Your Family Business Won't Survive If You Don't Plan for the Leadership Transition

This column was originally published on Entrepreneur.com on May 4, 2018.

When advising family business owners, one of the biggest challenges I see clients grapple with is the transition from being "power players" who dominate every aspect of the company, to "people builders" who cultivate the next generation.

Take the example of "Terry," who had successfully led his manufacturing company for almost three decades. At age 68, he just didn't have the energy that he'd had even 10 years ago. What he did have was a wealth of institutional knowledge, which was part of his company's success. Terry was still the public face of the company, known throughout the community and by his customers and distributors as an astute businessperson with a big heart. Unfortunately, all of Terry's secrets to success were locked in his brain, so when his two sons stepped up to take a leadership role, they had no relationships with key stakeholders, such as the advisory board, the bank, the local community, customers and suppliers. Their style of leadership also was different than Dad's. Key customers were leery of the impending change and suddenly became more interested in re-negotiating contracts.

Much of this difficult transition could have been averted if Terry had included his sons in key business meetings and relationship-building opportunities early in their leadership training. Terry had a lot to share, but he just didn't know how.

Family business challenges

Terry isn't alone. There are approximately 5.5 million family businesses in the U.S. According to Tharawat Magazine, these businesses are estimated to account for more than half of the U.S. GDP and employ more than 60 percent of the workforce. Yet, despite their outsized impact on our economy, many family businesses haven't planned properly -- or at all -- for a transition in business ownership. One study by MassMutual found that more than 40 percent of respondents expected to retire within 10 years. However, fewer than half of those expecting to retire in five years and less than one-third of those expecting to retire between six and 11 years reported that they had a chosen successor.

There are three main challenges that family business owners typically face:

• How can they pass on the institutional knowledge gained through years of experience so that the next generation can keep the business going in the right direction?
• Do they want to pass on their business culture and values, such as a connection to the community or concern for employees, to the next generation?
• Most importantly, how can the business be strong and sustainable without them?

Understanding the business lifecycle

To address these challenges, an owner must first understand the three key stages of the business lifecycle and what must be done to progress to the stage where ownership can be successfully transitioned.

Stage one: Entrepreneurial. The founder/owner runs the show; the long-term vision is in his or her head. Rarely is there a written strategic plan. While the owner may have the support of key personnel, they are expected to execute while the owner makes the ultimate decisions.

Stage two: Durability. In this stage, an owner is surrounded by other leaders who have the responsibility and authority to make decisions. The business follows something of a shared vision and also has more formalized operating processes; performance metrics; and a semi-independent board, which is either fiduciary or advisory.

Stage three: Legacy building. Here, the owner and other company leaders have done a really good job of capturing knowledge and disseminating it throughout the organization. Businesses in this stage have done a solid job of building the leadership bench and making succession planning an orderly process.

Few family businesses actually progress to stage three. To get there, owners need to envision what their lives might look like 10 years down the road.

Answering questions regarding successor readiness helps owners clarify what would give them confidence as the transition evolves. The transitioning leader might gain clarity on the current state by asking: "What is working today?" This can be followed by imagining the desired future state once they have fully transitioned into the next phase of their life. However, to get from the current to the future state, most owners need to develop several interim phases that allow for making incremental changes in their role as they become more comfortable with their changing responsibilities.

Embracing a new role helps many business leaders to both add value, due to their vast experience, and to learn new skills that will benefit both the company and the next generation. However, this is not always easy. Owners are generally engaged and entrepreneurial people, and it is difficult to step away from the heady days of making all of the important decisions. This is why we encourage a step-by-step process that has a clear goal in mind and helps the owner to take baby steps as he or she becomes more comfortable with a new role. It also helps to be transparent with other leaders in the company about what the owner is trying to achieve and what help or support is needed to get there. Some owners choose to include their transition objectives as part of the strategic plan and may begin to introduce new organizational practices, such as an advisory board or a family council, to help to achieve those objectives.

Once Terry was aware of the value and importance of his years of experience, we were able to develop a plan for gradually transitioning his role and systematically sharing his wealth of knowledge. Terry began by identifying his most important strategic relationships, detailing how he formed and maintained those relationships, and introducing his sons to his many advisors, clients and business colleagues. Next, we worked together to develop a training plan that incorporated the opportunity to learn directly from Terry and other leaders in the organization. Finally, Terry and his sons developed a clear agreement, outlining the process for transitioning their roles and responsibilities over a three-year period.

Because a business transition may not come naturally to the owner, it is crucial to create a formalized process, like Terry's, that includes well-defined goals, open communication and frequent feedback. Through this process, the owner gains the ability to move from the power player position to that of a people builder.

Copyright May 4, 2018 by Entrepreneur Media, Inc. All rights reserved.