Manage succession well for business success

Although management transition must be faced in every family business sooner or later, many company leaders don’t give it the priority this crucial issue deserves. Fifty-five percent of family businesses’ CEOs over the age of 61 have not chosen a successor, according to a recent study by MassMutual.
Not paying proper attention to succession can lead to disastrous consequences. Only one in three family businesses survive to the second generation and 85 percent do not make it into the third. Moreover, because in 60 percent of family businesses the company accounts for more than half the family’s net worth, the high failure rate is costly financially and is often the flashpoint for bitter family feuds.
The damage from the high incidence of failure goes well beyond the family itself, because family businesses are so important to our nation’s economy:
• 98 percent of all registered corporations are family businesses.
• 90 percent of the nation’s 21 million companies are family businesses.
• 60 percent of the country’s GDP is from family business.
When it comes to succession planning, most books, articles and consultants focus on ownership transition. However, this article is about management succession – which is arguably the more important. After all, if a company’s management leadership is not successful, ownership can become a nightmare.
I was involved personally in a four-generation family business and as a business coach for more than 20 years; I have assisted and observed dozens of family businesses dealing with management succession. From that experience, here are four things I’ve learned that are crucial to management-succession success:
• Don’t wait too long. By designating your retirement date far enough in advance, you are more likely not only to pick the right successor but to allow enough time for a smooth transfer of power. Depending on his or her background, it can take years to train a successor and to work through the many management and organizational issues. Yet don’t choose a date too far away, because your chosen successor may get tired of waiting.
• Involve key managers early. A successful transition hinges on staff buy-in – or at least acceptance. So getting managers and key employees involved in the planning will greatly help you ready your company for the succession. Remember, misinformation, rumor, threats of quitting or refusals to support the new boss are common in a succession. To help keep potential sources of conflict in check, identify stakeholders who may have strong concerns about your next company leader or the process by which that person is chosen. Then work out problems with them early on.
• Look outside for help. A board of directors, consisting of trusted members who are familiar with the company and industry, can serve as a voice of reason in the tumult of transition. Moreover, they can help you assess the strengths and weaknesses of potential successors, free of your personal concerns or biases. A board of directors is also helpful in assimilating a new boss into the business. Consider engaging an executive coach to help develop the successor’s functional and managerial skills. A coaching program provides formality and continuity to the successor’s professional growth and can accelerate the abilities and readiness for the new responsibilities.
• Support your future successor. Once you have chosen your successor, do everything you can to prepare him or her to succeed. This may seem obvious, but there is a self-defeating tendency, especially among hard-driving company founders, to want their successor to learn “sink-or-swim” style. Co-owners, board members and employees are more apt to follow your replacement’s lead if they feel confident in his or her knowledge and skills. Seeing their future leader floundering doesn’t give them confidence in him or her – or in your judgment. So a more promising strategy is to require your next-in-line to work in different functional areas of your company before taking the reins. For instance, have him or her gain experience examining information for tax and financial-reporting compliance and profitability analysis. And don’t hesitate to let your heir apparent get his or her hands dirty. Put your prospective replacement on the front lines with your sales staff or, if you are a manufacturer, down on the plant floor to see how your business really operates.
Lastly, when it is time to make the official transition, you must be prepared to step back and give your successor full authority to do the job.
Make this critical decision work. Statistics show that management succession is likely to be the most critical decision you make for your company – and family. Improve your odds of succession survival by starting early enough, involving key stakeholders and creating a formal plan that structures the process and provides guideposts for measuring progress. •
Jay Cumming (JCumming@tofias.com) specializes in strategic planning, executive coaching, succession planning and valuations for family and closely held businesses at Tofias PC, which has offices in Providence, Newport, Cambridge and New Bedford.