Ownership Transitions

The 5 Keys To A Successful Succession Plan

Published: 2011 01 24 | Views: 3223


In over 30 years advising families in business, I have seen the good, the bad and the ugly in terms of what the business can do to the family and what the family can do to the business.  

In terms of what the business can do to a family, the upside is that it can make a strong family even stronger by working together to do good things for the betterment of the family, the people working in the business and the greater community.  Unfortunately, however, for every situation like that, there are multiple cases of families being destroyed by the business due to factors like greed, ego or unresolved emotional issues.

As far as what the family can do to a business, the upside is enormously powerful – businesses run by people with a common purpose, common values and a common bond who understand the risk/reward equation and whose capital is patient.  The downside, however, is equally powerful – i.e. businesses getting dragged down by family issues that can become so overwhelming that even the most successful business cannot withstand.

So what does this all mean to a family business owner who dreams of one day passing the business on to one or more of the children and wondering how to do it successfully?  My answer is to do as much of the following as you possibly can:

1.    Show the family the positives in your work, not just the negatives.   

2.    Guide, mentor and empower the children towards their dreams.     

3.    Let business be business and family be family.

4.    Re-visit your personal financial and lifestyle plan before your succession plan. 

5.    Rely on good trusted advice.         


Key #1 – Show the family the positives in your work, not just the negatives

If you find little joy or meaning in the work that you do, your dream of family succession may be in peril before you even get out of the starting blocks. 

However, if you derive satisfaction out of things like providing employment for others or being engaged in community life through the business, then you should ask yourself the next question – does my family know this about me or do they only see the hardships that I endure and the sacrifices that I make in business?        

If you want to attract others to what you are doing, then make it attractive to them.  It might also be an important reminder to you about what you are doing and why you are doing it.  The positive effects from that could be huge and long-lasting for you, your family and your business.   


Key #2 – Guide, mentor and empower the children towards their dreams

Parenting 101 tells you to “let the chickies fly from the nest” at some point, and that the longer you let that point pass the more difficulty your children will have becoming mature and properly functioning adults.  (There are exceptions to this rule for developmentally disabled children and other situations which are beyond the scope of this paper.)

This can often be one of the most difficult things for us to do as parents as there will always be an element of risk in terms of when and how to apply the principle.  Our instinct is to protect our children and so we often err on the side of caution.  There is nothing wrong with that, provided that we don’t let the pendulum swing too far to the side of caution and have it remain there without considering the damage that may do.

Bringing children into the business in order to provide them with a livelihood is an important example of this principle at work.  On the one hand, a parent might think “if I have it why shouldn’t I share it with my children and spare them the risk and the hardship that I had to endure to get where I got?”  This would be a normal and lovingly-based thought process.  However, danger may be lurking below the surface.

With the very best of intentions, you could be sending a message to your children that they are not competent to make it on their own.  Stop for a moment and think of how destructive that could be to their development.  Think also about what it takes to be successful in business.  How well would you have done in business if risk was taken away from you?  How well would you have done in life?

Warren Buffett decided a long time ago to leave a tiny percentage of his estate to his children for a very basic reason as I understand it.  His attitude was that he earned his money, let the children earn theirs.  From the sound of things, he understands that the most important gift he can give his children is the benefit of his knowledge and experience so that they have the tools in life to succeed.  Obviously, his wisdom extends far beyond the investment world.   

Let your children find their way in this world, allow their dreams to emerge and give them the emotional support they need every step of the way.  If their passion is to get involved in your business, great, now you have something to talk about in terms of the circumstances in which you may allow them in.  If not, that’s great too, mentor them lovingly to help them find their chosen path.  If you remember that your primary obligation to your child is to be a good parent, you can’t go wrong. 


Key #3 - Let business be business and family be family

Keys #1 and 2 are in no way technical or limited to the family business.  They can be applied in many other situations and walks of life.  Key #3, however, is very much focused on the family business and the processes that should be in place to help ensure a successful transition of the business to the next generation or anyone else for that matter.

As business owners plan for the day they are no longer in charge, they need to think about who their successors will be - both as operators and as owners.  When is the time for me to exit from the business?   Who will take over from me?  When should I dispose of my shares and what is the best way of doing that?  If I want my children to one day acquire ownership, should it be by way of gift or sale?  And so on. 

Operational successors can be family members or from outside the family.  My advice on that is to go for the best person you can find for the job at the price you are prepared to pay.  If that person is a non-family member, you can still pass ownership of the business to family members. Whether the next CEO is a family or non-family member, be sure to pay what a position of that nature warrants on the open market.  If you’re not sure, find out for yourself or from a hired compensation consultant.  

 This is but one of many examples of the golden rule of family businesses – that is, to run the business like a business and the family like a family.  Once you allow family considerations to creep into business decisions, you are setting up the business and the family for failure at some point down the road. 

Examples of processes to be considered include establishing a family employment and compensation policy; setting up a functioning board of business-minded people focused on the best interests of the business (as opposed to the best interests of a shareholder); and setting up a family council consisting of adult family members with a stake in the business.  All of these processes are designed to ensure that the business is run like a business while family and ownership matters are dealt with in a separate forum. 


Key #4 – Re-visit your personal financial and lifestyle plan before your succession plan

In this line of work, there are very few absolutes.  In my experience, there is at least one and that is do not undertake a succession planning process before you and your spouse sit down and figure out where you are at and where you want to be from a financial and lifestyle point of view.

There are at least two good reasons for this rule: (1) the next generation needs to know to what extent, if any, the previous generation will be relying on the business for their livelihood following a transition to the next generation; (2) retirement planning discussions between spouses can be a vitally important opportunity to check assumptions and re-set expectations about the next chapter in their lives.    

Good communication is usually the ultimate key to a successful succession plan.  If communication between spouses is not as open as it needs to be for these purposes, it will have a negative impact on succession planning discussions with the next generation.  One or two facilitated discussions between spouses can go a long way towards succession success. 


Key #5 – Rely on good trusted advice

 Statistics and anecdotal evidence indicate that most family business owners who say they plan to exit their business in the next five years have very little in the way of a detailed plan.  Those who say they have a plan often confuse a succession plan with an estate plan.

A succession plan is a series of discussions with successors and key business stakeholders which culminate in a plan to most effectively transition the business.  An estate plan, on the other hand, is a process which culminates in legal documents to record the wishes of the owner regarding the transmission of assets on death.  A succession plan is a business-driven process.  An estate plan is a legal and tax-driven process.    

In their book How to Choose & Use Advisors: Getting the Best Professional Family Business Advice, Craig E. Aronoff, Ph.D. and John L. Ward, Ph.D say that a family business owner should examine relationships with an advisor who:

  • Fails to avoid conflict of interest
  • Fails to respect client confidentiality
  • Promotes dependency in a client
  • Works primarily in isolation
  • Is reluctant to deal with successors
  • Sells solutions rather than listening to problems
  • Ventures beyond his or her knowledge
  • Makes too many decisions for the client
  • Fails to foster good communication
  • Lacks empathy

On the positive side, they listed the following benchmarks of excellence in family business advisors:

  • Maintains up-to-date technical knowledge and shows strong interest in and commitment to the field
  • Communicates openly in clear, simple language, helping educate family members when appropriate
  • Seeks to know the family and business in depth
  • Understands how families work and how the family and the business relate to each other
  • Gives advice and counsel that suit both the family and the business
  • Initiates periodic meetings with the client for update and review
  • Is resourceful on clients’ behalf, spotting opportunities and sharing information and contacts
  • Shows empathy, patience and trustworthiness
  • Is willing to work with successor generations
  • Raises questions about the future
  • Promotes collaboration among advisors
  • Gives honest advice, even when it may jeopardize the client relationship

 From time to time, it is important to pause and ask yourself whether you are getting the advice you need.  For family business owners, there may be much at stake for the business and/or the family particularly when it is time to do succession or estate planning. 


Ron Prehogan is President of Equitas Consultants Inc., a consulting business that provides business and wealth transition planning and implementation services for businesses and families using a unique combination of facilitation and transactions expertise.  Ron can be reached at rprehogan@equitasconsultants.com or (613) 569-7001.  For more information about Equitas, visit www.equitasconsultants.com.

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