Importance Of Succession Planning in Family-Owned Business
Succession is one of the biggest issues for family businesses and frequently where things can fall apart. More than 30 percent of all family-owned businesses survive into the second generation. After that, the numbers start to fall. Only 12 percent will still be viable into the third generation, and a mere 3 percent of all family businesses make it into the fourth generation and beyond.
Succession planning for any business is critical. The selection of a successor is often a driver of profitability and is unquestionably an important piece of a business and family culture in a family-owned firm. Family business owners not only share their financial wealth but also their values surrounding their wealth with subsequent generations. Success is a high-stakes proposition.
However, succession planning for a family business owner can feel like a Gordian Knot. Choosing one successor among several can bring to the surface tensions and fractures that have not been detectable for years. On the other hand, succession can be the crowning achievement for an entrepreneurial business owner—a time when she or he can share his or her success with a son or daughter or children.
Choosing A Successor: Identifying Candidates
Many successful family business owners today dream of leaving their business to their son or daughter. Having a child follow in their footsteps is gratifying to a parent. Yet when it comes to choosing a successor, an owner must be careful not to let emotions cloud her/his judgment. Statistics show that a second-generation business has only a 53 percent chance of surviving ten years, and a third-generation business less than 32 percent, according to the Institute for Family-Owned Business. That means that nearly half of all companies passed down from parent to child end up failing within a decade.
No matter how much parents love their offspring, there may be good reason not to leave them the business. For example:
When a child lacks depth/breadth of business experience. Often there’s no substitute for high-level experience. A daughter may be bright and motivated but working for her parents during summer vacations doesn’t qualify her to run the whole company. If a mother or father is ready to step down but their offspring is still relatively young and inexperienced, the timing may simply not be right. The parent should either remain at the helm for a few more years or make arrangements for an interim successor.
When a child doesn’t have a passion for the business. Parents can’t force children to love their business just because they do. Children may prefer to explore their own unique talents. Forcing a child to embrace a business or industry he or she just doesn’t have a passion for is courting trouble. Children will always feel forced into it, and one day, at the worst possible moment, they’ll wake up, realize they’re not happy and quit. That leaves the parent and others holding the bag and scrambling for another successor.
Love is blind, so it’s important not to let emotions or guilt influence this very important decision. A family business owner must find a successor they can rely upon. When contemplating handing over the family’s primary source of income, owners need a successor they can trust and who they can predict will be successful.
At present, family-owned businesses have varied ways of deciding who will succeed an owner. The most common is probably by “entitlement” against subjective criteria, i.e. the eldest, the youngest, the smartest, a particular gender, or tenure inside the business. It would be easy to judge these decisions as “bad” or ill-advised, but a family business is normally under enormous pressure from various constituencies inside and outside the family, each with strong feelings regarding the decision. It is also important to note that many times such entitlement choices make sense and work out quite well. However, when there are other kinds of significant stresses on the business and on the family, these kinds of decisions rarely hold up.
Choosing A Successor: The Role of Assessment Tests
Most business owners would identify the following areas as “must-have” skills for the success of their business:
- Decision-making process
- Leadership abilities
- Risk orientation
- Interpersonal skills
- Temperament under stress
Is there a way to objectively assess with predictive accuracy which successor candidate will demonstrate proficiency in these skill areas? More and more family-owned businesses are turning to descriptive and predictive assessment tools to find these answers. These tools are not new.
Simply put, assessments have been helping companies make better hires for several decades. Hiring the right people for the right positions from the start reduces turnover and associated costs, increases productivity, and produces a skilled pool of employees to ensure strong leadership development and succession planning.
There are two kinds of assessment tests worth examining for succession in family-owned businesses. The first class of assessment tools is referred to as personality assessment or personality measures. It turns out that personality determines a number of important characteristics and behaviors, including how people interact with others, what motivates them, and what they value. Personality instruments also help determine whether there will be a “cultural fit” between the candidate and the business—and if the fit is not perfect these tools can identify areas where a gap can be closed.
The second class of assessments tools is referred to as cognitive ability assessments, also known as aptitude tests. Candidates with higher levels of cognitive ability are more likely to perform at a higher level on the job. Aptitude tests will identify measures who will perform effectively, learn new tasks and apply knowledge faster, solve complex and unusual issues, and respond well to training.
Online assessments can also be effective tools for promoting internal incumbents, interviewing, targeted leadership development and coaching, and succession planning. When family-owned companies recognize the broad value of assessment tests, they’ll want to use them to improve bench strength across their organizations as well.
The combination of valid cognitive ability and personality assessment tests provides a means to identify the person who has the most potential for success, as well as a development map to improve specific areas. These assessments can measure capacity in given job skill categories as well as cognitive, analytic and innovative abilities that are often predictors of success. They can also help succession candidates understand where their passion lies or where their skill sets are strongest. The combination of capability and suitability assessments provides insight into the motivating potential of a job for any given candidate, allowing them to maximize their potential so that:
- Owners know succession candidates have the capabilities to do the job. In other words, they possess the gifts, talents and cognitive abilities to effectively perform the job.
- Potential successors possess the passion for the work. Passion to perform the job duties and work within a given job context is measured by examining the individual’s personality, interests and preferences.
Next time, we look at two case studies that illustrate how personality assessment tests inform great succession decisions in real life.
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