SUCCESSION PLANNING (PART 3)
by Bernard Liebowitz, PhD
Two major themes composing succession planning have been discussed in prior
articles in this series: the needs of the business owner and spouse, and,
the requirements exposed by the business structure and by the management
team. Management and ownership transition, and, inheritance complete the
picture.
The owners of family and non-family owned business share a common dilemma:
when, if, should and how does transfer of ownership and management occur?
Owners of family businesses face an additional dilemma: which comes first,
family or the business? The three themes (ownership transition, management
transition and inheritance) are intertwined and their cross-threads need
to be kept visible. Underlying so many situations where problems arise
is the failure to keep in mind that management and ownership are separate
and distinct entities.
PLANNING FOR OWNERSHIP TRANSITION AND INHERITANCE
Ownership and inheritance problems (and their legal and financial consequences)
generally arise:
When the conditions and terms of ownership transition are murky and/or not
known by all the parties involved, and,
When the business is treated as a family heirloom that is to be equally
shared by all.
THE TERMS OF OWNERSHIP TRANSITION
Owners of businesses often hold out the promise of future ownership either
to employees or to offspring without being specific about the terms of the
transition. With sons and daughters it is often a "When you are ready"
condition where the definition of "ready" and its measuring rod
is left hanging. Key employees are frequently offered a portion of the
business "when the business really gets going", with similar imprecise
definitions. Key employees usually have little recourse when their efforts
to gain precision are rebuffed; all too often their age prevents them from
moving to other firms. Their revenge can take the form of lowered motivation
and involvement often at a time when their experience and contributions
are most needed. Also, this pool of disgruntled employees spawn disloyalty
in the form of secretly providing competitors with important company information.
Offspring have other avenues by which to right perceived wrongs and broken
promises. Family pressure is often brought to bear in the form of a spouse
haranguing her husband to sell or give the business to their offspring slaving
away in the business. A son's or daughter's threat to leave unless ownership
is transferred carries more weight than a key employee -- the threat from
an offspring can mean the end of familial relations.
The remedy requires a commitment by the owner well in advance of transition
to lay bare all details and terms of ownership transfer: exactly when the
process will begin, what conditions have to be met by the offspring or employees,
by what formula price will be decided, who can or should or must be involved
(e.g., a father may not sell the business to his sons unless both sons buy
it on equal terms), etc.
THE FAMILY HEIRLOOM
A second source of dissension surrounding ownership transition occurs when
the new owner has inherited unwanted partners. These partners can be siblings
who have other careers or who have no career at all other than as the company's
cash drain. The family heirloom scene frequently occurs when a parent wants
to be seen as fair and equal with offspring so as to avoid any dissension
or hurt feelings; it also appears when a parent feels that a son or daughter
needs protection and financial security. The unwanted-partner scenario
is undoubtedly the largest single source of lawsuits in family owned businesses.
The owner/manager feels he or she is working hard for the benefit of their
siblings, partners, etc., while getting in return nothing but complaints
that its not enough. The partners feel they have a right "to examine
the books" with all that that implies. A more explosive scene would
be hard to imagine.
A most vivid illustration is a business owned by three families.
Two of the families consisted of children from two marriages of the
deceased father. The third family was composed of children of the father's
brother. The father had bought out his sister's one third inheritance,
leaving him with two thirds of the business. He had divided his
ownership equally between his two wives, who had in turn willed ownership
to their respective children. The three families were all third generation,
i.e., either siblings, half-siblings or first cousins. Many of the
people from the families had never met before. The president was a
son who had worked for the father and was the only one who knew anything
about the business. The yearly Board of Directors meeting was composed
of the president and one representative each of the other two families.
Needless to say, the business had stopped growing on the day the father
died.
Offsetting this problem is the realization that management and ownership
need to be treated as separate and the acceptance that only active management
will entail ownership. If an owner's estate is tied up entirely in the
business, then some financial transaction needs to be made (e.g., a bank-loan
financing a buy-out, a buy/sell agreement funded by insurance, etc.).
Ownership transfer and inheritance, in other words, demands early preparation
and open negotiations.
PLANNING FOR MANAGEMENT TRANSITION
IN THE FAMILY OWNED BUSINESS
The sale of a non-family business usually results in the severing of the
previous owner's relation to the business. He or she might be retained
as a consultant for a defined period of time, the consulting role and responsibilities
would need to be defined, but the owner's participation in the future running
of the company would be very circumscribed. The management transition is
completed with the sale of the business. Not so, however, in family owned
businesses. This section will focus on the family owned business exclusively.
Only in family businesses is the prior owner's future role in the company
unclear even if an outright sale has occurred. The reason is obvious.
His sons and daughters who are now running the business are still his sons
and daughters, and the business they are running is another one of his "sons"
or "daughters", or is his "lover" or "mistress",
depending on what kind of satisfaction he derived from it. His whole identity
is wrapped up in the business. Transition can be either a very meaningful
experience for the entire family, or conversely, a tragedy in the making.
Management transition in family businesses encompasses:
The selection and preparation of a successor
The owner/president assuming a difference in status
Management succession within the company
Management involvement in the entire process
THE SELECTION AND PREPARATION OF THE SUCCESSOR
In considering succession, the following questions might serve as a guide
for the owner:
What qualifications do potential successors have to become president?
What are the personal and business goals of the potential successors?
Are the qualifications and goals of the potential successors what the business
needs?
What training, education and preparation should a successor have?
If there is more than one potential successor, how would each function
as president vis a vis their relative?
Family businesses are noted for confusing the issue of which comes first,
the family or the business. The assumption is that one or the other has
to take precedence. Thus, refusing the presidency of the company to an
offspring, even if not quite up to the task, is viewed as detrimental to
the family well-being. What is not as frequently admitted is that granting
this off-spring the presidency can be detrimental to the financial health
of the family. This example and other instances of an inadequate successor
being selected point to unresolved family disagreements that the family
wishes to deny.
A father had sold his business to two sons, one of whom was designated
as president but both of whom were to have equal say in running the business.
The president had grown the business over four times the size it was
when it was bought. His brother could not keep up with the growth
of the business in terms of being able to manage, communicate with supervisees,
learn about new technological advances, etc. Rather than owning to
these deficiencies, he blamed his brother for not including him in business
decisions and for not consulting with him. He went so far as to accuse
his brother of planning to steal the business from him. The mother
allied herself with the son who felt left out. The father tried to take
all sides at once, even when he contradicted himself. Were the father
to take the position of his son the president (and in several instances
acknowledged that the business could not survive without him), he would
come into direct conflict with this wife, something he has tried to
avoid throughout his marriage. Were the mother to admit that her favorite
son was being left behind and could not cope, she would have to deal
with her guilt about having been so overprotective of him throughout
his life. To avoid dealing with these issues, the focus instead highlights
the president not being protective and considerate enough of his brother.
In this instance it is evident that the parents have not attempted to
answer the questions about succession listed earlier. In fact, this vignette
reflects what too often occurs in family businesses, namely, the use of
the business as therapeutic refuge for members of the family. What would
in fact be more therapeutic would be for the inadequate son or daughter
to have to face the world in a different business setting and learn how
to cope rather than blame.
THE STATUS OF THE FORMER OWNER
I don't necessarily believe in retirement, but I do believe in succession.
Many owners can't conceive of what they would do without the business to
go to. No doubt an unwanted retirement speeds up the aging process unnecessarily.
Whether or not the business owner does retire or becomes an active Chairman
of the Board, the crucial element is defining the role and responsibilities
the previous owner will have in the future. If the transition is to be
successful, this definition of roles is a necessity. The most frequent
stumbling blocks intrude in the guise of business practices, inherited problems
and homage-paying.
The father as Chairman of the Board may disagree about how the business
is being run. Not enough sales is being generated, the wrong kind of markets
are being pursued, employees are getting away with murder, etc. The list
is endless. If in fact father is to be Chairman of the Board, what is needed
during transition is an agreement about what constitutes the quality of
management on the part of the successor. What criteria are to be used?
What reports will yield information by which to judge his or her functioning?
Is it to be gross or net sales, profit, return on investment?
Similarly, the Chairman also has to be judged according to agreed upon
criteria. As difficult as it might be for a son to be sitting as judge
to father's performance as Chairman, that's how important it is. If father
is not to be retired, if he is an active and viable person, then he has
a contribution to make to the company. This contribution can and should
be monitored. His forte may be sales; if so, then sales goals should be
set. If finance is his strong suit, then negotiating business deals for
the company may be his primary role and a set of goals would need to be
decided.
The Chairman and his successor may disagree about what I term "inherited
problems". It could be father's partner who is now the successor's
unwanted partner; or, nonproductive managers whom father has been planning
to do "something" about for a long time and never got around to;
or, machinery that should have been updated long before. To avoid disagreements
after the fact, these inheritances have to be resolved prior to succession.
If not, they become a source of friction after succession.
The third area of disagreements after an owner has become Chairman is what
I have termed the paying of homage. Because of the owner's significant
contribution to the growth of the company, all too often homage and deferral
of judgment is paid to him whenever he appears to want it. He feels entitled
to contradict what a manager or line supervisor has been told to do. Because
of his deservedly revered status, he is in a position to strew his path
with acknowledgment and praise, or, alternatively, to throw barbs and criticisms.
He need not be obvious in any of this behavior. The problem arises precisely
because people do revere him, want his praise and want to avoid his criticism,
especially his successor.
As embarrassing as it may be, the one fact the successor has to own up
to with father is that indeed he wants his praise; if he is not getting
it, he needs to know why; and, if he is only getting criticism despite stellar
performance, he needs to know the why of this as well.
MANAGEMENT SUCCESSION AND INVOLVEMENT
Just as a presidential successor has to be chosen, so also does management
have to prepare for their own succession. Unless the new president chooses
to keep doing the same old thing, his or her very promotion will entail
changes in management structure and hierarchy. He or she is different than
their parent and this very difference entails a difference in how operations
proceed, how information flows, how decisions are made, etc. The transition
from the previous culture to the one being born requires both the involvement
and feedback of management, as well as the reevaluation of their functioning.
To make the leap requires a re-negotiation of roles and responsibilities,
promises and expectations, goals and action plans. The new president may
want additional reports from the production manager who would want to know
why this is necessary. The head of sales may need to become more of a manager
and marketing expert than what he had done best before, namely, making crucial
and substantial sales when others couldn't. His new boss is saying that
unless he does make the change, the firm cannot enter the new markets he
plans. An earlier section of this series dealt with the need to bring in
the entire management team to the strategic goal setting required by business.
An equally important reason is the one offered here, i.e., to facilitate
the transition.
SUMMARY
Business succession requires planning by the family, the successors, and
the management team, in collaboration with legal and financial advisors.
It entails information openly shared, negotiations openly arranged, decisions
publicly acknowledged. The medium through which transition can successfully
occur are family and management meetings where questions are asked and answered
and agreements are concluded. To the extent that a business owner denies
the necessity for this, to that degree is he or she ensuring disaster.
That it is difficult, that it requires patience and perseverance, goes without
saying. But, then, who ever said business was like strolling in a rose
garden.