This may sound an obvious question yet my experience of family businesses is that many business leaders don’t know how to get started with succession planning or they view it as a single event rather than an on-going process.
There are three main processes involved in succession planning:
- Identifying and appointing a successor
- Managing the exit of the current MD
- Managing change from both the family and business perspective
Identifying and appointing a successor
This is the first stumbling block and where the family and business systems can collide.
In a family business the hope is that a family member will be sufficiently interested and qualified to take over the reins.
Depending on the experience and skills the family successor has, there may be the need for coaching, mentoring and accelerated learning to equip the successor to take over the reins. This may take up to two years as responsibilities are handed over in such a way that business continuity is maintained.
Before that the business needs must be analysed carefully – firstly what is the current situation in the business and secondly what are the predictions for the business over the next few years. This has to be the pre-requisite before any appointment is made.
I use a framework devised by Harvard professor Michael Watkins (1) where he suggests that the current business is likely to be in one of four situations – start up, sustaining success, realignment or turnaround. Arguably only one of these situations would be appropriate for a family member to take over the reins.
If the situation requires an interim appointment to bridge the gap between the current situation and the skills and experiences required then the family need to understand that. Explaining the family dynamics and business situation will need to be a key part of the courting process with the new executive to ensure as much as anything full understanding of the current position and to ensure the right cultural fit.
Managing the exit of the current MD
This might be the biggest challenge particularly if the MD is the founder of the business. There is likely to be a need for a mindset shift and this element of the process can take many months if not years.
The options open to the business clearly depend on the situation. The MD might retire and get out of the business completely; or, become the Chairman to provide continuity and mentor the new appointee; or, be employed on a fixed term basis to complete projects such as handing over key customer/supplier relationships.
How this is done depends largely on the financial arrangements in place to ensure a smooth transition. These financial arrangements may include one or all of the following: buying out shares, financing an on-going retirement income, agreeing an income where the owner’s role is changing.
The biggest change is emotional – letting go of the baby that has been created or nurtured. For this to happen smoothly a compelling future is required. It is unlikely that a world trip or playing golf each week will be sufficiently compelling. So a new future needs to be created that allows the next stage to be faced with optimism – this may centre around a different role in the business, or mentoring the next wave of entrepreneurs, or acting as a NED for another family business.
Managing change
Succession planning is a predictable problem. The biggest unknown is when.
The change is the easy bit – there is a new leader of the business on Monday. The transition is much more difficult and takes much longer to manage in part because people won’t know how they feel until faced by the situation. In a family business the transition may be even tougher as the balance of power may shift, relationships may change both of which may expose any fault lines that currently exist within the family.
Because it is a predictable problem, the transition can be pre-empted in part by the family describing how the succession planning process could work for them in the family constitution. This suggests that thought has been given to this process well in advance of the event so that when it happens there is a rulebook that explains how the process is going to work. If the constitution has been kept up to date and reviewed periodically then the thinking on succession planning should be current.
Whoever is appointed as successor, a united family will be important to that person’s success. Having a constitution to establish the ground rules for succession planning and a family council in which to air thoughts, concerns and suggestions helps the family deal with the management transition.
For a confidential discussion on how we can help start the succession planning process in your business, please contact Stephen Cowburn or use our Contact Us link below.
(1) Diagnosing the business situation in Watkins: The First 90 Days HBS Press 2003