By Edward D. Hess,
Adjunct Professor of Organization and Management, and
Executive Director – Center for Entrepreneurship and Corporate Growth,
Most family businesses do not successfully make it to the second or third generation. Estimates are that only 70% of the family businesses successfully make it to the second generation and only 10% to the third generation.
Two-Major Life Changes
Inter-generational successions are major life changes for two people (and their spouses) and for the company – its employees and customers. To increase the probability of success of succession planning you should plan for not one, but two successions:
1. The choice, the training and the testing of the potential successor; and 2. The planned exit and moving on to something meaningful by the retiring leader.
Why Do Successions Fail?
Most successions fail for one or more of the following reasons:
- You choose the wrong successor;
- He or she is not qualified or experienced enough;
- He or she is not respected by the employees and customers; or
- He or she is not respected or trusted by family members; or
- The retiring CEO will not let go and undermines the successor; or
- Other family shareholders who are employed in the business and who were not chosen as successor create major problems; or
- Other family shareholders not employed in the business use this opportunity to force a stock sale.
Five Year Plan
Proper succession planning is a 5-year process for both parties – the retiree and the successor. A successor, whether a family member or an outsider, has to earn the trust of the family, the employees and the customers and be tested over time.
As importantly, the current CEO needs to plan his or her exit and “moving on” to something meaningful. Most business builders cannot all of a sudden do nothing – have no status – no place to go in the morning. The retiring CEO needs time to think, test and create what he or she will look forward to in the next phase of their life – whether that is public service, charitable work, alumni activities, teaching, or politics. Most retiring CEOs need a new sandbox – somewhere else to go and play in a meaningful way.
So there are two successions going on simultaneously, a “succession-in” and a “succession-out” – two major life changes – both of which take time and planning.
Getting Started – It Is Not About You
In many cases, it is hard – no, very, very hard – for entrepreneurs and business builders to confront their mortality and to deal with giving up control over their “little baby”. Yet only through proper succession planning can the “baby” successfully move on to its next phase of life. A failed succession can destroy the “baby”.
Succession planning is a business builder’s greatest duty – one of STEWARDSHIP. Succession planning is a necessity to protect the family’s source of wealth – the business. The CEO owes it to his spouse and family to do everything he or she can do to ensure that the family legacy survives and prospers. Succession planning is not really about you – it is about your spouse, your children, your employees and customers. The hundreds of people who depend on you to do what is right for the business and for them.
Focus As Much On The Succession Out
To increase the probability of success two simultaneous successions need to be managed: The moving on of the older generation and the moving in of the younger generation or the non-family member CEO.
I have worked on two successions in the past few years, both of which, thankfully, worked well – not because of me, but because of the people involved. One involved a succession from a 65-year-old second generation son-in-law to a 37-year-old third generation grandson; and the other involved a 62-year-old second generation to a 40-year-old outside (non-family member) CEO.
In both cases, the new leader had industry knowledge, had worked with the business and the family for over 5 years, and had been tested thoroughly. Both of the new leaders had, over time, earned the trust and respect of family members (including those not chosen as successor) and employees.
Secondly, both retiring CEOs had something meaningful in their lives to move on to. One is working on environmental causes and the other entered public service. Both have stayed on their respective boards as Chairman for the purpose of advice and council. These meaningful exits were well thought out and planned over time. The retiring CEOs took the time to find their “place” and transitioned over time. Good successions do not just happen. They take time and have to be managed.