James Olan Hutcheson is founder and president of Regeneration Partners. firstname.lastname@example.org
Family members should be encouraged to gradually take on responsibility in running the business as soon as they are able to work – so when the time is ripe for succession, the company will flourish rather than wither on the vine, writes James Hutcheson
Within a few hours of Jim Cantalupo's fatal heart attack last year, McDonald's Corp had installed a new CEO to replace the 60 year-old. The speed with which the fast-food behemoth handled the unexpected succession at the top ensured that the impact on its operations and investor confidence was minimal. It also spoke volumes about the difference between the way most family businesses handle succession and they way they could.
For most family businesses, the necessity for succession planning is out-matched by its evil. The idea of handing over control is anathema to many hard-driving, self-reliant business founders. The task itself is complex, uncertain, and riddled with highly charged emotional issues since, most of the time, the successors are sons or daughters or other family members. Small wonder, then, that an estimated three-quarters of family businesses have no succession plan in place, despite the fact that the average business owner is older than McDonald's Cantalupo was when he died.
High failure rate of succession
That is unfortunate, and is no doubt a contributor to the appalling failure rate of family businesses to successfully move into successive generations. Successful succession planning saves money in the form of legal fees and taxes. It avoids strife that can destroy a company when heirs battle over control in a power vacuum. It can significantly improve company performance by increasing the quality of available senior leaders – both before and after succession takes place. Finally, it can contribute greatly to the current management's prospects for enjoying a financially secure retirement in which the continued success of the company provides them with great pleasure.
As the case of McDonald's illustrates, however, succession can be successfully accomplished. And it's worth noting that about one in four businesses do have succession plans in place, and that significant numbers of family businesses do survive into the second and third generations and beyond. Succession planning has been around a long time, it's widely practiced and nearly any company can expect to do it well by following a fairly straightforward road map.
The first step in successful succession is for the current generation of managers and owners to understand that succession is about the business. It's a business planning tool. In fact, it should be part of any business plan. The goal of succession planning is to perpetuate the business, not its founders or current leaders. Inevitably, succession calls for the present leaders to step aside – or to be carried away if they wait too long. When the current managers and owners can accept this concept, succession planning has taken a long step toward becoming a reality. If the attitude adjustment does not occur, successful succession turns into a long shot.
The second stop on the roadmap to succession is to start early. Business leaders should begin as soon as possible to discuss and make arrangements for the next generation of leadership to take the reins. "As soon as possible" means just that: today, right now. It's important that succession planning begins early because it often takes a long time to identify, groom, and otherwise prepare a new leader to take over.
As the third part of the roadmap, succession planners should think carefully about how to impart wisdom to the next generation. Time will help, but it will not do the job alone. One key part of seeing that it does is to introduce heirs to the company, as part-time employees perhaps, as early as they begin working. They should get the chance to work substantively in as many aspects of operations, administration, and management of the enterprise as possible.
Importance of thorough preparation
It is imperative that offspring not be thrust into the maelstrom of leadership without adequate preparation. Too often, company founders install a son or daughter in a do-nothing job where few or no demands are made on them. The problem with this is that without exercising their decision-making ability, honing technical skills and learning responsibility over a long period, there is no chance that a successor with have what it takes to lead the company successfully.
By contrast, good things can be expected of a successor who has spent many years working in all areas of the company, making decisions, learning from mistakes, gaining confidence from successes, acquiring useful skills and, importantly, building support among other people in the company. This will not happen overnight, so succession planners have to start early.
The fourth turn in the succession planning roadmap calls for family business leaders to seek outside advice. It is easy for family enterprise leaders to think that no one understands their business or their families. However, family business is a popular topic of study and research at universities and colleges all over the world. There is a vast pool of expertise and information available from professors, researchers, family business centre staff, consultants, and others. Succession planning requires competent experts.
The most broadly useful application of outside expertise is to make sure that every family business board has some outsiders sitting on it. This is important for reasons other than succession planning, but in succession planning it is essential. Outsiders can provide more objective assessments on such matters as the talent or preparedness of a successor to take the reins, as well as the necessity for a faltering leader to step aside. And only non-family members should be employed as mentors to young leaders-in-training.
Fifth, succession planning should include a major component devoted to ensuring the financial security of the leaders in retirement. Countless family businesses continue being led by people who are past their prime, while the next generation of leaders withers on the vine, because not enough thought was given to how to fund retirement. A typical situation is when a leader had not saved enough to pay for their retirement, cannot sell the business to anyone for enough to fund it, and so has to keep working there to justify taking the salary needed to maintain a consistent lifestyle. This is easily avoided by saving and investment strategies, if begun early enough.
The last step is easily the most important the one that has the power to invalidate all the previous steps. It calls for the leaders to execute the succession plan. The problem here relates back to the first step: Unless the current generation has the determination and willingness to step aside and let the next generation take over, then an orderly succession is unlikely.
The big question here is about timing. When should a leader step down? When is the next generation ready? The answer to the first depends on the answer to the second, but only partially. When age, illness or other infirmity erodes the effectiveness of a once-dynamic business person to the point that he or she can no longer lead the company, then it is time to take a look at the next generation. If the next generation is not ready, then it may still be necessary for current leaders to step aside, perhaps placing the company into the care of interim managers.
But even in cases where the older generation of leadership is still getting the job done, it may still be time to execute the succession plan. That is because the readiness of the next generation may trump the readiness of the current leaders. Think of the managers being developed as though they were vintage wine. When the wine is ready to drink, it's time to pop the cork. If the business waits too long, its carefully developed successors may decide to leave the company or lose their edge of interest and enthusiasm because they had to wait too long.
A critical part of executing a succession plan is to continue executing it even after the nominal succession has taken place. In other words, you do not simply hand over the keys to the front door and retire to the golf course or fishing boat. Leaders need to acknowledge and support the heirs. They can either keep a hands-off attitude toward decisions made by the new leaders. Just because a decision is not the one you would have made does not mean you should jump in and change it. Or, on the other hand, the wisdom of a succeeded executive should be available for next-generation leaders to tap when needed.
This six-part roadmap to succession is, necessarily, an overview of the topic. But it is enough to get most family businesses at least started in the right direction. With luck, they will not find themselves in the position that McDonald's did, of having to suddenly and completely replace their top executive. With preparation, however, you will be ready too.