Family Business and the Succession Journey

Family Business and the Succession Journey
Photo by Steven Lelham on Unsplash
Poland family business conference

In major league baseball, the greatest players, on average, hit the ball three out of every ten times. That means even the best players have a 70 per cent chance of failing every time they step up to the plate.

How do professional athletes work with those odds? They prepare. Every day, they train their bodies and minds to react instinctively to every pitch. That way, when the decisive moment comes, they are as ready as possible.

Family businesses face similar odds when it comes to sustaining multigenerational success. Statistically, privately owned companies also have a 7 in 10 chance of failing while attempting to transition to the second generation.

The question is then, are family businesses doing everything they can to prepare for the moment adequately? Research suggests the answer is no. A mere half of family businesses in the US have a written succession plan. In Canada, that number drops to 17 per cent. In China, only 10 per cent have formalised an approach, and in Latin America, the statistic is even lower at 9.9 per cent.

Numerous factors account for their ill-preparedness. Family business owners are often too busy running the company to dedicate themselves to planning for the future, and the averseness to broaching uncomfortable subjects delay the process further. Owners often bury their heads in the proverbial sand and continue with their day-to-day work.

The Succession Journey

 In our work with family businesses, we’ve found that the spectre of overwhelming complexity is a significant obstacle to succession planning. With so many considerations, owners often become discouraged and this leads to complacency and inaction.

Therefore, it is imperative to subdivide the process into its constituent parts. Succession is a journey that necessitates preparedness and must be taken one step at a time.

With the goal of securing the business for the future, the following five steps present a navigable route on the journey of succession:

Stage 1: Continuity Planning

Owners tend to overlook succession planning. Often, this becomes catastrophically apparent in the unexpected death of a founder. As a recent study shows, small businesses can experience a 60 per cent decrease in sales, a 17 per cent drop in employment and a 20 per cent lower chance of survival in the wake of a founder’s demise.

Business continuity planning is the journey’s critical first step, securing the business operations in the event that the unexpected occurs to an integral employee like the owner. Business continuity planning encompasses but is also much more than succession planning.

In my own family business, a well-documented and partially executed succession plan did nothing to help us navigate the owner’s sudden passing. Operational chaos ensued because no one else was immediately able to perform the owner’s key tasks.

It is for this reason that, as family business advisors, we emphasise the importance of a business continuity plan for operational peace of mind.

The first steps to crafting a business continuity plan are: identify a person willing and able to take over in the event of the owner’s demise, take an inventory of your key operations, customers and relationships and take out a key person insurance policy. It’s never too early to protect your business in this way.

When it comes to succession itself, initiating a constructive dialogue is crucial to ensuring alignment and avoiding assumptions on either the part of the owner or potential successor.

Stage 2: Foundation Conversation

The foundation conversation is where the succession journey begins. This is the opportunity for the outgoing owner and potential successors to determine whether their goals and aspirations are aligned.

When both parties sit down to seek alignment, they set the business up for a smooth transition. When they don’t, expectations remain undefined, and values may get lost in translation.

While an employee or family member may have been identified in the continuity planning stage to take over in the event of a business emergency, this steward may differ from the successor expected to take over in a planned transition. The foundation conversation is an opportunity for an honest discussion about all possible scenarios, determining whether both parties are aligned in terms of vision and expertise.

Stage 3: Decision Conversation

After the foundation conversation, the outgoing owner and potential successor may need time to consider their willingness to proceed. The decision conversation happens at the end of that period of reflection and is two-fold.

Firstly, the owner must agree with the choice of successor. In situations where multiple successors are under consideration, the owner also needs to communicate their decision in a thoughtful and empathic way to candidates who will not advance. Maintaining these relationships, which are sensitive, is crucial.

Secondly, the potential successor needs to communicate their willingness to assume the position of ownership.

Care should be taken to ensure that factors like the owner’s enthusiasm or a successor’s sense of obligation do not interfere with the decision. If the solution doesn’t work for all stakeholders, ultimately, the business will suffer.

In the decision conversation, the potential successor’s reticence to take over due to fear or lack of preparation may become apparent. It’s important to understand any hesitation on both sides to ensure that any potential problems are adequately addressed when and where it is possible.

Stage 4: Preparation Planning

On preparedness, Abraham Lincoln once said, “Give me six hours to chop down a tree, and I will spend the first four hours sharpening the axe.”

Preparation is key to the process, and inadequately prepared successors follow communication issues as one of the most common pitfalls of succession.

With a successor selected, this is the opportunity to identify any gaps in skill and determine the best way to fill those gaps through education, experience or a combination of the two. Some successors benefit from working outside of the family business before returning to take ownership.

Depending on where successors are on the journey, preparation can take months or years. Therefore, initiating the succession conversation earlier rather than later ensures that the successor is adequately prepared to assume the role.

At this point in the journey, it’s crucial that the outgoing owner and successor work together to define and document the critical elements of the transition, solidify their joint vision and determine a timetable for each step in the process.

Succession planning takes continuity planning to the next level. While you can think of the latter as an evergreen document to implement in an emergency, the former is a time-indexed plan for taking the company from point A to point B.

Stage 5: Performance Conversation

During the 2008 Olympics, the US men’s 4 x 100-metre relay team walked off the track in shame. In what should have been a textbook hand-off from one runner to the next, the baton fell to the track, and the team lost the race.

This is a literal example of what figuratively happens when the baton gets dropped in family business succession. Years of preparation can still mean nothing in an ill-executed hand-off from one generation to the next.

The performance conversation encompasses many potential execution-related scenarios. It ensures that, during the transition, the successor receives the support needed to perform well in their new position. This support may include intervention when things are not going as planned.

Here are a few of the questions that need to be addressed:

  • How can the outgoing owner step aside without leaving their successor in the lurch? How long should they remain to provide support?
  • How can the company respond to subpar performance? What benchmarks need to be set? Which accountability structures should be established?
  • How can successors innovate without destroying family tradition?

One of the best ways to prevent a metaphorical baton drop is to clearly and carefully set performance expectations for the incoming successor and other employees.

With clear expectations in place, stakeholders will have a set of metrics to which successors can be held accountable. Without those standards, stakeholders will lack the tools they need to ensure a smooth transition.

Conclusion

Succession is an inevitability, and strategies exist to prepare for a successful transition. By identifying the plans that should be put in place or the key conversations that need to be initiated, a business can prepare in advance and be ready to execute when the time comes.

It is our experience that the insurmountable peak of succession has held too many owners captive. It is time we change the imagery and embrace the succession journey one step at a time.

Rochelle Clarke is the Founder and CEO of Succession Strength, a company that helps family businesses assess their succession readiness and prepare for successful business transitions. Her areas of expertise include business strategy, communication, conflict management, business continuity and succession. Rochelle graduated from The Wharton School of Business where she received her MBA in Strategic Management and participated in an exchange program at INSEAD.

Family Business and the Succession Journey
Rochelle Clarke