Part 2 – Strategic Succession Planning for Family Business Success

Introduction

A family business is not your typical business. In our last article, we saw how the family and ownership dynamics affect the management and operations of the family business. While most family businesses want to continue their legacy and be successful from one generation to the next, according to PwC only 12% of family businesses make it to the 3^rd generation. This tells us that a successful transition from one generation to another is one of the most crucial steps to ensure the survivability and sustainability of the family business. To do so, having a well-defined succession planning is key.

The idea is to determine who, how, and on what terms will the family business be transferred from one generation to the next. Problems occur if the succeeding leaders are not fully prepared to take over the helm or they do not wish to continue the family business and if the business is not manageable anymore. Lack of planning, however, is the most recurrent reason for a family business failing to execute a successful transition.

We briefly touched on succession planning and its challenges in our last article. In this article, we delve further into this topic and look at some of the common challenges and the best practices of succession planning.

Common Pitfalls

1. Last-minute planning: Planning for a new generation of leaders takes time and effort. It is a process that takes years of planning. Not giving the successors enough time to groom their skills and prepare for the transition is one of the biggest mistakes in succession planning. A hasty transition often leads to a lot of internal problems and underperformance which eventually leads to further changes in leadership. 
2. Postponing the transition: When the succession is postponed, the current generation of leaders may develop a preference to maintain the status quo. This can seriously affect the health of the business as these leaders can be resistant to change, new technologies, and new ways of doing business due to their traditional way of thinking. They may not be willing to discuss new ideas or take any risks. The dynamic nature of the business makes it imperative for the family business to change with the times.
3. No clear goals or objectives: Any business has long-term goals and objectives that act as a roadmap to ensure that all employees are working towards a common purpose. The new generation of leaders may have different goals in mind which can cause a lot of confusion and anger once the transition happens. As a family, it is important to discuss and understand the goals and the vision of the business.
4. Not exposing the successors to the tricks of the trade: Not givingthe leaders of the future some exposure to the operations and the functioning of the business is a huge pitfall.  Allowing them to take on some amount of responsibility from a young age is always a good idea. It is important for them to develop connections, discuss business issues, meet stakeholders to understand the magnitude of the business and its responsibilities. Waiting till the transition is complete to expose them to the business can be quite overwhelming.

Best Practices

1. Strong Governance Policies: Establishing strong governance policies with a well-laid-out structure that clearly defines the roles and responsibilities within the family concerning the business needs will avoid conflicts and issues. When the roles and responsibilities are clearly understood by all generations, the transition becomes easier.
2. Effective Communication: Having open discussions about business problems and other issues across generations is imperative. Ideas should be welcomed and appreciated by the older generation. Open and effective communication will significantly contribute to the health of the business and help clarify the vision and goals of the business. Have regular family meetings or family retreats at neutral locations to discuss important matters. When the time comes, this will help in a smooth transition from one generation to another.
3. Family Office: Identify an experienced family office with qualified investment professionals, lawyers, and financial experts on board to help with the succession planning process. Getting outside help from consultants and family offices should not be seen with skepticism.
4. One Successor: Dividing management and day to day responsibilities evenly amongst heirs is not the best course of action. It may be an emotional decision but when it comes to ensuring the success of a business, having clear hierarchy is always recommended. Owners should have clear and open discussions with all heirs to determine their interest in taking over the business and choose a successor that has the core competencies and the determination to take the business to the next level.
5. Exit plan: The current leadership should clearly communicate their exit plans to ensure a smooth succession. This gives the business time to determine the logistics of the exit. It also allows the successors to prepare well in advance and start working towards taking over the helm.
6. Update the Succession Plan: Succession plans should be reviewed at regular intervals and updated according to the changing needs of the business.
7. Determine a Talented Pool of Candidates: While having only one successor is the way to go, keeping a backup list of candidates will ensure that if the chosen successor decides to leave the business abruptly, the business can choose the next successor from the talented pool of candidates.
8. Identify Skill Gaps and Training Needs: Determine and articulate necessary skill sets and core competencies for key positions. Identify gaps and training needs within the potential pool of candidates. Develop programs and procedures to ensure that the learning needs are met.
9. Maintain Morale: A huge change like new leadership can have a negative impact on the morale of the employees and the business. Having an open discussion about who is taking over next becomes very important. It gives the employees time to accept the changes. Being transparent also inculcates a sense of confidence and boosts morale.

Conclusion

Succession planning is crucial for the survival of any family business. Planning for succession avoids chaos, turmoil, and fighting when a family member retires or passes away. If the transition is chaotic or the wrong successor is chosen, it can have devastating consequences on the future of a business. That is one of the main reasons why we see merely 12% of family businesses making it to the third generation. To add to this, most of the family businesses don’t think about a succession plan till it’s too late.

Family businesses with a well-thought-out plan in place fare far better than those that don’t and in today’s dynamic business world, to survive and sustain, the family business owners must think ahead and have a smooth succession plan in place.

Also Read: Part 3 – Remarkable and Fair Compensation Strategies in Family Businesses