In our opinion, one of the most difficult aspects of a business succession plan is making the choice of who will lead the next generation of the business. Despite the difficulty, some have performed this task very successfully. For example, the Busch family of Anheuser Busch passed their family business down through six generations over roughly 150-years before selling out to InBev for $52 billion. Unfortunately, many family businesses are void of an interested family member willing to take over the second or third generation of a business. Even if they do have an interested individual, that person may not be capable or seasoned enough to assume leadership when the current leader is ready to move on or step down.
Procrastination often prevails until someone is willing to make the tough decision of balancing career ambitions against an objective assessment of the qualities and experience needed for the family business to reach its future potential. It is much easier to execute a transition when a targeted family successor or other key employee has the respect of the decision makers and many of the company’s team members. When this is not the case, keeping the business successful becomes much more of a challenge.
A factor that may contribute to the difficulty of identifying a successor is a lack of definition and communication of the fundamental goals of the business. Some owners of a family business may believe a major priority is to provide gainful employment to future generations of the family or to keep jobs in a community where the business has roots. Other owners of a family business may believe it is most important to make decisions that enhance the economic value of the business going forward. Formulating, and then consistently reinforcing, the fundamental goal of the business will make it easier to address tough issues like:
– passing over or needing to outright remove a family member as an employee;
– passing over a long-time, loyal manager that you won’t be offering next generation ownership to; or
– bringing on an outside management talent, risking the cohesiveness of the current management team to take the business to the next level.
Entrepreneur Clay Mathile sold Iams Pet Foods to Proctor & Gamble for $2.3 billion in 1999. He credits professional management that included an advisory board that led him to hire a seasoned consumer products operating executive, Tom McCloud. Tom had the experience to develop and execute a mass consumer product growth strategy, substantially growing the value of Iams. Clay and his board recognized that the growth of the firm required a leader that was not available inside the family nor was that leader to be found within the Iams’ management team.
In extreme cases, families of private businesses become absolutely paralyzed and dysfunctional, impacting the health of the business left to their stewardship by previous generations. The generation at fault can be and usually is debatable. For example, was the failure the result of the generation passing the torch not being prepared enough, or did the receiving generation get too distracted with activities that had little to do with keeping the business healthy and growing in value? We are familiar with a large private business, valued at over a hundred million dollars, whose internal family dispute eventually landed in the hands of the state Supreme Court. The dispute of the family shareholders resulted in a judge taking control of the board, limiting the decisions the family board could make, and ultimately reconstituting power among the board members. As one family member noted, the late father who had handed over control in a 50/50 control situation, was likely rolling over in his grave given the dysfunction that surrounded the governance of the family business.
Avoiding these conflicts must start with clarifying the differences of responsibility when individuals wear three hats: an owner’s hat, a corporate board hat with governance responsibilities, and an employee hat with specific roles. If an employee is also an owner, they may or may not have voting power in matters of corporate governance. If they think they should and don’t, friction can often surface, leading to family squabbles like the extreme case previously described.
Given the age demographics of the baby boomer wave, and the difficulty of dealing with succession issues for this generation, it is not surprising that organizational consultants like Patrick Lencioni’s The Table Group and Clay Mathile’s Aileron were formed to help businesses implement professional management. The guidance provided by these organizations is valued by many members of the private business owner community. Corporate governance approaches like Entrepreneurial Operating System (EOS) are thriving as they bring services forward to address complex family dynamics of dealing with succession and people-related leadership issues. The bottom line is you must get the tough issues out in the open. This will, in many cases, bring on the risk of discomfort, jealousy, resentment, and spirited competition inside many family businesses that must be dealt with. The risk of not dealing with these hard issues is an erosion of the value of a private family business that previous generations have greatly sacrificed to create.
There are various options to help you get these tough issues out in the open. Behavioral tools like Predictive Index can help surface what is natural and what will be a struggle for the exiting and incoming leaders. Coaching resources for executives, EOS facilitators, The Table Group consultants, and independent advisory boards like the ones recommended by Aileron, can help make the leadership development aspect of succession more manageable. In the end, procrastination will, in many cases, be the path taken because of the perceived pain of conflict in dealing with these issues.
Information presented is for educational purposes only and should not be construed as a recommendation.