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Business Observer Friday, Jul. 3, 2015 3 years ago

Handing down your company

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Enhance the odds of long-term success with a good family business succession plan.
by: Denise Federer Bottom-line Behavior

Most of the family businesses that I work with are ultimately faced with the dilemma of “what's next?” for both the business and the family.

Often times these entrepreneurial owners have spent a lifetime working to build their business, but are reluctant to take the time to think formally about how to prepare their heirs to lead the company after they are gone. Unfortunately, this lack of foresight and planning can put the future sustainability of the business at risk, along with creating unnecessary family conflict.

The statistics about family businesses, a mainstay of the global economy, are quite sobering. It's well documented that just 30% of all family businesses last into the second generation, and only 12% make it to the third generation.

Why? It's often the result of poor talent management.

An article in the April 2015 “Harvard Business Review,” titled “Leadership Lessons from Great Family Businesses,” provided some food for thought from a study conducted by Egon Zehender and Family Business Network International of the 50 leading family-run firms around the world. They found their top four best practices were:

Establish a baseline of good governance;
Preserve what they call “family gravity” (what makes a family special);

Identify future leaders from within and outside the family; and

Bring discipline to the CEO succession process.

Those are certainly important steps to take in establishing a sustainable family business, but as a family business consultant, I would add one more: Run like a business, but feel like a family. This requires a shift in thinking about how you view both yourself as a leader, the structure of your organization and the impact of your business on the lives of your family members.

Yes, that's easier said than done, but it's quite possible to accomplish. It starts with a critical first step for many family businesses: identifying values and creating a mission statement as well as a strong set of governance rules. You can not underestimate the importance of establishing these guiding principles to help shape the direction and outcome of the business.

However, some family business leaders are reluctant to engage in this kind of a structured process. They may feel awkward and avoid these types of more personal, difficult conversations, preferring to work in the business rather than on it. Unfortunately, that's detrimental to the long-term health of the company and family relationships.

For instance, the process of crafting a mission statement doesn't have to be overwhelming. According to family business consultants Aronoff and Ward, the document should tell readers “who we are as a family and what we stand for” by articulating the family's values and the means by which they are expressed both within the family and in the community. It also describes the family's vision for the future, documenting its dreams, hopes and ideals.

It really is best to engage in formal “baseline” activities like this in the early stages of a family business, since that's when this type of purposeful behavior will have the greatest impact. Think of it this way: You wouldn't erect a building without first laying a good foundation.

The reluctance to create a mission statement articulating family values and good governance rules is one of the two primary reasons I believe family business succession plans fail. The other is an unwillingness to bring in non-family talent when it's needed to get to the next level.

Many family business owners are not comfortable allowing a non-family member to assume the CEO position/leadership role, even when no one in the family is well suited for that responsibility. This is really akin to cutting off your nose to spite your face; by promoting a family member who isn't qualified to lead, the business is put in jeopardy.

One way to prevent this uncomfortable situation is to clarify roles and responsibilities within the family business. Your successor must possess both the required technical expertise, along with demonstrating leadership acumen. Getting family “buy in” on this vital precept is essential to ensure the future success of your company. Understanding the difference between ownership and involvement in management can be critical to guide families in making difficult talent decisions that are in the best interest of their business.

As cited in the the HBR article, family businesses account for an estimated 80% of companies worldwide — and they employ 60% of workers in the U.S. while being responsible for creating 78% of new jobs. Thus, it behooves the owners of family businesses to do what it takes to lay the proper foundation for long-term success, which includes implementing the best business practices cited above and ensuring you're guided by principles and values that best define your family.

Denise P. Federer, Ph.D. is founder and principal of Federer Performance Management Group. She has 27 years of experience working with key executives, business leaders and Fortune 500 companies as a behavioral psychologist, consultant, coach and trainer. Contact her at: [email protected]

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