By By Lisa Allen
Published Dec. 23, 2011
“)%–> “Unless the parties to a succession plan understand — and deal with — the emotional and psychological factors unique to the business and to its owners, the best plan will fail miserably,” said Ron Hershner, managing partner of Stock and Leader law firm in York.
Why plans fail
At the core of many crises is a lack of communication between generations.
Steven Moyer, president of The Network of Family Businesses in Harleysville, Montgomery County, near Philadelphia, recounted a recent case.
“The father started the business, and his son was out working for another company,” Moyer said. “The son and a cousin were going to buy the business, but at the 11th hour, the son said, ‘I really don’t want to do this.’ The dad was hurt that the son decided to walk away again.”
Moyer said what was missing was trust nurtured over the years.
“There have to be a lot of heart-to-heart conversations,” Moyer said.
Hershner said often the toughest part to starting a succession plan is psychological.
“It’s getting the founder to accept their mortality. Sometimes the reluctance is the uncertainty as to who the successor will be,” Hershner said. “One founder was convinced his son was going to move back from Texas. I had to get him to finally ask him. The answer was, ‘No, Dad, I’m not interested.’ ”
That’s where a plan long in place can soften some of the sting, Hershner said.
“People always put it off. They figure, ‘When I’m 62, I’ll start thinking about it.’ ”
That’s too late and too abrupt, he said.
If the founder has a plan that looks at where the company is in three years, in five years, it’s easier to grasp, Hershner said. Succession isn’t something that’s going to happen tomorrow; it’s gradual. It also readies the generation going out and the one coming in, and each has its own issues.
“They have different fears,” Hershner said.
For example, he said, he finds that leaders don’t overestimate the next generation’s capabilities — they underestimate them.
“More often, they feel that the next generation doesn’t have the stuff, when in fact they do. That’s the mentality of the entrepreneur: ‘These kids don’t understand how hard I’ve worked,’ ” Hershner said. “The second generation doesn’t want to disappoint. They are reluctant to rise to leadership. That’s a real challenge. The answer to that is not in law books. It’s a fascinating topic.”
In other cases, no matter how much a father wants a son or daughter to take over, it just might not happen.
“You don’t have indentured servitude,” Hershner said.
If the person intended to run the business turns it down, “you go back to square one,” Hershner said. “Most companies don’t have a lot of people who can be the leader.”
In that case, companies often turn to an interim leader, most likely an outsider, to steer the ship while they find a new leader. Those cases are more common in the event of an unexpected death or disability.
Why plans succeed
So when should a succession plan begin?
“I use a Chinese proverb: ‘The best time to plant to a tree was 20 years ago. The next best time is today,’ ” Moyer said.
It also requires being a good role model for the business, even at home.
“Part of that process starts when the children are 6 or 7,” Moyer said. “If dad complains about the business every night at dinner, why would the kids want it?”
Another piece is assessing the desire of the family at large, Moyer said. Do they want to retain the business as a family legacy, or do they want to sell and start their own businesses? Sometimes they bring in an outside CEO but keep ownership.
Should the next generation decide to step up, the plan has to include what’s next for the generation stepping aside. Often, that generation isn’t wired for retirement, Moyer said.
“There is so much tacit knowledge in the entrepreneur,” Moyer said. “They were in the office at 2 a.m. trying to solve problems.”
Moyer has several suggestions. One is to have the outgoing generation introduce the next generation to their contacts. Another is to mentor the third generation.
“The grandkids’ parents don’t have time to do it — they’re running the business now,” he said.
A third option is to be out in the community.
“Family businesses tend to be more philanthropic,” Moyer said. “Let them be that ambassador.”
Key to a smooth transition is objectively assessing talents, a tough task that is sometimes painful, said Dennis Clemmer, a senior consultant at North Group Consulting in Lancaster. It helps that he was a family therapist.
“I’m working with a company with six brothers and eight cousins,” Clemmer said. “Our job is to help identify the leadership in the third generation. Some of the owners were in managerial positions, but they shouldn’t have been. Their gifts were in other areas. They thought that because they were owners, they should be managers. We have to have some pretty tough conversations with people. It means dealing with your own ego. No one likes to feel like a failure.”
Those frank discussions about someone’s true talents often come better from people outside the company, advisers say.
“The skills sets are going to be different in the next generation. It might require different business skills as the business evolved. Each generation needs specific skills,” Moyer said. “If they have the best interest of the business at heart, that outside board of advisers can see that the next generation may not have the skills. They can serve as mentors. Do they have the skills to take up the ownership or management mantle? Those are honest discussions that are difficult to have.”
Third parties in the form of consultants or advisory boards also serve an important role as truth bearers, said Wes Carr, an adviser at Liberty Financial Strategies in Lancaster.
“It helps to hear it from them, instead of a parent or aunt or uncle, or the other way, from a child or niece or nephew. I’ve had it both ways,” he said.
Leaders also have to accept that the best choice isn’t always the eldest son, Hershner said.
Clemmer recalled one instance where the father pegged one son as the heir apparent. North Group did 360-degree reviews of the next generation and identified a better leader within that group. Crisis averted.
Solid plans address two factors: management and ownership, Carr said.
“If they have ownership, that’s a whole different ball of wax,” he said. “That’s why they sometimes wait until they rise to a certain level in the company before they can buy in. None of them do it a specific way. Each business is very different.”
When one should join the family business also varies by individual, Carr said. Some people know from a very early age that’s what they want to do. Other families insist the younger generation works somewhere else first. Then individuals can make a conscious decision about whether the family business is for them.
“There are advantages to getting experience elsewhere versus just falling into it, that only momentum took them there,” Carr said. “If not a good fit, it wouldn’t make sense to keep doing it.”
Survey: Family businesses are flying without a net
“)%–> A recent survey showed that most family businesses, even those sales with revenue of more than $5 million, don’t have a succession plan in place. That could leave the company floundering if something happens to the leader, many of whom are older.
- 60 percent of majority shareholders are 55 or older.
- 30 percent are 65 or older.
- 30 percent have succession plans.
- Less than 40 percent have a successor in place.
- 56 percent have a written strategic plan.
- 25 percent think the next generation is not competent to move into leadership roles.
- 93 percent have little or no income diversification.
Source: 2007 Laird Norton Tyee Family Business Survey (788 respondents from firms with sales of at least $5 million)