When a family-owned business shifts from one generation to another, suggestions for improvements often arise. While fresh ideas can breathe new life into a business, they can also create friction in the family and possible brand confusion for customers. Creating a family business succession plan can help with the transition in leadership and strategy, yet only a third of family-owned businesses have a plan in place.
“Succession planning is quite possibly the most misunderstood people-process in business,” says leadership development consultant Michael Timms, author of “How Leaders Can Inspire Accountability.”
“A common misconception is that it’s the financial and legal transition of a family business from one generation to the next,” he says. “But succession planning should include finding and preparing internal candidates for much more than just the CEO position.”
If you don’t yet have a comprehensive plan in place for your business when you retire, here’s how to shift leadership from one generation to another.
Creating a Family-Owned Business Succession Plan
The purpose of a succession plan is to protect the future of the business as well as its customers and employees. Timms says succession planning can be boiled down into three essential steps:
- Outline the competencies required for potential successors to fulfill key positions.
- Identify candidates who could fill key positions.
- Design a development plan for succession candidates to gain the competencies required to perform these positions.
“Unfortunately, most businesses act as though there is only one step: identify succession candidates,” says Timms. “This is precisely why most succession plans fail, family business or otherwise.”
Timms recommends that families identify specific competencies a successor needs to be successful in running the business — such as financial acumen or staff management. Then, focus on expanding the successor’s experience and knowledge in those areas. Include timelines and milestones, and set up a schedule for the succession candidate to regularly report their progress.
“In my experience, it is best if the succession candidate meets with someone other than the incumbent to review their progress on their development plan to avoid potential conflicts of interest or bias,” he says.
Avoiding Potential Pitfalls
The top two reasons for family-owned business succession failures are (1) breakdowns in communication and trust, and (2) the succession candidate was insufficiently prepared, says Timms.
“The root cause of almost all relationship breakdowns is unmet expectations,” says Timms. “There is a surprisingly simple solution to this problem: discuss and agree on expectations of one another.”
Timms suggests having each person ask one another tough questions:
- What do you need from me to be successful and enjoy your work?
- How will we provide each other with feedback on how well we are meeting our expectations of one another?
- How will we address unmet expectations or disagreements?
“If you can’t come up with a compromise on one or more items, ask for help with mediating the conversation,” he says. “Families in the transition of business ownership will inevitably end up having this conversation. Better not do it when issues arise or misunderstandings and hurt feelings have occurred.”
He concludes, “The key players at that point will likely not be in the best state of mind to have that conversation.”
Staying on Track as a New Owner
New owners will want to put their own stamp on the business. But it’s best to take things slow and not stray too far from the path. If your successor is clear on the business’s original vision — and they should be — it should serve as a North Star for any decisions and changes they may want to make now or in the future.
Some other tips for making changes include:
- Start with low-risk changes, such as smaller-scale improvements or pilot programs that can be tested and not pursued if they don’t go as planned.
- Present ideas to the original owner for their input. They might have insights not yet accessible to the new generation. For example, they may have already tried the idea and failed, or they may have knowledge that can improve the idea.
- Move forward with the decisions that are rooted in the business’s mission and core values. The “why” behind any business is what sets it apart from its competitors.
Learning From the Eichenbergs
Husband-and-wife business partners Brian and Sue Eichenberg, who owned Signarama Chandler in Arizona, raised their son Jim to be familiar with the ins and outs of their business’s general operation. Jim and his wife, Allison Kast-Eichenberg, joined the business in 2007 with plans to take ownership and continue to build on Brian and Sue’s legacy.
“Brian and Sue dreamed of passing their business on to their family, and even though it was their desire, it was still incredibly difficult. Dreaming about doing it and actually living it are two very different things,” says Kast-Eichenberg.
Most business owners are reluctant to hand over their life’s work to someone else and ride off into the sunset, says Timms. In the Eichenbergs’ case, Brian and Sue remained involved during the family business succession, frequently providing guidance and helping with various projects. “We like to say we had the world’s best safety net because they were always willing to answer questions, come in and help, and provide solutions,” says Kast-Eichenberg.
Working together could be the best way to avoid a mistake or any major conflicts.
“Do not fall into the trap of believing that you can do it all on your own,” advises Kast-Eichenberg. “Recognize and talk about the challenges and different ways of operating between the generations. Remember that ‘different’ is not bad or wrong; often ‘different’ is really just different.”
Did you just inherit the family business? Check out The Bottom Line, National Funding’s blog, for more advice on running a successful business.