“The final test of greatness in a CEO is how well he chooses a successor and whether they can step aside and let their successor run the company.” – Peter Drucker, management theory pioneer.
The value locked up in a family business lies within the next generation of leadership, for two reasons.
First, you can't get out if you don't have leadership in place to continue the company (whether you are selling the business to them or to a third party – there is no business without them).
Secondly, their ability to run and grow the business successfully is how you will convert your illiquid net worth into cash.
Statistics suggest this is a daunting task. Only 33 percent of family businesses make it to the second generation, and only 15 percent or less make it to the third generation.
“Shirtsleeves to shirtsleeves in three generations.” You will exit your business … either on your terms or those of someone else.
Back to Drucker's quote. It's not just choosing your successor, it is stepping aside.
And if you plant yourself too long in the CEO seat, it becomes increasingly more difficult for the next person to step in, let alone for you to step out. This truly is the final test of greatness.
There are 5.5 million family owned businesses in the United States. These companies comprise more than half of the nation's gross domestic product and create three-quarters of all new jobs.
Many experts believe that one common cause of failure in family businesses is a lack of transition planning and preparation. Leaders of family owned businesses often stay at the helm for 20 years or more, and, as a result, their exits have a major impact on the company.
Their shadows become long. These long tenures also can make it difficult for organizations to cope with rapid shifts in technology, business models and societal beliefs.
To increase the odds of succession planning in family businesses, the key is to start now.
Developing new leaders takes time. Transitioning power and authority takes time.
This isn't just about finding the right person, and that will take time, as well. Sometimes, the chosen successor doesn't work out, meaning more time will be required for the transition.
Succession is tricky in family businesses. On one hand, it's important that the next generation carries on the entrepreneurial spirit that has driven the organization's success. On the other hand, it's important that the current generation doesn't become too complacent and unwilling to change, holding on to power and authority too long.
Many successful families develop governance about family members coming into the business to help address some of these issues, including education and working outside the family business for several years prior to employment in the family business – as well as working multiple positions and earning their way once they do come into the business.
Many also limit the number of family members in key positions, in order to attract outside talent and showing that nonfamily employees have a career path. Additionally, developing a board consisting of family and nonfamily professionals is an important component of good governance.
As you take on succession in your company, stay proactive. It is an iterative process. With careful succession planning, you can turn a potential nightmare into an opportunity.
Tom Garrity is managing partner of Compass Point Consulting LLC in Bethlehem. He is a certified coach with Gazelles International and a certified exit planning adviser with the Exit Planning Institute. Compass Point provides growth and business transition consulting to small- and medium-sized businesses. He can be reached at 610-336-0514 or firstname.lastname@example.org.