Archive for the ‘Succession Planning’ Category

Managing Conflict In A Family Business

Nearly 80% of all businesses are family businesses In fact, about one-third of the Fortune 500 are family-owned or family controlled. Family businesses account for nearly one-half of all jobs and 40% of the gross national product. These are impressed statistics indeed. And while managing conflict is certainly important to everyone involved from a personal standpoint, it is obvious that this has a major impact on our overall economy when considering the above statistics.

In discussing the subject of conflict in family businesses, it is essential to point out that leading psychologists acknowledge that conflict is a normal by-product of transition in a family business and that there are proven ways to manage such conflicts in a productive (or less destructive) manner.

While this may not eliminate the conflict or underlying causes completely, sufficient gains can be realized to allow the business to function in a more productive and harmonious manner. In some cases, conflict between family members (or others) can be resolved (i.e. essentially eliminated). In other instances, it may only be possible to minimize it.

I. CONFLICT RESOLUTION

A. Negotiate for meaning – be sure you understand the issues involved; i.e. don’t fight over the wrong reasons;

B. Reverse roles – be sure you understand the other person’s perspective and feelings; i.e. their “reality”.

C. Negotiate for common goals – find the principles that all parties can agree on. Frequently, people don’t realize they want the same thing and are haggling over the “mechanics” of execution.

D. Negotiate for cooperative action – agree on what you will do – not what you won’t do; identify your degree of rigidity or flexibility on certain items (i.e., black and white vs. gray areas). Determine what you will give up and what you want in exchange.

E. Negotiate autonomy – to coin a phrase from the “hippie generation”, everyone needs “their space”. Identify how much “space” each of you needs and then develop a way to assure that everyone gets their needs satisfied. At first glance, these approaches may sound abstract, but after careful thought and introspection, almost everyone can relate them to his/her situation.

II. CONFLICT REDUCTION

If you have determined that total resolution isn’t possible or necessary and that simply reducing the amount of conflict (as some conflict may appear beneficial for other reasons), then you should consider the following steps in combination:

A. Negotiate for meaning
B. Negotiate for autonomy
C. Agree on a time period (e.g. we’ll agree to disagree and not throw rocks for the next three months”).

At times you may have a project that requires the efforts of two or more people. Here you have two options of which both are directly opposite:

1. Decrease interdependence – separate the tasks (if possible) so that each party can work independently (i.e. put them in separate “corners”) or
2. Increase interdependence – structure the tasks in such a fashion that each party will fail without the cooperation of the other (i.e. “United we stand, divided we fall”).

A simple example of this is taking two people and tying one leg of each of them together and then having them run a race together.

While they may despise each other, they know they will surely lose the race if they don’t work in unison. Who knows, maybe they’ll begin to trust and respect each other in the process?

III. CONFLICT REMISSION

SOURCES OF CONFLICT Conflicts between family members in business can often be traced to similar underlying conflicts in their personal family lives. Conflict remission requires and understanding of those dynamics; for example:

1. Differing goals for the business
2. Time management/work overload
3. Compensation/benefits disagreements
4. Different or unequal commitment to the business (hours, diligence, sense of urgency)
5. Family – non-family employee issues
6. Power/ego struggles
7. Insufficient definition of roles and responsibilities
8. Spillage between work and home life
9. Difficulties expanding the business
10. Change in the firm or breaking with tradition
11. Differing attitudes about spending or investment
12. Succession issues
13. Family dynamics interfere with communications and decision making
14. In-laws in the business
15. Personal crisis of family member employee
16. Feeling unsupported

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When Family Is Unable to Take Over the Reins

Family-owned businesses are faced with a predicament that is becoming all too common: there are no family members to take over the reins of leadership. This is not to say there are no family members working in the business. Rather, the family members in the business (including cousins, uncles, brothers, in-laws, children, etc.) either are not competent, interested, or available to assume leadership positions.

Business owners in this situation often assume that their only option is to sell the business. In fact, consolidators (i.e. larger national companies looking to merge smaller, local companies) will prey on companies in this situation. Consolidators recognize that these businesses are vulnerable to death, disability, or early retirement of the owners and that these businesses do not usually sell at multiples of earnings as high as comparable public companies. Therefore, they have a real incentive to chase after these companies once they smell a hint of weakness in succession planning. Some offers are so large (because of the huge difference between the “public offering” valuation and the “private” valuation) that the offer almost represents a bribe or extortion. It can be a true example of “an offer too good to refuse”.

These businesses have other options beyond an outright sale of the business. Some of these options are to:

1. Hire competent non-family managers to permanently assume leadership positions. They essentially “share custody” of the family business with family member/shareholders. This usually requires creating “golden handcuffs” so these non-family managers will remain and be loyal to the company…and the family.

2. Hire competent non-family managers to temporarily assume leadership positions in order to develop family members who may have the potential for leadership but are simply too young, inexperienced, or lack training. This is a very viable alternative but requires careful orchestration.

3. Carefully examine the list of family members who do not work in the business (who are already successful in their careers) and determine if they might be good candidates to “recruit”. Then approach them to determine their level of interest in joining the family business. They may still require grooming from non-family managers that have the necessary experience and training, but this is an acceptable alternative if this is early enough in the succession plan.

4. Merge with a “friendly” competitor. While this may, in some instances, be tantamount to a sale, it can also be structured like “a jointure of equals” where the company with the weaker management team is integrated with the stronger company and a new management team is assembled taking advantage of the strengths of all members. Sometimes this works because there is some overlap (and cross coverage) even though the weaker team members might not have been able to carry the entire leadership load by themselves. Similarly, the stronger players may benefit from some backup (e.g. emergencies, long vacations, personal time off, illnesses, etc.).

5. Have another company, who desires participation in your industry, become a significant shareholder in your company who will also supply some management talent as well as financing. This is a common alternative when the family business has significant untapped growth potential and the shareholders desire to tap into that but simply do not have the resources to do so alone. This “gap of resources is often money as well as management talent. Simply put, the family members want to keep the goose that laid the golden egg, but are not able to care for it in a manner that maximizes egg production over the long term.

There are other ways to deal with this situation only limited by one’s imagination, time available to execute the alternative, and the risk tolerance of the family member/shareholders. The goal of this discussion is to simply let family businesses know that they do not have to view an outright sale (often under undesirable circumstances) as the only option when there appears to be no family member to take over.

Family businesses that face this situation would be well served to read the many articles and case studies that have been written on this topic. The experience of others in similar situations is invaluable.

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So much to do, so little time.

The potential demand for succession planning and conflict management by family businesses is enormous. However, that demand lays virtually dormant. Could denial and ego be the cause of such neglect? With well over 14 million small businesses in the United States, of whom more than 80% are family-operated, the mission of family business institutes (“To promote the continuity of family businesses within the family through the generations”) is a daunting challenge. Certainly, if institutes were to serve as consultants to family businesses, their mission would be physically impossible. Instead, these institutes serve as a venue to teach the teachers and to spread the gospel of what it takes to be a successful family-operated business. They do this not by dealing with the everyday management challenges that all businesses face (e.g. sales, finance, production) but by focusing on those challenges that are unique to family-operated businesses. I will go into greater detail later about what these unique challenges are and how they are manifested.

DO WE HAVE THE FIREPOWER?

The concern I have is how the fewer than 150 family business institutes will ever meet the succession needs of these businesses. The only reason they are able to cope is the extremely small number of family businesses in these organizations. Because family business institutes are fairly new to the scene (the majority are under five years old), most have fewer than fifty member companies. Most can accommodate fewer than seventy companies in their current format and facilities. Therefore, they must be able to reach out on a broader scale. I believe they need to interact on a greater level with the professionals who serve these family businesses. Professionals need to increase their clients’ understanding of their environment and how best to meet the challenges family businesses face. Why? Let me quote some statistics. 2 out of 3 family businesses that are in the 2nd generation will not make it to the 3rd. And 6 out of 7 family businesses that are in the 3rd generation won’t make it to the next. Now, these statistics are somewhat biased, as I understand that the average life cycle of most small businesses is around 25 years. However, this does not lessen the importance of the issue of continuity since it is accepted that one of the leading causes of family business failure is the lack of planning given to identifying and grooming a successor.

WE NEED THE HELP OF OTHERS

Many professionals focus on the tax and financial planning aspects of business transfer between family members. While those are important aspects, it is essential that attention be given to the family-dynamics and personal issues among the family members in the business. Accountants, lawyers and other professional advisors may not be formally trained in these disciplines, but they can play an integral role as facilitators and as a resource forother advisors who can team up with them. After all, they usually know the family members and have gained their trust. This is an essential element to the process.

OWNERS MUST BECOME INFORMED

There is further evidence that these professional advisors have a great opportunity to serve their clients in this manner. Family business institutes have to vigorously market themselves to attract these family businesses to become members. Family businesses often operate under the handicap of too few people to get too much done. Owners find it almost impossible to set aside time to attend seminars, participate in self-improvement programs and the like. They are busy doing things rather than managing people. Michael Gerber addresses this point effectively in his book, The E-Myth Revisited (© 1996). Worse yet, many entrepreneurs let their egos get in the way when it comes to seeking help from others. Their pride causes them to say, “I don’t need any help from others. I can take care of my problems myself”. Even worse, they are often in a state of denial when their pride makes them say, ” I’m Ok. I don’t have a problem.” That may be what General Custer was saying before his demise.

THE MARKET FOR SERVICES IS HUGE

If only ten percent of the family businesses in the United States had a real need to learn more about how to avoid the pitfalls that cause 2 out of 3 to fail after the 2nd generation and 6 out of 7 to fail after the 3rd, then there would be over one million potential members to be served by the fewer than 150 family business institutes. Of course, common sense would tell us that 10% is far too conservative. If this is the case, and if one knows that family business institutes work hard just to attract fifty family businesses to their membership, then what does this suggest? I contend it serves as proof that most family business owners and their family members have not made succession planning and healthy family dynamics a priority for their business. This was further proven in a study sponsored by an international CPA firm and a major life insurance company which showed that fewer than 25% of small businesses had done any type of succession planning, and fewer than 50% had chosen a successor in the event of death, disability or retirement of the founder or current leader.

NEGLECT KEEPS THE MARKET SMALL

So, while I started out feeling that family business institutes (including the Siena Family Business Institute) had so much to do in so little time, I guess they don’t really have to be so concerned with what could be such a daunting task. As long as family businesses don’t mind living with their internal problems (which don’t exist!), then the institutes don’t have to worry about addressing them. After all, out of sight, out of mind. No, I’m not going to let family business owners off the hook that easily. I will identify and address some of the typical challenges they face with the hope that maybe this friendly reminder might cause them to rethink their commitment to seeking help from family business institutes and competent professional advisors.

FAMILY BUSINESSES-THE DIFFERENCE

But before I do that, let me briefly address one issue. People who have never worked for a family-operated business often wonder what is so unique about the challenges found in those entities. While all businesses are made up of various types of people with varying personalities, what separates family businesses from other organizations is family. One only has to think of their relationships with parents, siblings, in-laws, cousins, uncles, aunts, and grandparents to appreciate why the emotional dynamics of these relationships might be different from the emotional challenges of non-family co-workers. The real challenges surface when these individuals fail to separate their behavior and roles as family members from their roles as employee in the family business.

NOT ALL FAMILY BUSINESSES ARE SMALL

So much for making the argument that family-operated businesses are different than non-family businesses. And by the way, not all family business are small businesses (i.e. under $25 million sales according to the Small Business Administration definition). There are many family-owned companies that have sales well in excess of $25 million, are international in scope, and are not publicly traded. As for the publicly traded family-controlled businesses, many people are surprised to learn that about 30% of the Fortune 500 companies are family controlled. One fine example is the Mars Corporation (makers of M & M candies). Coors Brewing, of beer fame, and Wrigley, of gum fame, were once family-controlled companies.

THE CHALLENGES: LEADERSHIP

Now back to the challenges of a family business. The most common challenge is determining which of the children (or other family members; e.g. cousins) will be capable of leading the team. Some families, like the United Kingdom, use the “oldest-male” system to select leaders. In today’s society, it is no secret that there are many females who possess the attributes to easily win an objective contest over their male siblings (younger or older) for top leadership roles. Fortunately, the “oldest male” approach is becoming obsolete.

COMPENSATION

Another challenge for family businesses is compensation. Parents often feel compelled to show each child they are loved equally by paying them equally, despite the wide disparity in performance of each child. They fail to accept that equal is not always equitable.

LETTING GO

“They won’t let go” is a common cry among children (who are often in their 50′s and 60′s) when parents are unable to pass the reins to them for fear of loss of financial security. When the existing owner/manager refuses to transfer control, serious conflict or lack of motivation among the children can occur. I have seen near anarchy occur with children threatening to take key employees with them to start new businesses.

PROCRASTINATION

Almost as bad as not letting go is when the parents finally agree to make the move, but procrastinate in getting the paperwork done. Years can go by before they finally sign the documents necessary to effect any real change in control. This creates mistrust and bitterness.

DELEGATION

Delegating is a challenge to all managers. But lack of delegation takes on a whole new persona in family businesses. Children take it real personal (as a lack of confidence in them) and parents suffer because they feel they must carry the load alone and are under appreciated. Dumb as it may sound, this is sometimes caused by parents (immaturely) fearing their younger generation progeny. Their fear is not of physical harm, but as a reflection of their getting older, or becoming less competent than their children, or just not wanting to give up control of an activity they enjoy.

TRAINING AND MENTORING

When it came time for my wife to learn how to drive (she was a late bloomer in this area), I knew that our marriage would stay intact if I funded her driver training with a professional driving instructor. Not because I didn’t know how to teach driving, but because I knew I wasn’t the best suited to do so. First of all, I would have taught her all my bad habits. Secondly, I knew I didn’t have the patience to stay calm as she careened into the sidewalks and slammed on the brakes in the middle of the block. The moral to this story is that not all parents are best equipped to select, train and mentor their successors. However, this does not mean they must be totally excluded from the process. This is a difficult thing for them to accept; so, it becomes a problem. There are many healthy ways to address this if only they would take the time to learn about them.

FINANCIAL SECURITY

I commented earlier about parents not letting go. But I didn’t mention that this is often well founded on their part. The value of the business often represents the greatest portion of the parents’ estate. Often, it is their sole resource for financial planning. Entrepreneurs often plow every penny they earn into the business and fail to provide a nest egg outside the business. This creates great pressure on them to retain control until the last minute. There are ways to address this concern in the interest of the parents and the children.

MAKING OBJECTIVE DECISIONS

Managers have a tough enough time disciplining or terminating key employees even when it is justified. Imagine what a tough time parents have disciplining or terminating family members when it is appropriate. I have even seen them unable to take appropriate action when a family member was caught stealing money from the business.

IDENTITY CRISIS

Entrepreneurs, by their very nature, have big egos. That doesn’t mean they are conceited or think they are omnipotent. It just means they have the personal pride and conviction to stick with their dreams when the going gets tough. Sometimes their egos (which can be tied to their personal identity) get linked to the business. That is, THEY are the business and the business is THEM. If the business becomes a failure (even if they are not working in it), then they have become a failure. This is not abstract. This is exactly how they feel and how they perceive the situation. Therefore, it is very difficult for them to “give custody of their baby” to someone else – especially the young children who could barely be trusted to clean up their rooms or come home before midnight as teenagers. You get the point.

LOSS OF STATUS

Some owners of prestigious businesses, get a sense of status and importance in the community from their business. To no longer be involved with their business represents a loss of that experience to feel prestige or status. Some even feel they are being put out to pasture.

THE MONEY TABOO

Many people raised prior to the 60′s may have had parents whose attitude was to “not talk about money.” Consequently, they are uncomfortable discussing their personal financial condition with or disclose the company’s financial condition to their children. Obviously, this “keep them in the dark” approach has many latent problems; the least of which is, “How do the kids learn to manage the finances, and how do they track the success of their efforts?”

DENIAL

And the all time favorite, of course, is the reality that only others will die or become disabled and not the owner. If they believed otherwise, they would have made the appropriate arrangements to plan succession, deal with financial planning matters, and tell the kids what they needed to know.

THE NEXT STEP

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Key Management Succession: Plan or Perish

History is replete with stories of companies whose futures were limited because their strong leaders neglected to provide competent successors. Leading financial sources attribute almost half of all business failures on the appointment of incompetents into key management positions.

Succession has never been a simple matter nor is it confined to top management. For example, the loss of a line supervisor can, for a time, be more critical in a highly automated manufacturing plant than a vacancy at the top management level.

Providing for succession so that trained personnel can assume authority with a minimum of confusion should not be deferred until key executives approach retirement. After all, not all executives hang on until age 65. Death, disablement, promotions, transfers, terminations or resignations are a part of the real world of business.

Closely-Held Companies

The smaller the family business, the more severe is the succession problem. When the younger generation takes over from the previous one, it is often due to an unexpected death rather than planned retirement. To make matters worse, the next in line–son, daughter or in-laws–may lack proper training or possess few qualifications

beyond the family relationship. And if that weren’t enough bad news, they might not have the desire to go on managing the company.

Transition Affects Others

Employees, suppliers, customers, competitors and bankers all have a legitimate interest. A company can become so torn with strife because of family in-fighting that if the business is put up for sale as a last resort, those who may earlier have wanted to buy it will lose interest. The company is then left to stagnate or die.

Why Successors Are Not Chosen

Let’s face it. Most managers are so busy just “doing their jobs” they have neither the time nor inclination to groom a successor. Some independent strong-minded managers may even resent having a qualified subordinate waiting in the wings to take over. Others may feel they have “plenty of time” to groom a successor. The prospect of retirement can be traumatic resulting in putting off planning for retirement and picking a replacement for as long as possible.

While a certain manager may have his/her own unique methods and strengths, unique does not mean indispensable. Another manager may have a different combination of strengths and be equally capable.

How to Plan for Succession

A long-term solution to the management succession problem requires long-term planning and there may be a need to replace a manager before those plans can be put into effect. A short-term approach would be to have an executive’s duties assumed either by his/her second-in-command or by a group of managers working together until an orderly transition to a permanent successor can be arranged.

Anticipating that every executive will ultimately retire, be promoted, become disabled, or be pirated away, a successor can be designated far in advance to work closely with the executive, assimilating the day-to-day routine and sharing the decision making.

By allowing the intended successor to work with his predecessor and familiarize himself with the routine as well as decision making processes, interest is stimulated while increasing skills.

It may not be possible to teach things like winning the confidence of bankers and making far-reaching decisions on company affairs. Practical experience must take up where management development courses end. Each company tailors a process which best fits its circumstances.

What can be done if there is no qualified successor?

Since training takes time, if there are no qualified successors to fill key vacancies (especially the CEO), it may be better to sell a company rather than trying to train a successor on short notice. This may seem like a drastic step, but it must be considered as one of the options as the company’s value and entire future may be at stake.

Summary

Key management succession should be a process, not a happening. To ignore the need for an orderly, planned transition of authority from one executive to the next is to ignore the facts of life and death.

In a closely-held company, it can mean the difference between survival and being dismantled.

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10 Tips on Choosing a Successor in a Family Business

Leadership, drive, connections, and technical expertise are some of the qualities that founders of family businesses possess. These qualities are not easily replaced and yet, these founders often fail to plan for their succession, thereby depriving the business of essential management assets. Succession planning involves more than just passing the leadership baton to assure continuity of the enterprise; it also requires ensuring the harmony of the family.

A business needs a leader who possesses competence, maturity, good judgment, good character, and other qualities to assure that it is operated in a professional manner. However, the family business is often the economic “watering hole” for many family members. Consequently, selection of a successor requires consideration for the dynamics of that leader within the family unit.

Tip #1 – Founders (or later-generation leaders) should view, as their final test of greatness (title of a book by Dr. Craig Aronoff), the role of facilitator of the succession planning process. This benefits the community as well as the family and the business.

Tip #2 – The successor should be a “unifying agent” rather than a “divisive force”. This fosters continuity of the family as well as the business.

That does not mean selection is a personality contest. Instead, this person should be viewed with respect and trust by family members in the business. Sometimes, this person may not be as “gifted” as another successor candidate in all the desired

qualities; yet this person is more likely to gain the cooperation and support of family members to create a harmonious and productive family team.

In working with family businesses to identify, select, and coach potential successors, it becomes apparent that trust and respect of family members in the business is critical to a smooth transition. Sometimes, the founder chooses the person who seems to be more “business savvy”, more assertive, or is older. However, that successor candidate may not have the same trust and respect of family members in the business given to another candidate. This can create significant problems.

Tip #3 – Choosing successor candidates is no easy task and it would be a mistake to expect that you “pick” one as though you were hitting a bull’s eye on a dartboard. Identifying potential successors is a process – not an event.

It should involve multiple tests conducted over as a long a period as is reasonable. Part of the process involves “grooming” candidates and seeing how they perform. Sometimes what is discovered is that the candidate “most likely to succeed” does not wish to be the successor leader. This can occur for many reasons. Sometimes, that person does not wish to stay in the family business (e.g. other career interests) or may have personal life situations that may preclude them (e.g. supporting their spouse’s career ambitions in a location away from the business). Tip #4 – Some founders have children in the business that do not seem to possess the ability or interest to serve as the successor leader. It is not always wise to place them into a leadership position.

These businesses are faced with the challenge of either selling the business or bringing on nonfamily managers to serve as “caretakers” of the business for the benefit of family members (a real, but challenging option). This option requires careful consideration and expert guidance to assure success. Too often, this results in terrible consequences because the process was not managed properly.

Tip #5 – Begin grooming your successor candidates as soon as possible.

The first step starts as the family members are growing into adults. Make sure they (usually the children) have a chance to experience what the business is all about. This means that they must hear the good as well as the bad (since children are often only exposed to the bad side at the dinner table). As they mature, they need to be given exposure to as much of the business as they can (not just filing, digging holes, or cleaning tables). Besides getting a good education, they need to work outside the family business. The rule of thumb is that they should not be admitted to the family business until they have demonstrated some “success” working for other businesses during adulthood. This might be five years or more. It might be demonstrating that they moved up a notch on someone else’s corporate ladder.

Tip #6 – Use objective measurement tools to assess the readiness of candidates.

Many businesses administer a personality profile test to assess whether a candidate possesses the types of personality traits suited to a particular job. A recent study by an international polling organization was the subject of a book that contends that people are more likely to succeed if placed in job roles more suited to their personality. This would seem to make sense. After all, it would not seem prudent to place into a leadership position someone who is indecisive, inarticulate, and unable to deal with complex issues (no offense intended to those founders for whom these might be personality traits). Therefore, successor candidates go through reliable and meaningful personality profiling to determine their natural characteristics.

Fellow family members may believe they know these characteristics from years of personal experience; however, they are often wrong or biased (as children learn how to “play” their parents at a young age). An independent consultant, can see potential successors in a different light. There are often diamonds in the rough that simply need polishing.

Tip #7 – Give each candidate similar opportunities for leadership challenges and see how they handle these situations.

Sometimes, the founder views the most outgoing personality as the best suited when the quieter, more levelheaded individual may be the better leader. Some children may appear to be “brighter” (i.e. they easily learn and memorize facts) while others are more able to think on their feet under pressure, be more decisive, be more nurturing, and ask better questions – in other words, are more street savvy!

Tip #8 – Do not assume that you need to select only one candidate.

While some family businesses believe there should be only one strong leader at the top (sometimes the visionary), many companies have a strong management succession team consisting of two or more family members (often siblings) who operate the business as a unit. While daily operational roles for each member of the unit are clearly defined, the unit makes all strategic planning decisions together (sometimes by majority rule and sometimes by total consensus).

Tip #9 – Accept the reality that you are going to someday die – usually before you expected!

It takes at least five to ten years to properly develop and implement a solid succession plan. Most founders try to do it in as little as a few years (from their graves) due to late planning. This can be catastrophic to the value of the business.

Tip #10 – Read Tips #1 – #9 and ask yourself, “What am I waiting for?”

If you are among the more than 75% of founders who have not developed a succession plan, perhaps this article will stimulate you to begin the process. The rewards can be enormous not only in monetary terms but also in the pain that you will avoid putting your family members through.

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