Succession Planning for Founders and Family Owned Businesses

• Who Cares? 
• Begin the Succession Planning Process
  • 1. Develop a Founder Profile
  • 2. Build a Position Description
  • 3. Identify a Successor Pool
  • 4.Generate a Successor Profile
  • 5. Contrast the Profiles
  • 6. Develop a Transition Plan
• Personality Assessment: A Necessary Tool for Succession
  • So, what are personality assessments?
  • Example: George and His Sons
  • Example: Two Brothers
  • Example: Gigi's 
  • Founder Baseline
  • Successor Baseline
  • Leadership Competencies
  • Baseline Recommendation
• Making a Transition Plan
  • 1. Business Transition Strategy Session
  • 2. Contingency Planning
  • 3. Business Relationship Development
  • 4. Communication/Announcement
• What About an Exit Plan?
  • Example: post-succession at Gigi's 

Who Cares?

Effective succession planning is the tie that binds the family business for multi-generational success. Succession is concerned with passing control of the family business from one leader to another (for example, a founding parent to a child in the business). This issue presents itself most urgently when a founder/leader begins to consider exiting the business, whether for retirement or for health or other reasons. The decision must be made at this juncture to sell or close the business or continue it as a multigenerational family enterprise. A business that is committed to continuing after the exit of a founder/leader will necessarily need to adopt a succession plan. In fact, succession planning is a key metric of long term stability for the multi-generational enterprise. And family enterprises need stabilizing metrics, as we can see when we look closely at the family business sector.

We know that more than 80% of current family business owners believe the same family or families will control their business in five years, but succession statistics undermine this belief. According to many studies, only about 30% of family-owned businesses survive into the second generation, 12% are still viable into the third generation, and only about 3% of all family businesses operate into the fourth generation or beyond. There is a disconnect between the optimistic belief of today’s family business owners and the reality of the massive failure of family companies to survive through the generations. Research indicates that failures can be traced to one factor: an unfortunate lack of effective family business succession planning.

When we take a closer look at the history of succession, we learn that succession has, for centuries, been determined by innate characteristics such as heredity, gender, birth order, and sometimes marriage. We see this in the rites of succession from tribal clans to kingdoms - even as recently in some of our most influential industrial dynasties. Some leaders identified their successors by seemingly subjective criteria or with declarations akin to “because I say so”. These candidates were then anointed and groomed for roles of increasing responsibility within the organization, ultimately culminating in the handing down of the top job. While this has been the de facto approach for centuries, it has not always been the most successful. Why? Perhaps it is because it is missing critical information about the position itself and how the individuals who fill the position actually perform their jobs.

While it is the enterprise founder/leader’s prerogative to choose who succeeds him/her and when, we assert that executing succession as a business process can be a critical discriminator for the transition of every business. Let’s face it, the navigation and execution of any business is based upon careful gathering of information and intentional execution of work against an explicit and measurable set of criteria. Since succession is arguably one of the most important processes in a business, shouldn’t this process be executed with the same meticulous effort? And shouldn’t the selection of a succession candidate be made with the very best information possible? Remember also, that often in family enterprises, a parent who is also the founder/leader may need ‘rational’ assistance when selecting one of his or her adult children as a succession candidate.

Begin the Succession Planning Process

So let’s break down the succession process into its most basic steps. These don’t need to be elaborate and time consuming, but it is quite helpful to be thoughtful and to use existing assessment tools that make sense to you to properly measure competencies and attributes. Assessment tools come in all shapes and sizes and can measure just about anything under the sun. Finding and utilizing the right assessment tool will ensure that you are selecting the ‘best fit candidate’ that will likely be successful.

1. Develop a Founder Profile
2. Build a Position Description
3. Identify a Successor Pool
4. Generate a Successor Profile
5. Contrast the Profiles
6. Develop a Transition Plan

1. Develop a Founder Profile

This step is about clearly identifying the requirements and competencies of the position at this point in time and with eyes open to what will likely be required in the future. Every leader comes to a position with strengths and challenges. Over the years his or her strengths are honed and the challenges become less obvious. Founders of businesses are often in place for three to five decades – their positions growing up around them like more children. It is critically important to understand all of what the founder/leader brings to the position. It helps greatly if you utilize a personality and skills inventory to help delineate and clarify the strengths his/her challenges. Also consider what particular market and economic challenges the founder/leader has lived through and had to combat. Have eyes wide open about whether these same challenges will be present in the future or whether or not new and different challenges will likely be present and therefore likely to require a different set of skills and attributes. For example, consider a man who has been the sitting CEO for 43 years of his family’s filter manufacturing company. He built the first plant in the 1970’s. His commitment and tenacity has helped create a powerful brand in his market sector. While his business is profitable and he has taken care of his family over his life time, his market share is shrinking and his operational costs are stressed. Many of his skills and attributes will be clear requirements for his successor, but there will also be requirements for his successor in the areas of technology and smart manufacturing as well as market pressures having to do with an off shore competitive landscape that will also surely be waters to navigate. Documenting the Founder Profile to include ALL of these requirements is critical.

2. Build a Position Description

Identify the competencies and attributes of the seated leader, including those special characteristics that has made him/her a successful leader of the business. This information or data will be largely derived from what you learned while developing the Founder Profile. The main difference is converting the attributes and characteristics into Skills, Knowledge, and Competencies. For example, a founder is often very adept at being resourceful and pouncing on opportunities which translates into the competencies of initiative and mental agility.

3. Identify a Successor Pool

As we said before, a founder/leader has the prerogative to pick whomever s/he wishes to be his/her successor. But after completing the first two steps of this process, we guarantee that the leader will be looking at successor candidates in a whole different way. It is important to, while thinking about successor candidates, consider people within the company, whether they are family members or not if you think they have the ‘right stuff’. You may also want to advertise outside of the company just for comparison’s sake, and there is nothing wrong with this. Finally, even if the founder/leader is hell bent on only one candidate, completing this process will increase the likelihood of a successful transition. In any case, you now have a set of criteria that will help you identify resources who are will be the most competitive as successor candidates.

4.Generate a Successor Profile

At this point in the process you have a pretty good idea about what will make a successful leader both now and in the future. You also have some idea about the characteristics, competencies, attributes that might predict success in the position – in short, you now have a ‘profile’ to benchmark against. This is the point at which you begin to gather information about the successor(s) so that you can accomplish the benchmark. This includes their professional background – what have they have actually accomplished, what challenges they actually experienced, what knowledge, skills, and abilities they have actually demonstrated in previous positions. Again, it is much for powerful for you to gather this information in multiple ways i.e. Resume, Interviews, Personality or Skills Inventories. When you have collected all of this information, document it into a Successor Profile.

5. Contrast the Profiles

Now you have two profiles – one for the founder/leader and one for the successor. This is the step where you compare and contrast profiles, looking for the overlaps and gaps between the individuals – there will always be gaps and overlaps because people are different, and this is a good thing. This data will now provide a basis for continued deep and effective interviewing as well as form the basis of a transition plan for succession, if/when the candidate is selected.

6. Develop a Transition Plan

This step presumes you have your candidate! Now you need to consider when the exit is going to occur – that becomes your ‘end point’. Your ‘beginning point’ is now. In between are the steps that need to happen in order to effect a smooth transition. These steps in general include: a communication plan (to internal and external stakeholders); a listing of things that must be taught and learned; a schedule of who, when and how the teaching occurs.

Congratulations! You have used a business process to manage a critical stabilizer for your business for years to come.

Personality Assessment: A Necessary Tool for Succession

Now we want to delve more deeply into the world of assessments, and how personality assessments can become the core of an effective succession. Every leader in every organization should have more than a passing acquaintance with these interesting and powerful tools – but the owner who is contemplating a succession transition should be intimately involved with them.

The role of competencies in succession management cannot be overstated, because below the surface of competencies and observable behaviors, attitudes, and actions lies the fundamental personality traits and core motivations that drive them. Personality assessments allow us to know what these personality traits are along with their corresponding motivations, both of which help us with the ‘fit’ of the candidate to the position.

So, what are personality assessments?

A personality assessment is a questionnaire or other standardized instrument designed to reveal aspects of an individual's character or psychological makeup. A person’s personality and behavioral style is measured through what is known as a self-report personality questionnaire. A self-report questionnaire is a ‘test’ that asks questions which are relevant to a particular employment position or role in the workplace. For example, a response to a question about how we behave in a party can indicate how we might work in teams. A personality test has no right or wrong answer, and it is not timed. The information collected is collated into one’s ‘personality profile’.

There are very important guidelines for using any personality assessment for any business reason:

• There must be published proof that the assessment does not discriminate against individuals by sex, age, race, color, religion, sexual orientation or national origin.

• It must be a valid predictor of performance.

• It should measure specific qualities required for leadership.

• It should be used as part of a process and never as the sole determinant.

There are many assessments used throughout the workplace. Some assessments focus on specific areas such as communication, interpersonal needs, organizational culture, skill capacities, and leadership or management behaviors.

Personality assessments can be extremely helpful in determining differences or gaps in your team or organization. Take a look at these examples.

Example: George and His Sons

George was the founder’s son and his job was to run their Portland, Oregon plant which made plant filters for greenhouses. Recently their ‘scrap’ numbers had been going up, their safety and morale numbers going down, costing them money as well as credibility with their customers and employees. After working with an operational consultant, who administered a skills inventory to his floor staff, George learned that he had a disproportionate number of people on his floor that were highly analytic and very creative but many fewer people who were pragmatic and detail oriented. He rebalanced the team by moving people around and intentionally hiring people with these specific attributes. The scrap numbers went down, and the morale went up – the team was working together to more critically determine whether processes needed to be improved or whether operators needed more training in running the rotors.

Example: Two Brothers

Two brothers were co-owners and co-CEOs of a very large, privately held peanut company. The founder, their father, was the chairman of the board. The three of them were out one afternoon playing golf. On the seventh hole, the younger of the brothers started screaming at his older brother, threw his club on the ground and stomped off to the clubhouse shouting, “If you don’t want me in the company, I’m gone!” He sought out the assistance of a family business advisor. After conducting interviews with all three of the principals, the family advisor suggested that the two sons complete a suite of personality assessments for her (and them) to better understand the differences and similarities between them. When she analyzed the data, it was immediately clear that the brothers had completely different motivations in life, different approaches to leadership and finally, different aspirations for their careers. This data provided a foundation for the three principals to come together more transparently. The outcome was that the eldest brother became the CEO of the peanut company, and the younger brother became the President of the family office and family foundation – a win-win for the sustainability of the family’s legacy.

As you can see from these examples, personality assessments can be quite useful in addressing business problems as well as communication problems. One of the most powerful ways to use them, however, is as a framework for a Successor Development Plan (SDP).

An effective SDP is based upon the needs of the business, and identifies the specific skills needed from, and the qualities required of, the successor. The plan lays out the specific skill and ability growth areas for the successor, a timetable for acquiring them, how they will be measured and specifies points of progression based upon performance. Consider this SDP for the successor of a founder of a jewelry business.

Example: Gigi's 

Germaines’ Gems (GiGi’s) has been the leading jeweler in Scottsdale, Arizona for over twenty years. The founder of Germaines is Nella Germaine. She started her business as a vendor in the town plaza selling turquoise jewelry alongside other street vendors. Today GiGi’s has a revenue of $25M, three locations, and 30 employees.

In this scenario, a family advisor used a suite of personality assessments as well as interviews with the principals and all department managers in the store to identify the skill gaps between founder and successor competencies. We are excerpting some salient points that illustrate the identification of competency and skill gaps utilizing assessment data. [Pay careful attention to the competencies that have become requirements for the successor that perhaps were not as critical for the founder.

Founder Baseline

Nella Germaine’s has successfully led GiGi’s for more than four decades. She attributes her success to:

• Doing whatever it takes

• Doing what she loves

• Bringing the right people to the table

• Fixing a strategy and leveraging it until it happens

• Not being afraid to make a mistake

Nella is a poised, charismatic leader who is:

• Like-able

• Optimistic

• Driven

Nella excels at:

• Listening

• Story telling

• Anecdotal Humor

• Appreciation

• Public speaking

Nella acknowledges her weaknesses:

• Being conflict avoidant

• Needing to be liked

• Intolerance for detail

• Losing sight of spending

Successor Baseline

Hannah Germaines has successfully managed an important part of GiGi’s – the operation having to do with high end and precious stones – and she is well liked by her co-workers.

Some of her most notable strengths include:

• Being bright and quick minded

• Business and financial acumen

• Behaving in a friendly manner to everyone

• Being affable and easy to get along with

• Modeling openness in a team environment

  • Being comfortable with detail

  • Effectively using tactical reasoning

Behaviors and attributes that do not support Hannah in her present role include:

• Projecting a lack of confidence

• Comportment

• Fluency of language

• Communicating indirectly

• Being conflict avoidant

• Modeling ambivalence

Leadership Competencies

GiGi’s is embarking upon a course for intentional growth. The collateral increases in revenue, customer base, and geographical expansion will create the need for the following competencies. These competencies provide the benchmark for the Successor Development Plan.

• Flexibility

• Emotional adaptability and stability

• Interpersonal skills in listening and coaching

• Sensitivity

• Ability to deal effectively with conflict and ambiguity

• Mental agility

• Ability to understand nonverbal communication styles

• Cross-cultural awareness

• Ability to value differences in people

Baseline Recommendation

The following table illustrates the learning gaps that provide the baseline for a Successor Development Plan to be executed by Hannah with the support of a professional coach.

The most important part of this SDP is that the gaps have been identified and they are transparent for all to see – that way Hannah and her mother, Nella, were able to work toward results that were both measurable and actionable.

Making a Transition Plan

The last critical decision once you have identified your successor is whether or not to stay in the business indefinitely alongside one’s successor OR to determine an exit point and to transition ownership of the business to one’s successor at a certain date. Once you have identified the best fit successor for your business, and depending upon your ownership decision, the Transition Plan or Exit Plan become the mechanism to complete the succession process.

A Transition Plan is a detailed, consensus driven strategy and action plan that serves as a roadmap for a successful transition of leadership to the successor, while mitigating risk. An Exit Plan is an explicit strategy for transferring the trust, respect and goodwill that's been built up over the years for the stakeholders of the business – this would include owners, heirs, employees, customers, and the community.

If the succession plan is simply a transition of day-to-day leadership and there are no ownership changes and the owner/founder plans to stay involved in the business, then the final chapter of the succession process becomes a Transition Plan (for example, an owner retains the position of Chairman of the Board with his/her successor becoming CEO or President of the operating business). Below is a process that can be used as a template – use as many or as few steps as make sense for the size of your business. The template has four steps:

1. Business Transition Strategy Session

2. Contingency Planning

3. Business Relationship Development

4. Communication Planning

1. Business Transition Strategy Session

Establish a Business Transition Team composed of family and non-family staff members.

Revisit your company’s mission statement. Seek input from stakeholders regarding how aligned your company has been with the vision, mission, priorities, goals and results of the last fiscal year.

Hold a business transition strategy session in which the group will develop a 3-5 year vision for the family enterprise. Include a competitive analysis during the session (which is simply an understanding and listing of all your competitors both now and those you may anticipate)

Conduct a frank assessment of your company’s capabilities as well as limitations and environmental threats especially as they relate to your business’ current growth strategy (This is often referred to as a S.W.O.T. exercise, which looks at the company’s strengths, weaknesses, opportunities, and threats individually)

Establish one year priorities and goals to achieve the mission. Develop detailed action plans that are coordinated as well as realistic, and guidelines for accountability.

2. Contingency Planning

Owner and Successor should collaborate on a contingency plan in the event of a succession crisis --- that is, the Owner's death or disability. Both should consider the possibility of identifying a non-family CEO for a limited tenure if the Successor is not yet ready to assume the position.

3. Business Relationship Development

The Owner should develop a plan to introduce the Successor over a period of time to important outside contacts and firms with which s/he does business or is in relationship. These introductions should be conducted with a transparent and open approach. In this way the Successor will get practice participating in strategic decisions, as well as develop a network of colleagues to support him/her in the coming years.

4. Communication/Announcement

The Owner should announce that s/he has identified his/her Successor and that an ‘X’ year Transition Plan has been developed with specific milestones at the end of each year.

What About an Exit Plan?

If, however, the succession plan marks a change in ownership and the owner/founder is exiting the business at a particular point of time, the mechanism is referred to as an ‘Exit Plan’. The Exit strategy is necessarily highly customized for each business. It involves the design and implementation of an owner’s successful exit from the business. This strategy takes into consideration the owner’s unique personal objectives to convert his/her current business into desired outcomes. The Exit strategy helps to maximize the financial return, minimize the tax liability, plan for contingencies and increase the likelihood of a successful transition of the business.

Each business owner’s unique objectives drive the creation of the Exit plan. The first step in the process is to articulate the owner’s objectives so that the plan focuses on achieving those goals. Key exit objectives identified as part of the exit planning process include: the planned or desired departure date; the value (income) that the owner wants or needs from the business; the individuals or entities to which the owner wants to sell/transition/transfer the business.

Early on, owners will need to decide to whom and in what proportion s/he will transfer ownership in the business --- outside parties, adult children, key employees, co-owners, or a combination of these stakeholders. Obviously, personal wealth and estate planning must be incorporated into the plan. This aspect will allow the owner to preserve his/her wealth but minimize taxes using lifetime and estate planning tools.

Family business owners who want to take full advantage of the sacrifices they have made in creating a successful business are in the position to gain a significant return on their investment with the right exit strategy. It is the last important decision an owner will need to make. However, there are a number of professionals that owners would be well advised to ask for assistance as they work through the exit/transition planning process i.e. estate attorneys, financial wealth managers, family business advisors, board members. The owner, successor and these advisors will make up the key Exit Transition team.

It is also important to ensure that the advisors who are retained are qualified and have sufficient experience to be part of this advisory team. Some of the advisors on this team will be trusted advisors from over the years, but others might optimally be new to the business and not have close personal or professional ties to any of the principals. Researching and retaining advisors who have experience in a team orchestrating exits for their business owner clients, will help quantify and attain realistic exit objectives. The Family Firm Institute (ffi.org) and the Institute for Preparing Heirs (preparingheirs.com) are two resources that might have advisors to suggest for consideration.

Some of the work of this Exit Transition team will include

• Setting realistic objectives for exit
• Maximizing valuation in the short term by creating a growth strategy and helping to execute the plan
• Designing and implementing plans for the transfer of wealth to subsequent generations
• Developing a Contingency Plan
• Executing a Business Relationship Plan
• Communicating the Exit Transition

Example: post-succession at Gigi's 

Earlier, we looked at a case study of Gigi’s Gems – a high end family owned enterprise in which the owner/founder, Hannah Germaine had two daughters, both of whom worked in the family enterprise. Hannah identified her youngest daughter Nella as her successor. Hannah’s eldest daughter, Hilde worked in the business as a senior sales associate. The Exit Transition was effective – Hannah successfully exited the business six years after beginning the process and is now retired and living in Belize with her husband. [You will note that Hannah’s original exit goal was four years, but events in her market and in the country changed the timeline.] The business continues to be profitable and has increased its market share by 15% since the transition.

Here are the particulars of their transition, in brief, just to show you what one transition looked like:

Transition and Exit represent the final journey for business owners --- it is a journey that will in all likelihood look a bit different from what we expect, but like all good walks, the ruts and turns in the road just may make it worth the journey!

Ready to start the conversation about succession?