By Ken McCracken, Founder and Consultant at Withers Consulting Group
When things are going well in a family enterprise it is likely to be because there is, for the moment, a balance of interests among the main stakeholders and one that is good enough for everyone to get on with their respective lives. Since achieving and maintaining this equilibrium is challenging, often business decision makers resist making changes until the need becomes absolutely urgent. From expansion and growth, to coming of age appointments and even the death or retirement of a key stakeholder, change is always necessary when it comes to ensuring the longevity of any enterprise.
Until the demand for change becomes irresistible, the family and other key stakeholders, such as senior non-family management, accept compromises or trade-offs so that business and family life can continue – usually using the ‘we’ll talk about this later’ technique. A common example of this is when junior members of the family are appointed to senior positions without the prior consent of the rest of the business unit. For other stakeholders, raising their concerns could be tricky, to say the least, with the risk of arguments and bringing other issues to the surface. So, instead of taking these risks, the change is accommodated, grumbles are pushed into the background, and life goes on.
It would be easy to criticise a family in this situation and say that they should have had a more thorough, upfront discussion about creating a formal policy on employing family members. That would have been another way of tackling the issue, but the strategy of adapting to change – and it is strategic – can be successful for families, when ‘success’ is measured by the practical standard of everyone being able to get on with life and the enterprise prospers.
The problems arise, however, when change is unanticipated and is imposed without warning, usually as a consequence of death or a business crisis.Making adaptations to cope with change and recover equilibrium quickly, will of course be more challenging after a change has been forced. And, when a family has to deal with the larger scale of change that occurs during succession, it is vital to have a final plan in place that can be executed effectively and with minimal upheaval.
It is understandable, however, that succession planning might feel daunting for families when you consider what is at stake:
- Their identity which, to an extent, is defined by association with the family business
- Their emotional attachment to the family business name, brand and reputation
- A network of family relationships
With so much at risk, you might think that families would embrace planning for the future but as we know that does not always happen… There’s more to succession planning than naming a successor; as with many things in life,success revolves around the final execution. The following questions should be answered before succession plans are implemented to avoid the pitfalls that can occur when business leaders fail to plan:
Is your family as committed as you are?
Family business owners need to first consider if it is realistic to expect family to remain in management control of the company. Before any decisions are made, they need to decide if the chosen family members have the ability – talent, interest, enthusiasm, knowledge, and experience – to carry it forward.
Can they make business decisions together?
If the family is committed to staying in business together, and has the ability to do so, can they make decisions together? This is less a question of personality and more of structure. Do you have a governance system that can enable business, ownership and family decisions to be made effectively? It might be necessary to invest in developing the structures and policies of organised decision making and start making decisions together going forwards.
Are successors experienced enough to fill your shoes?
How can the next generation be helped to gain the experience they will need to take over? Executive education, mentoring, membership groups such as the Family Business Network can provide the next generation with useful experience and a broader perspective on the issues they’ll undoubtedly face.
Could an independent board help?
Entrepreneurs often distrust boards, fearing interference. But a good board can make the difference between success and failure if succession happens unexpectedly. Consider adding one or two independent directors to your company’s structure and present your core strategic issues to them for discussion. This will help to develop a more formal decision making process by including regular meetings with clear agendas.
How will you and your partner be supported?
Stepping back from a business is sometimes made more difficult because the seniors do not have sufficient wealth independent of the business in order to support their lifestyle and needs. Any succession plan must clarify how the financial security of the seniors will be provided for, which means looking at compensation including pensions capital reinvestment plans, free cash flow, distributions
When family members encounter the stresses of succession planning it is quite natural for them to take evasive action rather than face the further stress of trying to deal with the issues. The thing to bear in mind is that succession planning is really long-term strategic planning for your business and your family – not something that will work itself out at the time.