THE COMPLEX ISSUE OF SUCCESSION PLANNING
Donald Carr, President, EB3 Consulting, Inc.
One of the most complex issues for a small business owner is the process of transition of a small business from one generation to the next. Years of personal experiences in building the owner’s “baby” – the owner’s legacy – and often their only major asset – makes it difficult to let loose. Small business owners’ lives are centered upon their business – it is their life – they have lived it, breathed it and funded it 24 hours a day for most of their lives.
The option of succession to your heirs is to endow your ‘child’ who often has not ‘walked in the shoes’ of the owner in starting and building the business. Many owners fear that the next generation does not have the same passion for the business as does the parent. In fact, some owners view the ‘transition’ more as an obligation than a life goal. In some instances, the parents feel that the younger generation views the business only as a ‘cash cow’ – one that should generate a comfortable income for them without the necessity of dogged, hard work and ongoing dedication to the business. The next generation may simply not have the knowledge, skill, financial assurance, or passion needed to continue the business successfully.
At the same time, the ‘child’, now a grown adult, often has an advanced degree, independent dreams, a spouse and children, and a perspective much different than the parent. Not only may their generation perceive and value many things differently, but they have directly observed the ‘trials and tribulations’ of the parents and have been shaped by both the victories and the failures of the parents in developing the business. The next generation may actually have a perspective that is more realistic (honest) than that of the parent. They may see the erosion of sales, the aging of the plant and facility, the age of the key employees, the failure to update processes and procedures, or simply the failure to keep up with the changing economy.
The next generation seldom takes over the ‘family’ business with the intent to either shrink the business or keep it at idle. That is simply not what they have been taught or what they have observed their entire life. In fact, children of entrepreneurs and small business
(2)
owners almost always report their intention to grow the business – often to double or triple revenue, size, or profit.
They talk in terms of modernizing the business – updating the business – or taking the business to the next level. It is just that type of grandiose talk that keeps many owners ‘awake all night’ or makes it more difficult to relinquish control, as the parents fear that their offspring will fail – harming both the business legacy and the financial future of their children.
The case of multiple heirs certainly exacerbates this succession complexity. In this instance, the parent faces additional issues relating to potential feelings of favoritism or fairness from one or more of the children. Guilt of the parent in choosing one child over the other as leader of the business, or the parent’s desire to protect a child perceived or actually less capable of the role, can cause subjective pondering and inaction. In all of these instances, the parent may make choices to appease in the short term, while inadvertently handicapping the future success of the business.
Our research clearly suggests that parents tend to favor a child who has the more similar behavioral attributes as the parent. For example, a parent who has an analytical or technical personality is more likely to feel comfortable in passing the business to the analytical child versus the child who is more creative or more relational oriented. The outgoing, relational owner may favor passing the business to the child with the outgoing personality to protect the personal relationships that he feels built the business. While such a transfer in either case may be appropriate, it may also deprive the business in a brave, new world of the well-rounded skills necessary to run the business going forward.
Unfortunately, it is often found that a parent who fears the different disposition of the child ends up staying in the business well beyond reason. He justifies that “If the child doesn’t know the operations side of the business, they could never run the business” or for that matter, “if the child doesn’t know how to sell, they could never grow the business”. In either case, the parent ‘hangs on a little longer’ believing that some day it will all work out. They delay their own retirement, while energy in the business erodes with age, causing decay, and forestalling the ability of the child to ever succeed.
Yet another nuance in the scenario with more than one heir in a business is trying to provide fairness or equality among siblings, or perhaps including non-family key managers. What does that mean for the rational future of the business? How does a business move forward in such an instance, particularly if one of the new owners is behaviorally incompatible?
(3)
Two recent clients come to mind where these issues were present. In the first instance, a very successful multi-generational manufacturing company faced the retirement of one generation after more than 30 years of running the company. Two sons were involved in the business, one who was quite analytical, and one who was more relational, like the father. The brothers were close to one another, both in age and emotion. They had relied on each other for validation throughout life, while Dad was steeped in the business. It was their desire and hope that they could run the company “jointly” with each having an equal voice in all decision-making.
History suggests that such management structures may work well when times are good, but when difficult times or difficult issues arise, severe dissension and discord in the company, or decision stalemates may become the rule. The father was very concerned about this type of arrangement, discouraged it, and sought outside input to resolve the challenge. A significant effort to establish a management by objectives model with timely metrics was implemented to ensure that deference wasn’t able to trump decision making. The father and sons listened, negotiated and finally concurred to ultimately allow a workable co-leader arrangement to succeed for the owners and employees.
In another instance, a father transferred the business to his two sons equally – one who was very technical and structured, and the other who was easy-going, personable and somewhat irresponsible. As a hedge against the potential of a stalemate, the father sold 20% of this company to a trusted third-party manager who was liked and respected by both of the sons. It was the father’s belief that the third-party would serve as a sounding-board for the two brothers, and also provide a mechanism for breaking potential deadlocks in decision-making.
Over the course of the first year of this very successful construction business, the analytical brother attempted to implement processes and structure that would insure accountability within the company. While the easy-going brother agreed with the need for such changes, he nonetheless continued in his irresponsible and unaccountable behaviors, causing the technical brother to become increasingly frustrated. Unfortunately, the third-party owner chose not to intercede, instead maintaining his neutrality between the brothers so as not to appear to be taking sides. As a result, a stalemate occurred, and the beginning of a loss of morale in the workforce and deterioration in the operations of the company began.
At the time of this article, the issue has not yet been resolved, but two senior managers have recently left, complaining about lack of direction. To date, the tools, techniques and processes have not been put in place to allow the business to drive business decisions optimizing the personality and behavioral traits of the brothers.
What the brothers ultimately
(4)
do to break this stalemate, and if it can be broken before damage occurs to the company’s future, will determine the future of this business and the legacy of the original owner of this business.
What these two examples demonstrate is that even with the best of intentions of all concerned, the manner and mechanism of transferring a business to the next generation can be both opportunistic yet fraught with hardship and landmines. State of the Art solutions to maximize outcomes is critical to both generations in the transition.
While no two situations are ever identical, there are some general rules that can be followed:
1. Be sure that the business has the controls, processes and accountability in place so that fair and measured performance can occur within the business;
2. Expose the next generation to all facets of the business, including the financial, operations and sales aspects of the business, well prior to transition;
3. Start discussions of succession planning no less than 3-5 years before the intended time of transition. In these discussions, address issues of control, decision-making and best practices. The preferred practice if you could turn back the clock, would be to establish this structure from the point of entry of the children at a younger age.
4. Encourage the next generation to voice concerns that they may have about the business going forward, with objective goals and results (not only opinions) driving such concerns and resolution. Only if those areas are addressed early in the process will there be the potential of avoiding this transitory stress.
5. Allow the next generation to begin the process of ‘managing’ discreet portions of the business to allow small failures and training moments while still available to minimize the issue and to provide both context and support in resolutions.
6. Consider seeking a neutral third-party to assist in the transitory phase of the process. Accept the potential that the parent may be ‘too close’ to the situation to really be able to resolve conflicts due to the process, including employee issues, generational issues and/or intra-family biases.
Entrepreneurship in America is the hallmark of American society. It is through the innovation and hard-work of entrepreneurship that the United States finds itself the economic leader and reserve currency of the developed countries in the world. It is no wonder that the
Wall Street Journal recently affirmed that the vast majority of all inventions and patents worldwide originate in the United States. Capitalism and the ‘just do it’ attitude of the entrepreneur remains a model for the rest of the world. Small business owners work hard to create and build their businesses, and deserve to enjoy the fruits of their labor upon retirement. Much like the proverbial boat owner, it is said that the entrepreneurs’ two greatest days are the day he opens the business and the day he sells the business. Continuing the legacy to the next generation of entrepreneurs is a critical part of the process and the entrepreneurs’ ultimate success.
Addressing succession issues now will result in a comfortable retirement for the business owner, and will insure continuity of the business they worked so hard to build. Start today in planning for tomorrow, and in leaving a legacy for generations to come.
Donald Carr, President, EB3 Consulting, Inc.
One of the most complex issues for a small business owner is the process of transition of a small business from one generation to the next. Years of personal experiences in building the owner’s “baby” – the owner’s legacy – and often their only major asset – makes it difficult to let loose. Small business owners’ lives are centered upon their business – it is their life – they have lived it, breathed it and funded it 24 hours a day for most of their lives.
The option of succession to your heirs is to endow your ‘child’ who often has not ‘walked in the shoes’ of the owner in starting and building the business. Many owners fear that the next generation does not have the same passion for the business as does the parent. In fact, some owners view the ‘transition’ more as an obligation than a life goal. In some instances, the parents feel that the younger generation views the business only as a ‘cash cow’ – one that should generate a comfortable income for them without the necessity of dogged, hard work and ongoing dedication to the business. The next generation may simply not have the knowledge, skill, financial assurance, or passion needed to continue the business successfully.
At the same time, the ‘child’, now a grown adult, often has an advanced degree, independent dreams, a spouse and children, and a perspective much different than the parent. Not only may their generation perceive and value many things differently, but they have directly observed the ‘trials and tribulations’ of the parents and have been shaped by both the victories and the failures of the parents in developing the business. The next generation may actually have a perspective that is more realistic (honest) than that of the parent. They may see the erosion of sales, the aging of the plant and facility, the age of the key employees, the failure to update processes and procedures, or simply the failure to keep up with the changing economy.
The next generation seldom takes over the ‘family’ business with the intent to either shrink the business or keep it at idle. That is simply not what they have been taught or what they have observed their entire life. In fact, children of entrepreneurs and small business
(2)
owners almost always report their intention to grow the business – often to double or triple revenue, size, or profit.
They talk in terms of modernizing the business – updating the business – or taking the business to the next level. It is just that type of grandiose talk that keeps many owners ‘awake all night’ or makes it more difficult to relinquish control, as the parents fear that their offspring will fail – harming both the business legacy and the financial future of their children.
The case of multiple heirs certainly exacerbates this succession complexity. In this instance, the parent faces additional issues relating to potential feelings of favoritism or fairness from one or more of the children. Guilt of the parent in choosing one child over the other as leader of the business, or the parent’s desire to protect a child perceived or actually less capable of the role, can cause subjective pondering and inaction. In all of these instances, the parent may make choices to appease in the short term, while inadvertently handicapping the future success of the business.
Our research clearly suggests that parents tend to favor a child who has the more similar behavioral attributes as the parent. For example, a parent who has an analytical or technical personality is more likely to feel comfortable in passing the business to the analytical child versus the child who is more creative or more relational oriented. The outgoing, relational owner may favor passing the business to the child with the outgoing personality to protect the personal relationships that he feels built the business. While such a transfer in either case may be appropriate, it may also deprive the business in a brave, new world of the well-rounded skills necessary to run the business going forward.
Unfortunately, it is often found that a parent who fears the different disposition of the child ends up staying in the business well beyond reason. He justifies that “If the child doesn’t know the operations side of the business, they could never run the business” or for that matter, “if the child doesn’t know how to sell, they could never grow the business”. In either case, the parent ‘hangs on a little longer’ believing that some day it will all work out. They delay their own retirement, while energy in the business erodes with age, causing decay, and forestalling the ability of the child to ever succeed.
Yet another nuance in the scenario with more than one heir in a business is trying to provide fairness or equality among siblings, or perhaps including non-family key managers. What does that mean for the rational future of the business? How does a business move forward in such an instance, particularly if one of the new owners is behaviorally incompatible?
(3)
Two recent clients come to mind where these issues were present. In the first instance, a very successful multi-generational manufacturing company faced the retirement of one generation after more than 30 years of running the company. Two sons were involved in the business, one who was quite analytical, and one who was more relational, like the father. The brothers were close to one another, both in age and emotion. They had relied on each other for validation throughout life, while Dad was steeped in the business. It was their desire and hope that they could run the company “jointly” with each having an equal voice in all decision-making.
History suggests that such management structures may work well when times are good, but when difficult times or difficult issues arise, severe dissension and discord in the company, or decision stalemates may become the rule. The father was very concerned about this type of arrangement, discouraged it, and sought outside input to resolve the challenge. A significant effort to establish a management by objectives model with timely metrics was implemented to ensure that deference wasn’t able to trump decision making. The father and sons listened, negotiated and finally concurred to ultimately allow a workable co-leader arrangement to succeed for the owners and employees.
In another instance, a father transferred the business to his two sons equally – one who was very technical and structured, and the other who was easy-going, personable and somewhat irresponsible. As a hedge against the potential of a stalemate, the father sold 20% of this company to a trusted third-party manager who was liked and respected by both of the sons. It was the father’s belief that the third-party would serve as a sounding-board for the two brothers, and also provide a mechanism for breaking potential deadlocks in decision-making.
Over the course of the first year of this very successful construction business, the analytical brother attempted to implement processes and structure that would insure accountability within the company. While the easy-going brother agreed with the need for such changes, he nonetheless continued in his irresponsible and unaccountable behaviors, causing the technical brother to become increasingly frustrated. Unfortunately, the third-party owner chose not to intercede, instead maintaining his neutrality between the brothers so as not to appear to be taking sides. As a result, a stalemate occurred, and the beginning of a loss of morale in the workforce and deterioration in the operations of the company began.
At the time of this article, the issue has not yet been resolved, but two senior managers have recently left, complaining about lack of direction. To date, the tools, techniques and processes have not been put in place to allow the business to drive business decisions optimizing the personality and behavioral traits of the brothers.
What the brothers ultimately
(4)
do to break this stalemate, and if it can be broken before damage occurs to the company’s future, will determine the future of this business and the legacy of the original owner of this business.
What these two examples demonstrate is that even with the best of intentions of all concerned, the manner and mechanism of transferring a business to the next generation can be both opportunistic yet fraught with hardship and landmines. State of the Art solutions to maximize outcomes is critical to both generations in the transition.
While no two situations are ever identical, there are some general rules that can be followed:
1. Be sure that the business has the controls, processes and accountability in place so that fair and measured performance can occur within the business;
2. Expose the next generation to all facets of the business, including the financial, operations and sales aspects of the business, well prior to transition;
3. Start discussions of succession planning no less than 3-5 years before the intended time of transition. In these discussions, address issues of control, decision-making and best practices. The preferred practice if you could turn back the clock, would be to establish this structure from the point of entry of the children at a younger age.
4. Encourage the next generation to voice concerns that they may have about the business going forward, with objective goals and results (not only opinions) driving such concerns and resolution. Only if those areas are addressed early in the process will there be the potential of avoiding this transitory stress.
5. Allow the next generation to begin the process of ‘managing’ discreet portions of the business to allow small failures and training moments while still available to minimize the issue and to provide both context and support in resolutions.
6. Consider seeking a neutral third-party to assist in the transitory phase of the process. Accept the potential that the parent may be ‘too close’ to the situation to really be able to resolve conflicts due to the process, including employee issues, generational issues and/or intra-family biases.
Entrepreneurship in America is the hallmark of American society. It is through the innovation and hard-work of entrepreneurship that the United States finds itself the economic leader and reserve currency of the developed countries in the world. It is no wonder that the
Wall Street Journal recently affirmed that the vast majority of all inventions and patents worldwide originate in the United States. Capitalism and the ‘just do it’ attitude of the entrepreneur remains a model for the rest of the world. Small business owners work hard to create and build their businesses, and deserve to enjoy the fruits of their labor upon retirement. Much like the proverbial boat owner, it is said that the entrepreneurs’ two greatest days are the day he opens the business and the day he sells the business. Continuing the legacy to the next generation of entrepreneurs is a critical part of the process and the entrepreneurs’ ultimate success.
Addressing succession issues now will result in a comfortable retirement for the business owner, and will insure continuity of the business they worked so hard to build. Start today in planning for tomorrow, and in leaving a legacy for generations to come.