ensure the continuity and longevity of the business.
Succession planning isn't just about deciding who will take over the reins; it is about preserving the values, culture, and vision that the family has instilled in the business. It's also about managing the expectations and aspirations of family members who may or may not be involved in the day-to-day operations. Without a clear plan and open dialogue, these businesses risk internal conflict, leadership vacuums, and even potential collapse.
The Emotional Aspect of Succession Planning
Succession planning in a family business is as much about emotions as it is about business strategy. For the outgoing leader, letting go of the business can be a difficult and emotional process. It often represents not just a career, but a lifetime of work and a significant part of their identity. Similarly, the next generation may feel the weight of responsibility, pressure to live up to expectations, or even reluctance to take on the role.
Addressing these emotions openly and honestly is crucial. Providing support and guidance to the outgoing and incoming leaders with an executive coach can make the transition smoother. For the outgoing leader, this might involve exploring what will fill their time when they start stepping out of day to day running of “the family business,” support in creating boundaries in a new advisory role rather than an abrupt departure. For the incoming leader, coaching, mentoring, and the support of both the family and an outside advisor can be invaluable.
Key Steps in Succession Planning
As is the case with any business seeking to identify and develop successors, we’ve guided succession planning in a family-owned business with several key steps.
1. Start Early: Early succession planning enables a smoother transition and provides time to groom potential successors. It also reduces the stress and uncertainty that can arise if the process is left until the last minute or needs to happen with an unexpected change, like health. It also may involve organization design - maybe there are two roles needed to fill the shoes of the founder, like in one business we worked with the founder was both CEO and CFO.
2. Identify Potential Successors: Not all family members are suited to lead a business. It is important not to confuse potential with performance. Consistent delivery of results (i.e., performance) does not imply that an individual can lead. We recommend external and/or 360 assessments of strengths, skills, and aspirations of each potential successor. Sample “markers” of the potential to lead include such things as:
- Key Experiences: A track record of successful developmental roles, assignments and challenges that provide depth and breadth.
- Leadership Characteristics: Tolerance for Ambiguity, Persistence, Integrity, Authenticity, Assertiveness, Ability to Collaborate, Challenge and Motivate
- Agility and Self-Awareness: Willingness and ability to learn from experience
- Capacity for Problem Solving: Critical Thinking Skills, Decisiveness
- Low “Derailment Risks”: Doesn’t micro-manage, is not volatile, does not go along to get along or go distant when times are tough, shares information and insights
In some cases, the best choice might be an external candidate or internal non-family member who can bring fresh perspective and professional leadership skills to the table.
3. Create and Track Leadership Skills Development Plans: Once potential successors are identified, they should be given opportunities to develop their leadership skills. Focus could include building business acumen capabilities such as:
- Strategy Formulation
- Financial Awareness, Business Metrics
- Results Driver
- Complex Decision Making, Business Trade-offs
- Customer Focus - Authenticity and Executive Presence
Building these capabilities can be accomplished via formal education, mentorship, and hands-on experience in various roles within the company. Development progress of the identified successor(s) should be monitored regularly, and interventions and direct feedback should occur as necessary. The goal is to ensure they are well prepared to handle the challenges of leadership when the time comes.
4. Communicate Openly: Transparency is key in the succession planning process. All family members should be informed about the plan and their roles in it. It also ensures that everyone is on the same page regarding the future direction of the business. We’ve facilitated open communication to help to manage expectations and minimize conflicts, while other families held succession planning close to the vest and unintentionally started a high level of family drama.
5. Create a Formal Plan: Draft a clear roadmap for the transition. It should outline the timeline for the transition, the roles and responsibilities of the incoming leader, and any changes to ownership or governance structures. Legal and financial advisors can help ensure that the plan is comprehensive and legally sound.
6. Address Family Dynamics: Family dynamics can complicate succession planning. It's important to address potential sources of conflict, such as sibling rivalry or differing visions for the business. In some cases, involving a business consultant or mediator can help navigate these sensitive issues.
7. Consider Tax and Legal Implications: Particularly in terms of ownership transfer and estate planning. Consulting with legal and financial professionals is crucial to navigate complexities.
8. Review and Update the Plan Regularly: Succession planning is not a one-time event. The plan should be reviewed and updated at least annually to reflect changes in the business, the family, or the broader economic environment. Essentially, succession planning in a family business is a complex but necessary process that requires careful thought, open communication, strategic foresight, and someone leading the process with high emotional intelligence to navigate the family dynamics. By starting early and involving key stakeholders, family businesses can ensure a smooth transition that preserves the legacy of the business and the harmony of the family.
Ultimately, a well-executed succession plan allows the business to thrive for generations to come. Several of the companies we work with have just transitioned ownership to the fourth generation – it can be done!
Want more information on succession planning? Contact us at lauraco@crothershrconsulting.com