Unlike the succession plan of a ruling monarchy, passing the torch in business is a bit more complicated. Here is what you need to know about ensuring your company’s continued success.
Much like writing a will, no one relishes the task of succession planning. After all, it involves handing over the reins of a business you’ve poured your heart into to someone else. The stakes are high, and understandably that makes almost everyone involved – from the top management down – nervous.
Succession planning is a good thing. Designed to help companies prepare for the future, the process is vital for identifying and developing new leaders capable of carrying the ball as veteran executives lessen their day-to-day involvement or leave the company.
With such a plan in place, there is less chance of top executives leaving the company for greater opportunities elsewhere if they’re secure in knowing what lies ahead. By identifying and grooming these future leaders, they will be experienced and capable successors as those roles become available.
There are important benefits to the process. For example, a succession plan may help a business retain key employees, reduce its tax burden, and maintain the value of its stock and assets during a management or ownership transition. For family-run businesses, having a well-thought-out succession plan can maintain the family’s control of a company they’ve had for generations.
Succession planning is also an important step that needs to be shared with business and supply chain partners, those companies that have put a lot of time and effort into their relationship with you. By revealing the plans for the future, your partners will sleep better at night, too.
“I recognize that I have to put people in place to off-load some of my responsibilities.” —Jack Fleischer
Succession Rates Among Family Businesses
For most closely held companies, succession planning is one of the toughest and most critical challenges; it can also be a great opportunity to create a multi-generational institution that embodies the family’s values and mission for generations to come. The process can be used to bring in the younger generation with a new set of relationships, innovations, and opportunities.
According to the Family Business Institute, 88 percent of current family business owners believe the same family will control their business in the next five years — but succession statistics don’t substantiate this belief. The Family Firm Institute claims roughly 30 percent of family and businesses survive into the second generation; 12 percent are still viable into the third generation; and only about 3 percent make it to the fourth generation or beyond.
There is clearly a disconnect between the optimistic belief of today’s family business owners and the reality of the massive failure of family companies to survive through the generations. Research indicates that failures can essentially be traced to one factor: a lack of succession planning.
“It’s a tough situation when you’ve got family members who have no interest in the business or if siblings aren’t on the same page.”
Jack Fleischer, President at Hermitage Lighting Gallery in Nashville, is a second-generation lighting showroom owner who is currently working with a professional to structure a succession plan.
Jack and his wife, Daniella, have been active leaders in the business for decades and now their children have joined the team. “My daughter, Rachel, has been in the business for about a year [after moving back to Nashville from New York City] and is now in charge of purchasing for the lighting side of the business,” he states. “My middle son, Matt, joined us three years ago, when he moved from Florida back to Nashville; he runs the National Accounts division. My oldest son, Adam, joined the business October 1 as Director of Operations.”
One of the reasons Jack Fleischer made succession planning a priority is because he had inherited the lighting showroom business from his father, Gerald, and knew how important the strategy was. “We’ve found that effective succession planning needs to be a mix of working with a professional while also personally challenging [my] kids to ‘show me you can run it,’” he adds.
Of course, it’s not always easy. “There is a lot of baggage that you develop with family over the years that can be tough to separate from business,” Fleischer comments. He outlines four pieces of tried-and-true advice for members of any family-owned company getting ready to go through succession planning:
Have experts in your corner; it makes all the difference. Ask for recommendations and search out educated professionals who understand succession planning and can work with your legal counsel, financial advisors, investments bankers, etc.
Decide on the rules of engagement at work with your family members before any of those rules apply.
Have open conversations, even when it’s tough.
Do the work needed — organizational charts, aptitude testing on family members, active learning and listening, engagement.
“I’m still at the helm,” Jack says, “but I recognize that I have to put people in place to off-load some of my responsibilities and move into a real well-oiled machine.”
Similarly, Jen Schmitt, Vice President and General Manager at software and services provider Schmitt ProfiTools, Inc. in St. Louis, understands all about working in a family-owned business. She works alongside her father, Rich Schmitt, Executive Vice President. “One of my favorite columns that we wrote this year was about succession planning,” she says. “We got such a great response.”
Schmitt highlights several potential hurdles if you don’t have a plan or a great team of professionals, such as: What is to take place upon succession? What happens when children inherit shares of stock by default when there is no estate plan in place? What happens when spouses inherit shares or in cases of divorce, or situations where there are company ESOPs (Employee Stock Ownership Plans)?
“Family involvement can take on many forms,” Schmitt notes. “It’s a tough situation when you’ve got family members who have no interest in the business or if siblings aren’t on the same page. And of course, it’s very difficult to run a business if family members aren’t involved in the decision-making process.”
The Schmitts have been involved with almost every potential situation possible during their years as business consultants — and it is especially challenging when it comes to succession planning. “What has been the mantra for both [my father and I] is that family comes first. We don’t let the company or the direction we are taking the company interfere with family,” she affirms.
The Laws of Succession
Dan Beederman, a partner at Schoenberg Finkel Newman & Rosenberg, LLC in Chicago, agrees with Fleischer’s timing strategy. He deals with independent sales reps and associations such as AIMR, REPS, ERA, and others in his practice. Succession Planning is one of his focuses.
“Succession planning is important because the streams of channel are interrelated, and if there is an interruption in any aspect of the chain, it affects everyone,” Beederman states. “You shouldn’t wait until you are ready to retire. Start thinking about succession planning much earlier when you’re still active. Start looking around you and identifying some key people who might be good successors.”
For those not in a family-owned business, identifying key employees in your organization who could be successors is critical. For the sake of retention, Beederman suggests taking those employees aside and communicating their value. In some cases, giving small shares of the company to key people along the way is a sign of commitment.
Beederman points out, however, that if stock is issued to employees, it should be done as small amounts of stock over the years until they finally own the percentage of the company they agreed upon.
“Incentivize people to stick around; you don’t want to get them hit with a large tax bill when they only own 5 percent of the company.” This method also helps you stay in control.
Another option in succession planning when family is not involved is a merger. This can sometimes mean having one of your manufacturers or channel partners merge with your company. “This is a much tougher deal when it’s a merger between agencies,” Beederman advises.
Whatever form succession planning takes on within your business, the keys to the process are summed up perfectly succinctly in those two words:
Succession — ensuring that your business has the tools, the people, and the plan in place so that it can continue to grow and succeed after you are gone.
Planning — good plans don’t just fall into place. They require thought, time, experienced professionals, and lots of communication for success to be the end result.