Succession planning to preserve legacy when family and business collide
Families, on their own, are complex systems. They are lifelong connections, and they are typically striving for equality and unconditional love. The nature of a business is quite the opposite. Involvement is not guaranteed and is typically conditional.
That’s what makes family-run businesses so challenging. To have success mixing these two systems requires a foundation of trust, transparent communication and thoughtful, proactive planning. Being in business together, while often ultimately successful, can put a family’s well-being, their relationships and their wealth at risk. Despite these challenges, there are many unique opportunities and benefits that can unfold with proactive attention to overcoming obstacles.
Many of the challenges of succession planning within a family business stem from the difficulty of talking about money or thinking about and planning for death. Business founders start out making all of the decisions, and for many years, the success of the business rests on their shoulders alone — often with great sacrifice, blood, sweat and tears. The thought of retiring or handing over the reins can seem unfathomable. But not having a plan, and not clearly communicating the plan to all stakeholders, is worse. Without clear expectations and qualifications for a future leader, family members can end up destroying relationships while fighting for their voice to be heard — just picture the recent hit television show "Succession."
To avoid this outcome, it is important that a family business puts a governance framework in place to ensure the right people are in the right place at the right time to make the necessary decisions and that there is a structure to how these decisions are made.
When “passing the baton,” so to speak, it helps to designate a period when the founder and successor can both hold the baton together. This engages the founder in a process of knowledge transfer conducted on their terms, it allows the successor to develop a deeper respect for their mentor’s founding principles, and it enables both to develop a mutual understanding of how the business can evolve.
Not only should every business have a succession plan, it should also have a just-in-case plan. A just-in-case plan is similar to insurance — while we hope our house does not burn down, we proactively plan that it might, just in case. In the same vein, it is critical to have a plan in place just in case the founder or another key leader and decision-maker becomes incapacitated, suffers a rapid health decline as the person ages or even just decides to suddenly quit or retire.
An agreement written in good health should outline how to protect the enterprise from a crisis. This could include a clause that leaders over a certain age are subject to annual health assessments by a trained physician, or if capacity is in question, a second opinion is required. If confirmed by a doctor that there are signs of significant declining capacity, the leader agrees in writing to step down and move forward with the predetermined succession plan. While it’s uncomfortable to speak about such things, it’s ultimately best for the business to engage in a “fire drill” — in other words, scenario planning and testing for if the worst should happen.
Conflict is normal in families and in business and can even be healthy, but only if it’s done respectfully.
A foundation of trust is required for a family business to be positive both for the family and the enterprise. Trust requires empathy, active listening, positive intent and, in some cases, a commitment to put the good of the group above the individual. Relationships take work — especially with family members.
I often encourage families to explore their core and aspirational values. Shared values should be at the heart of how decisions that impact the family and the business are made. An agreed-upon shared purpose can also be helpful in guiding decision-making.
Having a conflict management policy in place allows the family to come to a shared agreement on communication — how they will talk about each other publicly and what is kept confidential. Agreements on protecting reputations can avoid damaging conflict or lawsuits, and having nonfamily board members mediate these agreements can be helpful to avoid potential power struggles.
Avoiding entitlement with an employment policy
Another key challenge in family business and succession planning is nepotism. Giving high-power positions in the company to family members who may not be capable or deserving puts professional competence and reputation at stake.
To this end, an employment policy is a key governance document, ideally introduced before anyone in the next generation begins working for the business. It has many facets, but the basic principle is this: The standard for family employees must be higher than that of a nonfamily employee — not the opposite.
The employment policy defines the eligibility requirements for family members to work in the business. I recommend that it include a preference for employing someone only if that person works outside the business for a few years, to gain external experience and validation, and is ultimately hired for a position because the person is the best candidate for the role.
When working with family enterprises, I often like to ask what legacy they truly want to leave behind. What do they want their children and grandchildren, and the community, to say about them after they are gone? How do they want the business to impact the family? How should ownership be transferred? Often families pass down equal ownership to their children regardless of their involvement in the business but decide the decision-making and board roles should be held by those working in or involved in the business on a day-to-day basis.
At its core, succession planning is about overcoming the initial discomfort of discussing the future, so that family members can communicate openly and honestly about what they want that future to look like — and oftentimes, the future is more aligned than one might think.