Once upon a time, family business patriarchs had it easy when it came to deciding who would take over the family business.
Centuries-old customs required that the eldest son “regardless of skills” received control of the family business upon the death of the father No one ever retired. Business literally lived or died based on the often unknown management skills of the male heir. Their business skills frequently were not explored until dad died.
Today family business succession is handled with more forethought and under the greater scrutiny of inheritance laws. Affluence combined with people living longer, with more leisure years, signal to many entrepreneurs and senior family business leaders who have the difficult decisions of when-and how-to pass the reins of the family business with the least harm to the business and family.
The question of who gets to run the family business is complicated, of course, by relationships within the family. Numerous clients confess that they are troubled about how to pass the business without destruction.
While many still plan to be an integral part of their business for several more years, they realize that their desire to work long hours had waned in recent years. They are slowing down. What worries many of them is now deciding between heirs which will make the better leader in the long run.
One commented,”I feel a little like Solomon in the Bible, trying to divide my baby, my detailing business, between two heirs. Somehow that seems almost easier than picking one over the other. I love what I do,”he said, “but I don’t see that same passion in either my daughter or son.”
But that passion might actually be there, just displayed in a different way because each person has a unique personality. Indeed, the heirs may be eager to have their turn at running the business.
These kinds of dilemmas are far from unusual, and they underscore the very subjective emotions that cloud the business choices a senior family member often must make about the future of the business.
Such decisions are easier with some outside advice and a clearer, more objective exaltation from a family business consultant.
If it’s any comfort, the challenge of passing on the family business is a worldwide problem. According to an April 10, 2000, article in Business Week Magazine, a family feud over who should run the Hyundai Group, South Korea’s largest conglomerate, has brewed up a dispute that even involves the national government.
The 84-year old Hyundai founder appointed one of his sons as the sole group chairman earlier this moth to end family squabbles. But this decision came in the face of the national movement to discourage family dynasties that do not involve shareholders and board members.
As a response, The South Korean Finance & Economy minister stated that the country’s creditor banks, largely controlled by the government, could cut back on loans to Hyundai unless a different successor was considered. Now the future of the Hyundai Group is up in the heiragain, so to speak.
The image of passing a baton on to the next person in the rely race is a familiar one, and it is an apt image for businesses in which a family business leader hands over the responsibility to a child. Even under the best of circumstances, it can be a difficult and awkward time of transition.
For the elder leader, it means giving up control not only of the business but also of the parent-child relationship. The relationship rarely stays the same at home once control is relinquished at the work place. Moreover, the parent becomes dependent upon the success of the business in a different way and may now feel vulnerable to the business decision being made by the child.
As in a relay, once a runner passes the baton, he spends the rest of the race as spectator and cheerleader, but no longer contributes directly to the outcome. For an entrepreneur who feels he has been the sole motivator for the birth and continued success of the business, this new limited-partnership role requires a new understanding, a new patience. Furthermore, few people are prepared for the slowing down that all of us can expect as we get older. Our energy levels change. Retirement years are somewhat a matter of numbers.
Yet it also important to see that a relay race is the perfect metaphor for life. We humans are designed to pass on our knowledge and possessions from generation to generation. The human life span is a natural cycle that begins with a period of development and learning followed by a long middle period of accrued experience and activity followed by a gradual diminishing of energy and ability. When a senior family member acknowledges this natural cycle, the transition can be accomplished with less strain and stress. Succession isn’t necessary the result of a “crisis” within the family business.
Another complication can occur when the family business leader maintains financial control of the company while turning the day-to-day operation over to another member of the family. Thus, power is divided, and the next generation tier isn’t fully able to independently change orexpansion. Moreover, the now former CEO may be also obligated to pay employees and other overhead expenses even if the company experiences a downturn as the result of the transition. The time-worn issues involved with parent-child bonds of dependence are also a factor, with the child trying to establish new roles of independence.
As with the relay race, planning ahead is the key to success. Know your runners and their individual strengths. Who is the fastest at the start? Who has a sustained start? Who has a strong finish? In a family business, skills needn’t be dropped just because one family member is in transition to a position of less involvement.
The timing of any business transition is critical. Procrastination can become a healthy attribute when you’re trying to have the business suffer as little chaos as possible from any transition of power. In other circumstances, such as when a senior family executive’s declining powers result in poor decision-making, speed can be essential. In any event, it is necessary for the entrepreneur to work hard to plan a succession.
It’s important to realize that there is a window of opportunity for a smooth hand off of power and control. The children need time to develop the skill set necessary to carry the business forward. They need the concentrated mentoring of the outgoing CEO or president. Similarly, the patriarch must realize that the children may want to make changes in day-to-day operations. Change is natural, even when someone else initiates it, even by a son or daughter.
The next generation needs to be allowed to take risks similar to what the senior entrepreneur took to gain his or her own competence and skill set. But watching the next generation take risks with your business takes a certain amount of lip biting.
And don’t forget the post-transition problems. Now that the entrepreneur has less responsibility to the family business, and more leisure time, what will he do with the energy and time once devoted to the business? Planning retirement and leisure time may actually be necessary.
A succession plan that involves both the new relay runners at the helm of the business as well as the entrepreneur’s diminishing participation can help the business transition go smoothly.
Here are essential elements of a succession plan:
- Make continued business leadership a key goal. This can be accomplished through a series of planned meetings with family-member owners to discuss their goal, wishes and concerns.
- Gather, analyze and share financial information on the company and on current owners, including ownership percentages, tax records and tax commitments, value of the business and organizational structure.
- Remember that taxes may be a key factor in any transition of business. A comprehensive estate plan for any outgoing share holder should be considered.
- Strive for a balance of equity. Answer these questions definitively: How many business assets will remain with the senior entrepreneur? How much will be passed onto heirs, both inside and outside the company?
- Work hard to clear up the major muddy area of how much parental authority will be exercised over the children. Answer: How much should the senior entrepreneur pass on to the children? How much should these children be required to earn and do for themselves?
These are difficult questions which require objectivity; and therefore, generally require an outside consultant who has no emotional investment. These objective decisions must be made in the best interest of the business.
Once upon a time, it was simpler. But today, with all that is at stake and all the complications of the day, it’s a wise father indeed that knows how to pass business responsibility onto his child. When asked who should run Ford Motor Company, Henry Ford said,”Asking who will run the family business is a little like asking who will sing tenor in the choir, the tenor of course.”