Succession Planning -Part 21: Managing a Family Business (Pt. 1)

 No small business is easy to manage, and this is especially true in a small family business.  It is subject to all the problems that beset small companies plus those that can, and often do, arise when relatives try to work together. This will be a 4 part post as the check list for Succession Planning -Part 21: Managing a Family Business (Pt. 1) Is a long one.

 The family member who is charged with managing the company has to work at initiating and maintaining sound management practices. By describing what is to be done and under what circumstances such practices help prevent some of the confusion and conflicts that may be perpetuated in family run businesses

 The questions in this checklist are designed to help chief executive officers to review the management practices of their small family companies. The comments that follow each question are intended to stimulate thought rather than to include the many and various aspects suggested by the question.

 This checklist should serve as a motivator and an outline for you and your business advisors to set in motion the essential changes needed to insure the success and continuation of your business!

 q  Do you have written policies?

 Flag this question and return to it later. Working through this checklist should suggest changes that may be needed even if you have written policies. By the same token, your business will provide input for writing out policies if there are none in writing.

 q  Is executive time used on high priority tasks?

 The time of the owner-manager is one of the most valuable assets of a small business. It should not be dribbled away in routine tasks that can be done as well, if not better, by other employees. Never lose sight of the fact that you as owner/manager, have to make the judgments that will determine the success of your business.

 You may want to run a check on how your time is used.

You can do so by keeping a log for the next several weeks. On a calendar memorandum pad jot down what you do in half-hour or hour blocks. Then review your notes against the questions: Was my time spent on management tasks such as reviewing last week's sales figures and noting areas for improvement? Or did I let it dribble away on routine tasks such as opening the mail and sorting bills of lading? You may want to ask your key personnel to run the same sort of check on their time.

 q  Do you set goals and objectives?

 Goals and objectives help a small company to keep headed toward profit. Goals and objectives should be specific and realistic. In addition they should be measurable, time phased, and written. List your goals and objectives by writing them out for your present successful operations. Objectives that are written out in straight-forward language provide a basis for actions by your key personnel. For example, state that you will sell certain number of units this year rather than saying you will increase sales.

Is planning done to achieve these goals and objectives?

 In a sense, planning is forecasting.

 An objective, for example, for next year might be to increase your net profit after taxes. To plan for it you need to forecast sales volume, production of finished goods inventory, raw materials requirements, and all the other elements connected with producing your forecasts, you will want to make provision for watching costs, including selling expenses. If there are key employees who can provide input into the planning, ask them to become involved in that process

 

Succession Planning Part 20: Making Succession Work

Making Succession Work

 The key to making succession work - you must honestly communicate. This is the key ingredient. Use the family retreat as well as family meetings. Family meetings can educate the family in discussions about the nature of the firm, the kinds of leadership skills needed, entry and exit conditions, decision-making policies and conflict resolution procedures. Casual conversations about these issues can contribute to your formal planning later on.

 Family meetings do not have to be formal affairs, but they should occur regularly and have an agenda. Parents don't have to lead the meeting; have the offspring organize and conduct a portion of the meeting. Use the meetings to defuse any potential time bombs.

 Anticipate problems. Will there be any problems with non-family members? If so, which ones? How will they be a problem, and what can you do (short of firing them) to handle it?

 Sibling rivalry is another problem to consider. Does it exist? If so, how will you resolve it?

 It may not be a problem until the successor is named. Develop a code of conduct for sibling relations. This code will outline how siblings must act toward each other (i.e., in a way conducive to a healthy business), including how to work together, how to play together and how to keep spouses informed about what's going on. Anticipate problems that may arise and meet them head on.

Summary

Succession is a process that may extend from two to four years or longer depending on your age and on your successor's age. It occurs in phases. Over a period of time, you initiate or educate your children to the family business. After determining a successor, you develop a plan to transfer leadership in the family business. The decision to announce who the successor is and when the transition will occur depends on the family.

 There are benefits to making an early announcement, including (1) reassuring employees, suppliers and customers, (2) allowing siblings time to adjust to the decision and to make alternative career decisions, if necessary, and (3) enabling the entrepreneur to plan for retirement.

 The fundamental goal should be to pass the family business successfully to the next generation. To do this you must feel financially secure, secure with the company's future goals and plans and secure with your successor.

Succession Planning - Part 18: Education of the Successor

Education of the Successor

Training or educating the successor in the firm is a delicate process. Many times a parent finds it difficult to train a child to be successor. If so, an alternative trainer may be found within the firm. A successful trainer will be logical, committed to the task, credible and action oriented. These attributes, when tied into a program that is mission aligned, results oriented, reality-driven, learner centered and risk sensitive, will produce a well-trained beneficiary. All of this, of course, is easier stated than accomplished. Education of the successor should be a priority for it will determine the future success of the business.

 A training variant of the management by objectives (MBO) concept is the training by objectives (TBO) concept. This concept can be an effective method for providing both the training for and the evaluation of successors. In the TBO process, both the trainer (you or a non-family manager) and the trainee (potential successor) work together to define what the trainee will do, the time period for action and the evaluation process to be used. This system allows the successor to be placed in a useful, responsible position with well-delineated objectives. It also provides for steps of increased responsibility as goals are met and new, more rigorous goals are established. It is important that the successor enter the firm in a well-defined position. Instead of entering the company as "assistant to the president," which requires that he or she follow the president around all day, the successor (or any other child) should enter with a specific job description. In a small business this is very difficult because everyone is usually responsible for all tasks. Nevertheless, the successor cannot be evaluated effectively if he or she is not given responsibility and authority for certain tasks.

 Your business will enable you to determine which criteria are necessary for good training. Usually, an owner wants to assess a successor in the following areas:

• Decision-making process.
• Leadership abilities.
•  Risk orientation.
•  Interpersonal skills.
• Temperament under stress.

 An excellent way to assess these skills is to let the successor give his or her insight on a current problem or situation. This is not a test and should not be confrontational. Instead, solicit advice and try to determine the thinking process that is generating your successor's suggestions. For example, you may be faced with a pricing decision. Give the successor all the information needed to determine whether or not to raise prices, then sit back and listen. Ask questions when appropriate--these should be "Why?" and "What if?" After the successor is finished, say "I was considering . . ..” This way each of you can learn how the other thinks and makes decisions.

 It is possible that your leadership style differs from that of your successor. Your employees are used to your style. If your successor's style is very autocratic and uncaring, your company is going to experience problems.

 Potential successors should be introduced into your outside network (e.g., customers, bankers and business associates), something many managers neglect. This will give everyone time to get to know your successor and allow the successor to work with business associates and bankers, and to get acquainted with customers.

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Succession Planning - Part 17: Selection of the Successor

Selection of the Successor

Note:  Remember… the process of Selection of the Successor can be done from the inside OR the outside.  If you decide to go outside … the process remains basically the same as outlined below.

 Selection is the process of choosing who will be the firm's leader in the next generation. Of the entire transition process, this can be the most difficult step, especially if you must choose among a number of children. Selecting a successor may be viewed by siblings as favoring one child over the others, a perception that can be disastrous to family well-being and sibling harmony. Owners select successors on the basis of age, sex, qualifications or performance. Because of the potential for emotional upheaval, some owners avoid the issue entirely, adopting an attitude of "Let them figure it out when I'm gone."

 Nevertheless, there are several solutions to this dilemma. Assuming you have more than one child who is or can become qualified for the position of president, you can select your successor based on age. For example, the oldest child becomes the successor. Unfortunately, the oldest may not be the best qualified. Placing age or sex restrictions on succession is not a good idea.

 Alternatively, you could have a "horse race." Let the candidates fight it out, and the "best person" wins. While this is the style in some major corporations, it is not the best option for all family businesses.

 Family business owners may want to take advantage of a successor selection model developed for corporate executive succession. In this model, family members, using the strategic business plan, develop specific company objectives and goals for the future president or chief executive officer. The job description includes the requirements for the position--such as skills, experience and possibly personality attributes. For example, if a firm plans to pursue growth in the next five years, the potential successor would be required to have a thorough understanding of business valuations and financial statements, the ability to negotiate and a good relationship with local financial institutions.

 Designing such job descriptions provides a number of benefits. First, it removes the emotional aspect from successor selection. If necessary, the successor can acquire any special training the job description outlines. Second, it provides the business with a set of future goals and objectives that have been developed by the whole family. Finally, the founder may feel more comfortable knowing objectives are in place that will ensure a growing, healthy business.

 If you have an outside board of directors, you may want to solicit their input regarding successor selection.

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Succession Planning - Part 16: Initiation of the plan

Initiation of the plan

The initiation of the plan phase is that period of time when the children learn about the family business. It occurs from the time the children are born. A child can receive either a positive or a negative impression of the family business. If parents bring home the negative aspects of the business, complaining about it and about employees and relatives, the children will view the business in a very poor light. Other ways to destroy children's interest in the business is to be secretive about it or to convey an unwelcome or a hands-off attitude. There are families in which children are welcome to join the family business, but no one has told them so.

 

Owners are often cautious about systematically conditioning their children to enter the family business, an attitude that stems primarily from their awareness of individual differences and their belief that their children should be free to select a career path.

 

If you do want your children to enter the business, or at least have that as a career alternative, there are some steps you can take to initiate them into the firm.

 

The first step in motivating your children is to be certain that is what you want. Your lack of conviction about their involvement will be communicated to them. This may be interpreted as doubt about their ability, about the viability of the business or about the potential of the parent-child relationship to survive the strain of succession. Any of these situations can cause your child to lose interest in the business.

 

Assuming your children know that you want them to enter the business, you should talk with them often and openly about it. Be realistic, but stress the positive aspects. Your business provides you with many positive experiences to share with your children. Your children should learn what values the business represents, what the business culture represents and where the business is headed.

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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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