Several Habits of Successful Successors
by Shel Horowitz
“Most family transition is done upside down and backwards,” Dean Fowler, author of the book Love, Power, Money: Family Business Between Generations, told the Family Business Center's March 2006 gathering at the Log Cabin.
He explained this bit of heresy: in most succession planning, the consultant focuses on the senior generation; they’re the clients, they make the decisions about how to transition to the next generation. “But if all you do is effective estate planning, it’s likely that your business will fail in the next generation”; succession planning needs to focus on the successor, if that successor will succeed.
And that means looking not only at gifting strategies for estate planning but also developing liquidity strategies for the successors to buy out the parent generation. "In successful transitions, the successor generation buys voting control from the senior generation out during their lifetime, rather than waiting for the second spouse to die.”
It also requires some focus on management style and strategy. Typically, from the first to the second generation, “It’s going from kingdoms to democracies."
How do you transition and who needs to take the initiative? From Fowler's perspective, successors need to be proactive in designing the transition plan and presenting their alternative to their parents.
You have to get clear on the boundaries of who’s going to do what where and when. As Fowler illustrated, "You need to know who’s the salesman and who’s the photographer. Vincent Van Gogh could not sell a painting but his brother was a fantastic marketer.”
Sibling and cousin teams have to develop a structure that lets them function differently in their roles as owners and as managers; the equity and control may be shared while operational authority resides in a board-elected president, for example. “In some of the most successful family businesses, none of the shareholders work in the business. They hire outside managers.” If the business forces owners to work there when they have no interest or competencies, “it promotes incompetence in the company."
Successful family businesses establish a governance structure, such as a formal Board of Directors, which in turns oversees the President. Non-active stockholders can have a voice through the Board but stay out of the way and do not meddle in day-to-day operations. Through effective governance structures, many successful family businesses keep the family invested in the company and consequently they have a competitive advantage, since their cost of capital is low.
Successful transitions happen when the successor generation is ready emotionally, intellectually, and financially. The successors need self-esteem, independence, and the perspective that comes from having worked away from the family business for a few years—something that “trustifarians” hanging out on the ski slopes and whining don't have.
But also, both generations need to make choices that benefit the business. “In the unsuccessful situations, entrepreneurs are often self-centered and have spouses who are over accommodating, and the children tend to continue this split. In the unsuccessful families, parents tend to protect the most incompetent family member: ‘We knew he’d never make it in the world, so we made him president.’
“If there’s a disability, work around it. We had one business where the son had a severe reading disability. We got him a tape recorder. He could listen to instructions and make his reports. He become a successful contributor to the business."
The successor generation must be allowed to follow their own passions—which may or may not coincide with those of the previous generation. Often it's hard for the senior generation to accept the passions of the successor generation. “A theater major came back to a Wisconsin print advertising company. He took the initiative to propose that the business develop a new profit center in TV and radio advertising. When his father died unexpectedly, the son was now the 100% owner; he became the creative director and hired a non-family executive.
Now they only provide advertising of retail products through TV and radio; they’ve given up print. Furthermore, this proactive successor has successfully grown the business to serve global markets. The family cooperated to reshape the business to meet the passions and interests of the successor.
Successful successors do it their way. They don’t just keep accommodating to the rest of the family and the senior generation.“Your parents will never change the way they relate to you. You’d see this 90-year old saying, ‘Barbara, did you clean up your dishes?’” But Barbara can set limits on her parents’ micromanaging. She can say, ‘Dad, I can handle this on my own,’ or ‘Dad, I could really use your advice on this.’”