An Observation on Business Succession

When the topic of business succession is mentioned, one generally thinks about the alternatives available to transfer value economically to the next generation: GRATs, defective trusts, recapitalization, gifting, etc. Or perhaps a plan is designed to transfer economic value to the succeeding generation without relinquishing control held by the current owners. Or perhaps the plan provides the current generation lifetime financial security without damaging the financial stability of the enterprise for the new generation of management. But what is rarely talked about is the preparation of the succeeding generation to take the reins of the business. The literature on business succession is exhaustive, but there are several common threads that emerge as we discuss successful transitions with our clients.

Commitment

Perhaps, the single most important key to a successful transition of the family business is the commitment of the new leader. Commitment cannot be assumed. In most successful transitions, the managing generation has intentionally encouraged their children to thoroughly explore their gifts and passions before electing a career with the family business. The exploration may occur inside or outside of the family business but it needs to be done honestly. In fact, many current leaders specifically emphasize the frustrations and sacrifices of leading the business to ensure fact-based decisions by their children.

The decision to join and eventually run the family business is much more than choosing the best alternative for interesting opportunities and financial rewards; for the most successful leaders, it is almost a calling. Successful new leaders express a desire to assume stewardship of the enterprise for the benefit of future generations or provide opportunities for employees and their families or perpetuate and extend the values and culture of the enterprise. Passion, excitement, and a sense of over-arching purpose characterize their commitment.

Confidence

A corollary to high-level commitment is confidence. It’s not the kind of pride or vanity that can lead to recklessness or poor relationships, but, rather, as one leader put it, the quiet faith that leads an athlete to want the ball in the game’s most crucial moment.

Our clients report that this confidence is largely the result of experience. Many of the successful new leaders have been immersed in responsible situations immediately; and have been allowed to struggle and overcome challenges without intervention. They have been allowed to stub their toes, thereby learning to better anticipate risk on the one hand and to overcome mistakes on the other.

Though the current leader does not intrude, he makes it clear that he is available for consultation, the need for which is determined by the protégé. At the same time, the successful mentor ensures that there are frequent, informal discussions with the mentee. For example, one of our very successful leaders arranged lunch several times per week with his emerging leadership team providing an opportunity to discuss current business issues and challenges.

As the new leader assumes management responsibilities, the current leader needs to ensure that the chain of command is maintained; employees who continue to come to the CEO with problems need to be directed back to their new supervisor.

Another recurring theme in building confidence is collaboration. The current CEO shares his views from the top – the vision, the obstacles, the risk/reward trade-offs – with his successor-in-training. It seems obvious that sharing big-picture ideas and projects would build both skill and confidence, but many CEO’s prefer the expediency of dealing with the major issues on their own with their traditional advisors.

Every individual has strengths and weaknesses. From a business transition outlook, we are prone to focus on the successor’s weaknesses in order to shore them up. Frequently, however, it makes more sense to concentrate on the individual’s strengths, structuring responsibilities in a manner that allow him to operate at the highest level and use the best of his skills for the most time. Build upon strengths and find ways to nullify weaknesses. Focusing on an individual’s gifts is both wise and biblical.

Expectations

Having a shared view of the transition process between old and new leaders can be valuable. The new leader should expect that he will have his mentor’s support in public, but his candor in private. The current leader should expect that the new leader will support company values even as he brings his personal style to top management.

If the transition is going from founder or primary builder to the next generation, the founding entrepreneur may need to realize that he has overcome hurdles that the new leader will not likely face. Therefore, the demands on the new leader’s time may not be as severe. The new leader may need to appreciate the founder’s unique love of the enterprise, and honor his contributions by continuing to report on business activities.

Finally, both current and new leaders should expect that the new leader may, among other things, depart from historical practices; abandon old markets and open new ones; build a new team of managers and advisors; and manage capital projects differently.

Some decisions will be winners, some will be losers, but the transition process will be complete, and that is a feat worth celebrating.

by Cliff Nelson, TJT Consulting

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