Succession Planning - Part 15: Choosing a Successor in a Family Business

Succession is the transferring of leadership to the next generation or hired management. It is a process rather than an event. While there is a time frame within which the transition will occur, the actual amount of time taken for the process is arbitrary. It will depend on you, your family and the type of business you are in. This is a difficult process for most family businesses. The failure to face and plan for succession has been termed the "succession conspiracy" by Ivan Landsberg. He cites a number of forces that act against succession planning in Choosing a successor in a family business:

 Founder

· Fear of death.

· Reluctance to let go of power and control.

· Personal loss of identity.

· Fear of losing work activity.

· Feelings of jealousy and rivalry toward successor.

 Family

· Founder's spouse's reluctance to let go of role in firm.

· Norms against discussing family's future beyond lifetime of parents.

· Norms against "favoring" siblings.

· Fear of parental death.

 Employees

· Reluctance to let go of personal relationship with founder.

· Fears of differentiating among key managers.

· Reluctance to establish formal controls.

· Fear of change

 Environmental

· Founder's colleagues and friends continue to work.

· Dependence of clients/customers on founder.

· Cultural values that discourage succession planning.

 Overcoming the forces against succession planning requires the commitment of the family and employees of the business.

 Succession occurs in four phases: initiation, selection, education and transition. A discussion of each phase will follow in 4 separate posts.

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Succession Planning - Part 14: Where Do You Go For Money?

 Another major problem in managing a family business is that of obtaining money for growth. Generally speaking if the company is profitable, you can get funds from your bank. Here are some ideas on Where Do You Go For Money regarding how a small business can generate operational/growth funding.

But when the growth is substantial, a company often outgrows its local bank. When you see the prospect of expansion looming ahead, the managing relative should begin to plan for it. You will need to consider techniques for financing, such as the following. Planned financing may be a combination of these items:

 (1)  Taking out a mortgage on the company's building.

(2)  Asking suppliers to extend credit on purchases.

(3)  Factoring the company's receivables and inventory financing.

(4)  Borrowing on a note basis from friends.

(5)  Borrowing the cash surrender value of relatives' life insurance policies.

(6)  Contacting an insurance company for a long-term loan.

If the business is a small corporation, the following techniques also offer possible sources of money:

 (1)  Selling a portion of the stock to the company's employees for cash.

(2)  Selling some of the stock to another company for cash. In a merger, you can use the credit of the larger company.

(3)  Contacting a regional investment banker who may privately find a lender, using some of the company's stock as collateral.

(4)  Contacting a national investment banker who would underwrite some of the company's stock. This would be "going public".

 Effective budgetary controls are important in seeking growth funds. Such controls help the managing relative to determine the company's needs. Lenders also regard them as evidence of good management.

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Succession Planning - Part 12: How Is the Pie Divided?

How Is the Pie Divided?

A important issue in succession planning is How Is the Pie Divided. Paying family, members and dividing profits among them can also be a difficult affair. Many persons feel that they are underpaid, but what about relatives who comment as follows:

 "Uncle Jack sits around and gets more than I do."

"Aunt Sue goes to Europe on the returns of money her husband put into the business before he died ten years ago."

"Your brother goofs off and rakes in more than you do."

 How do you resolve such complaints? You don't entirely. But if the business is a small corporation, certain equalizing factors can be accomplished by stock dividends. By re-capitalizing the company, some stockholders can take preferred stock with dividends.

 Salaries are best handled by being competitive with those paid in the area. Find out what local salary ranges are for various management jobs and use these ranges as a guide for paying both family and non-family personnel. When you tie pay to the type of work that the individual does, you can show disgruntled relatives the value that the industry puts on their jobs.

 Fringe benefits can also be useful in dividing profits equitably among family members. Benefits, such as deferred profit sharing plans, pension plans, insurance programs, and stock purchase programs, offer excellent ways to placate disgruntled members of the family and at the same time help them to build their personal assets.

 How the pie is divided is vital to growth in a small business. Profits are the seedbed for expansion, and lenders are influenced by what is done with profits. What banker wants to lend a company a substantial amount when relatives drain off its earned surplus?

Succession Planning -Part 11: Status Quo Blocks Growth

When some of the relatives in a family-owned business grow older, they develop an attitude of status quo. They don't want things to change and are afraid of risk. With this attitude, they can, and often do, block growth in their family's business.

 The solution to such a problem is to urge or suggest that the status quo members slowly disappear from the scene of operation. One way to do this is to dilute their influence in management decisions. For example, the status quo relatives might be given the opportunity to convert their stock in the corporation to preferred stock. Or they might sell some of their stock to the younger relatives.

 It might also be possible for the status quo relatives to think in terms of gradual retirement. Their salaries can be reduced over several years, and they can relinquish some of their interests. With the proper advice, it might be possible for a small corporation to re-capitalize. A new partnership agreement might be drawn up when the company is a partnership.

 Such actions can take into account all of the growth of the business to that particular point and can enable the retreating members to recover their equity. Meanwhile, the manager and active relatives can renew their efforts toward expanding the business.

Succession Planning - Part 10: Is Non-family Turnover High?

Is Non-family Turnover High?

Some family-owned companies are plagued with a high turnover among their non-family top people. Sometimes relatives are responsible. They resent outside talent and, at best, make things unpleasant for non-family executives. Succession Planning - Part 10: Is Non-family Turnover High examines this issue and the issue of expenditures in the small business.

In other cases, top-notch managers and workers leave because promotions are closed to them. They see your relatives being pushed into executive offices.

The exit interview is a useful device for getting at the root of this type of turnover. A key employee who has decided to leave may be eager to tell you the true story - or at least enough of the facts to help you develop a course of action.

When a manager has the facts, he or she may have to confront the trouble-causing relative with an unpleasant story. What comes out of the confrontation is anyone's guess. Rare is the owner-manager who can fire a troublesome and close relative and make it stick. One way to remove such a thorn from the side of key executives is to help the relative start a business in a non-competing line-provided he or she has the management ability that is necessary for success. Another way is to "exile" him or her to a branch office or find a job with another company.

Spending To Save Money?

Many times, as the owner-manager you feel that you must make an expenditure to improve efficiency, yet other family members oppose the expenditure. They view it as an expense rather than an investment. They feel that funds spent for items, such as more efficient equipment, encroach in their year-end dividends.

One way to help these relatives see that "you have to spend money to make money" is to base your arguments for the expenditures on facts and figures that non-family employees or your business advisors have gathered. Suggest to the opposing family members that the matter be settled on a cold dollar basis: for example, "by spending money for this machine, we can increase profits and get our money back in four years."



If the opposing relatives refuse to accept your projection, try calling in outside business advisers. Relatives will sometimes believe advisers, such as your management consultant, accountant, or attorney, when they won't accept your judgment. But keep in mind that outside advisers, who are personally close to other family members, should not be included among your counselors.

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