Leadership Transitions

Strategic Succession Planning:  An Underutilized Resource

Published: 2006 04 17 | Views: 1873

Ask a typical businessperson what a succession plan is and he or she will likely tell you that it is having documents in place to provide for the passing of the business and other assets to the next generation in a tax-efficient manner.  Business people who have such documentation in place should be applauded because surveys indicate that most business owners are not there yet – even those who say they plan to exit the business within five years1

However, before the applause gets too loud now ask outgoing owners and their successors if they think that going to a lawyer and an accountant to have a will done is the be-all and the end-all to a succession plan.  According to one recent survey2, the vast majority of retiring owners polled said that dealing with the “soft” succession issues resulted in greater harmony among themselves, their family and employees, prepared their successors for the future, and ensured the continuing prosperity of the family business.  In addition, the majority of successors said that dealing with the soft issues fostered family and employee harmony,  created good relationships among stakeholders (key managers, customers,  suppliers, etc.) and significantly increased their confidence when ‘taking over the reins’. 

It was recently announced that Samuel,  Son & Co., Ltd., a $3 billion Canadian steel manufacturing and distribution business, appointed a 5th generation member of the Samuels family as chairman of the board.  According to newspaper reports3,  the 4th generation leader had suffered an untimely death but, thanks to having a good succession plan in place, the transition to the next generation was most successful.  According to the current chair: “I think it’s important for each generation to understand what expectations are so when those crises come it’s good for everyone to have a mutual understanding of what’s to happen next.  We did a good job with that,  and I’ve counseled other family businesses that it’s something to focus on in the good times, because you never know when the bad times will come.”

The Strategic Succession Plan

It is apparent that the vast majority of businesspeople are not planning for succession in an appropriate way, if at all.  What is required is a strategic succession plan which combines the technical component of preparing a will and a shareholders agreement with the implementation component of ensuring that succession takes place in a manner which not only benefits the business, but also keeps family relationships intact.   

There are typically three distinct components to the implementation component of a strategic succession plan:

1.  Ensuring that the business is ready for succession, otherwise known as “professionalizing” the business.

2.  Ensuring that a successor is properly identified and ready, willing and able to take over the business at the appropriate time. 

3.  Involving key stakeholders such as family members and non-family senior management in the plan. 

Professionalizing the Business

Recently I was involved in a situation where two 50-something partners of a property management business had been in business together for over 20 years without a shareholders agreement.  Each has one child in the business, neither of whom appears capable of taking over the business,  with the possibility of more children entering the business in the future.  After the partners retire, they believe that the business can be effectively run by a professional manager. 

As the business has been run in a classic entrepreneurial seat-of-the-pants fashion, we decided that the first step was to plan to get the business ready for a successor before looking for one.  The partners are in good health and are not nearly ready for retirement so they have time to put systems in place to professionalize the business. 

Besides the operational systems of technology and human resources, we discussed and decided upon the immediate creation of a functioning board of directors consisting of the two partners plus an independent third party who is knowledgeable about the property management business. 

One of the first items of business of the new board was the creation of a family employment policy which grandfathered the existing children in the business but provided that any other children who want to enter the business must first work elsewhere for at least two years and have the skills necessary to work in the business.  The board is also responsible for setting the annual compensation for the existing children in the business.

We also looked at the existing management structure and their roles and responsibilities with a view to achieving more input from senior managers.  As is often the case with owner-operated businesses, non-family employees were under-utilized in terms of getting their feedback and experienced input prior to important decisions being made in the business.  The establishment of regular management meetings resulted in increased manager engagement, and better business decisions.

Another important item that is typically discussed and decided upon at this stage is the role of the entrepreneur following the transition to professional management.  This is critically important particularly where the entrepreneur is not yet ready for winters in Florida on the golf course.  Some of the best-laid plans can go awry if the next generation is not sensitive to the needs of the entrepreneur who often has to fight feelings of uselessness and irrelevance when a sudden retirement effectively gets imposed. Therefore it is very important that these issues are openly discussed as part of the implementation component of a strategic succession process.

Identifying and Training the Successor

I have many first-generation clients who assume that their son or daughter will want to take over the business and/or has the necessary skills to run the business.  The assumption as to willingness and desire needs to be tested usually with the assistance of an independent third party who can obtain more candid and honest feedback from the son or daughter than the parent can.  The skills assumption is one that needs to be carefully and methodically evaluated often through the intervention of a family business consultant.  The point is that an honest test of these assumptions is usually out of the reach of even the most sensitive and openly communicative first-generation leader.

Once a successor is identified, some form of skills training needs to be considered.  Training does not necessarily mean going back to school – in fact, the best training is often undertaken internally and in an informal manner.  Whichever route is decided upon, it is important that proper thought be given to the skills issue at the earliest possible stage. 

The process must also include a discussion between the first-generation owner and the next-generation owner as to their respective visions for the long-term future of the business.  At least as long as the parent continues to be involved in the business, it does no one any good for there to be unspoken assumptions that are not aligned.

Involving Key Stakeholders in the Plan

I recently advised a family business with a 70-something patriarch who had just passed ownership of the business to his 40- and 50-something children who had been involved in the business all their adult lives.  The ownership transition was years in the making and in the past year it had taken up a significant amount of the family’s time.  It was obvious to senior management – most of whom had over 25 years of tenure in the business - that something was going on but nothing had been said to them leading to all kinds of speculation.

Non-family senior management should be brought into the succession planning process as they have a perspective on the business that family owners do not have.  Owners often have the attitude that succession is none of their employees’ business.  However, nothing can be farther from the truth.  The continued involvement and loyalty of the senior managers will likely be the cornerstone of the success of the business for years to come.  There is nothing to be gained – and much to be lost - by shutting them out of the process and presenting them with a fait accompli after the fact.

Adult family members and their spouses, including those who do not work in the business, are key stakeholders and need to be involved in the succession process.  Failure to do so will likely create business or family problems down the road because someone feels resentful about being kept out of the loop.  Often all that is required is to periodically inform family members about the business and to seek their input.  Family councils or family assemblies are common vehicles for this purpose,  although it must be made clear that decision-making power in the business resides with the board of directors and not the family council or assembly. 

Lastly, the board of directors or board of advisors needs to be brought into the succession process.  At the very least, the board needs to provide its input as to the effect that any proposed succession plan will have on the business, because the board is the ultimate guardian of the best interests of the business. 

When Should a Succession Plan be Started?

The short answer to this question is as soon as possible after the current owner(s) decide to pass the business on to the next generation or think that next generation ownership is a distinct possibility.  All other things being equal, the earlier the process begins the more successful the plan will be.

In my example above of the two 50-something partners in business for 20 years with each having one child already in the business, the family employment policy as it relates to condition of employment must by necessity grandfather the two children already in the business.  This can create problems for any other children who may want to enter the business in the future and find that they are barred because they don’t meet the entrance requirements that their siblings did not have to meet (i.e. working elsewhere for at least 2 years).  It would have been preferable to have the family employment policy in place before any children started working in the business.

Perhaps the most celebrated family business case in Canada is the long-standing fight between the Waxman brothers who owned a very successful scrap-metal business in Hamilton, Ontario for many years.  The dispute arose when it was alleged (and later proved) that Chester Waxman was illegally trying to steer the next generation ownership of the business to his own descendants and away from his brother Morris’ descendants.  Had Chester and Morris sat down years earlier and agreed on succession of their business, they would have avoided a 20-year $20M battle, with all the attendant long-term damage to the families and all concerned.  Chester and Morris were described as being “closer than two coats of paint on the wall” for their entire lives leading up to the dispute.

The Role of the Family Business Consultant

Lawyers in the estate planning field are accustomed to dealing with accountants, financial planners and life insurance salespeople.  This is the technical aspect of succession planning which has been around for decades.

In more recent times, the field of family business consulting has emerged.  The American-based Family Firm Institute, which is the world’s largest organization serving professionals in the family business field, defines four disciplines serving family business: law,  finance, behavioural science and management science.  The theory is that family businesses are best served with a team of professional advisors who have skills in each of these disciplines as they relate to family business. 

The size and complexity of the business and related family dynamics will determine the scope of recommended professional requirements beyond the company lawyers and accountants.    At one end of the spectrum, a first-generation business with healthy family relationships might be able to have all its family business consulting needs competently filled by the company lawyers and accountants (assuming that they have enough experience with family businesses to provide soft skills advice required from time to time).  At the other end, a multi-generational business with family issues affecting or potentially affecting the business will almost certainly require a family business consultant, in addition to the lawyer and accountant.

Can/should the Company Lawyer Play the Role of the Family Business Consultant?

As a trusted advisor to the company or its principal shareholder, the lawyer sometimes provides “soft skills” advice to the client surrounding succession planning issues.  The questions are:

(a) is the lawyer allowed to do so? 
(b) if so, is it wise for the lawyer to do so?
(c) is that advice as skilled as it needs to be.

As to whether the lawyer is legally permitted to take on the role of the family business consultant and if so under what conditions, regard must be had to the regulatory requirements governing permitted lawyer conduct in the jurisdiction in question.  In the Canadian province of Ontario, for example, there are rules of the Law Society of Upper Canada regarding multidisciplinary practices and affiliated entities which are designed to provide disclosure and protection of lawyer-client privilege to clients.

Assuming the lawyer is allowed to act as family business consultant, the next question is whether it is wise to do so.  I would argue that it is not wise for at least two reasons: (1) due to a close personal relationship that has likely developed with one or more family members, there is a lack of actual or perceived independence and objectivity; and (2) the lawyer does not have the requisite training and skills required of a family business consultant in today’s specialized world.

In the Waxman case referred to above, several years before the conflict between brothers Chester and Morris surfaced, they sat down with the company lawyer to discuss succession planning.  Chester had three children and Morris had two.  The company lawyer – who worked closely with Chester but not with Morris - recommended an estate freeze which would have resulted in each of the five children owning an equal number of common shares (i.e. Chester’s children owning 60% in total and Morris’ children owning 40% in total) as opposed to ownership being divided equally between Chester’s and Morris’ children.  Morris rejected the proposal and there was never again any talk of a succession plan.  It was only a matter of time before litigation ensued. 

Another example is where an owner-operator has a child in the business who one day might take over.  The child sees the company lawyer as “Dad’s golfing buddy”  and someone who, rightly or wrongly, has Dad’s best interests at heart.  The lawyer may or may not succeed in helping to put a succession plan in place, but even in a best-case scenario there will be less buy-in by the next generation with the plan than if the process had been conducted by a truly independent professional having no perceived bias. 

In addition to the issue of objectivity, there is that of whether the lawyer has the requisite training and skills to do a proper job.  Lawyers are trained to be lawyers, and are paid to provide legal advice.  This training is very different to that acquired by family business consultants. Yes, many lawyers are smart and frequently have the all-important feel, understanding and history of the family and business dynamics.  However, it is one thing to spot the issues – it is quite another to advise on their solutions.  Under these circumstances, the lawyer’s best advice to the client is to bring in a family business consultant who has the expertise and experience to work through these issues.  How would we as lawyers react if an architect, for example,  gave advice on a shareholder agreement, based on ‘common sense’?


70%  of businesses fail to survive beyond the first generation and 90% fail to survive beyond the second generation.  For business owners who do not want to be on the wrong side of those statistics, it behooves them to think of succession planning and implementation in a broad and proactive way at the earliest opportunity.  This might not seem urgent to the business owner who feels there are not enough hours in the day to look after day-to-day matters, but it is nonetheless extremely important. 

Lawyers who act for a family business should help the client not only with the estate planning paperwork but also in ensuring that what is put on paper and what is desired by the client have a good chance of being implemented successfully.  Although usually not stated explicitly, the client, the business and the entire family are all counting on you in that regard.

1 A U.S. Trust Survey of affluent Americans indicated that only 36 percent of affluent business owners (net worth of $3 million+, or gross income of $200,000 or higher)  had a well thought-out, fully developed succession plan.  Also, a Canadian Federation of Independent Business study (June 2005) finds that only 35% of business owners have a formal or informal succession plan.  Among those planning to exit within five years, still less than half of them (48%) have a formal or informal succession plan.
2 Canadian Federation of Independent Business study (June 2005)
3 Financial Post of the National Post, Tuesday, January 17, 2006

Share |