Don’t Treat Succession as if Your Business Were the Royal Family

William and Kate’s recent visit with the children brings to mind the issue of succession.

Of course for the Windsors, succession is a done deal. Prince Charles, the oldest child, will succeed Elizabeth II unless he dies or gives up his right. Prince William gets his chance after that.

Some family-owned businesses follow a similar model of succession. The current head or owner of the company passes the baton on to the oldest child — and in some cases, the oldest male child.

The Key Is Survival

But the old saying, “shirtsleeves to shirtsleeves in three generations,” describes a concerning fact about this standard of succession. Many family businesses that are passed down to children and then grandchildren may not survive through the third generation.

History shows that this path of succession often leads to inefficiencies and mistakes that jeopardize the continued existence of these family businesses. There are a lot of reasons for this, including that the first-born isn’t necessarily the most qualified. Still, keeping the business in the family can often yield more wealth for generations to come than any investments you might purchase with the proceeds from selling it.

If you decide to keep your successful business in the hands of the family, you need to begin the process of choosing a successor. That choice will have a direct impact on your financial future and retirement. Picking the wrong person (or handing over the reins too soon) can cause your company’s fortunes, and your retirement financing, to deteriorate. The worst-case scenario is that the business will fail.

Steps to Consider

If your company’s policy is to let the oldest child automatically take the reins, you might want to step back and consider other approaches. Here are eight common-sense steps to consider to help choose your best successor:

1. Determine if any of the next generation is even interested in continuing to work for, and more importantly, manage the business. And set a target date for the takeover. It can be difficult to keep a designated heir in place without a timeline. It needn’t be a specific date. A series of milestones leading to being prepared to take over is sufficient.

2. Decide which of the interested children has the best skills to take over. This might require outside assistance from trusted advisors or business consultants. Enlisting outsiders can help to eliminate any biases the family’s senior generation might have for — or against — certain offspring. A person outside the company will likely be impartial, have no real stake in the outcome and help you objectively evaluate potential candidates. Keep in mind, depending on your children and your family’s dynamics, it may turn out that someone outside the family who has worked in the business may have the skills and personality to lead into the future.

3. Don’t assume your primary choice wants to take on the mantle. Begin discussing the possibility long before you plan the transition. But be aware that the potential candidate may have a hard time getting his or her head around the idea. Leading the company is obviously going to be harder than just working for it. Not everyone has the strength, talent or understanding spouse who will allow them to take the reins.

4. If there’s more than one viable successor, give each a chance to win the job. This is no different from the process that often happens in publicly held companies and in many large private businesses. Each qualified candidate should be allowed to fill a position at the company and to progress up the ladder of management.

5. Rotate the jobs each candidate performs, if possible, so they gain experience in many areas of the business. Not only will this better groom the ultimate leader, it also will provide depth to the management team. The candidates should be trained in decision-making, leadership, risk management, people skills and handling stress. As each moves around the company, increase responsibilities and set more rigorous goals.

6. After a reasonable period of time, the “decision team” should select and meet with the best candidate to discuss expectations, compensation, terms of contract and other issues related to leading the company.

7. When there are multiple candidates, owners should meet with each one who wasn’t selected. Decisions will have to be made here, such as whether the person will stay in some executive position and be willing to work as a team with the new head and the other candidates. Don’t make the mistake of keeping candidates with the company simply because they’re part of the family. If someone isn’t a good fit, you may be better off terminating the business relationship.

8. Develop a well-communicated plan for the transition of power to the newly selected company head. This might take several months or even years. During this time, authority and decision-making should gradually be shifted from you to your successor, allowing you both to adjust to your new roles.

Don’t underestimate the human element and how much time and effort will be required to make the succession work. Developing a plan early will allow you to maintain control over the process and have the available information you need to make decisions. Once the plan is in effect, stick to it unless there are extenuating circumstances.

Other Resources

It’s a good idea to consult with your attorneys and tax advisors who specialize in family business succession to understand all the implications. When a successor has been adequately prepared, there will be limited or no disruption to your business when the person takes over. The change in leadership should be natural and expected by everyone.