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Transfer, Transition, Tension and the Family Business

A Primer for Founders Who Have Dynastic Intentions

Two of three transitions essential to the survival and success of a family-owned business were examined in Family Management and Business Success. They are:

In this article, we'll look at preparing for the actual transfer of the business, and, discuss how designated and appropriate family members can eventually succeed the owner(s).

Frequently, this last step is the most arduous and painful of the three transitions. The barriers are numerous, but the most fundamental are failing to think strategically about bringing the family into the business, and waiting until very late in the owner/manager's tenure until providing for succession.

The seriousness and extensiveness of these barriers is reflected in the findings of the Pervin 1998 survey of family business owners, which revealed:

This information confirms the business family's ambivalence to and avoidance of the continuity planning process. This inability to confront the continuity issue forthrightly can have disastrous consequences: selected successors can be inadequately prepared due to late decision-making; children may fight among themselves for the leadership position; and the business can collapse or be lost.

Forces Against Continuity Planning

The failure to address family management continuity could be chalked up to the entrepreneur's natural aversion to planning. However, my experience indicates that the reasons are far more subtle and complex. To understand the forces which often converge to prevent effective succession planning, it is important to recognize that there are four highly interdependent subsystems in every family-owned business: the owner/founder (especially if still active); the firm; the shareholders; and the family.

The five most pressing causes of family business failure that I observe are:

  1. conflict and misunderstandings in the family at some level,
  2. the inability of next generation participants to cultivate the requisite skills that match those needed by the current and future business environment,
  3. the lack of planning and governance at the business, family and ownership levels,
  4. ad hoc communications skills that undermine accountability and effective decision-making, and
  5. inadequate estate planning.

Each of the subsystems has certain dominant features or characteristics. The family subsystem is primarily focused emotionally and directed toward group support and affiliation. The firm subsystem, which comprises not only the firm's employees but also the environment in which it operates, is primarily focused rationally on a shared business purpose and directed toward work goals and task accomplishment.

The founder system embraces elements of the firm, shareholder and family subsystems, and its ultimate objective is to achieve the appropriate overlap, balance and interrelationship amongst each of the subsystems at each stage of the business' ongoing progress and success.

As Ivan Lansberg has pointed out in his pioneering research on succession in the family-owned business, there are a number of compelling forces within each of the subsystems, which work against succession planning.

They are:

Founder

Family

Employees

Environment

In order to counteract such a mixture of insidious opposing forces and allay all concerns and fears, the owner/founder must take a firm and leading hand. This typically involves four separate steps: developing a written succession plan; integrating the separate plans (the founder's personal development plan, the firm's long-term business plan, and the family's continuity plan and creed) into a transition master plan; coordinating their implementation; and managing every step of the transition process.

Develop a Continuity Plan

For the founder/owner, the major steps in the succession planning process are the following:

  1. Educate yourself on the need for succession planning. Read articles. Talk with your counterparts who have successfully handled promoting children to the top management roles in their companies. Seek outside assistance to help in the development of the plan, if required.
  2. Educate the children on the business philosophy. From the time the children are young, the founder should instil in them an excitement about the business in general and the company in particular; the values of entrepreneurship, savings and risk; and the importance of successfully balancing personal, family and business needs.
  3. View succession planning as an essential long-term process affecting the very existence of the business. Begin planning for it as early as possible. Include or consult all of those key people (family members, company management, suppliers, customers, lenders) who have an interest in the business and the planning process.
  4. Encourage your spouse and children to participate in the planning process. Solicit their input regarding personal intent, interests, concerns, motivations and priorities regarding the business.
  5. Decide whether your business is a "Family First" or "Business First" operation. This issue will be fundamental to your future conduct. The answer will determine the degree to which family members will be held accountable for their performance and how compensation levels will be determined.

    Assess the capabilities of the children in the business. Ask advisors and persons you trust to assist in arriving at an objective assessment of capabilities.

  6. Use an independent outside board, if one exists, to help make the final determination of who should take over the reins.
  7. Select a successor, who will move the organization forward, has independent ideas and can contribute to its evolution. Do not just pick someone in your own image and likeness.
  8. Establish fair ground rules so there will be no misunderstanding later on how children can enter the business. Cover aspects like: under what conditions a family member can enter the business; whether they should gain experience outside the company first, and for how long; policies governing salaries and promotions; and a code of conduct between relatives and employees. Before family members start work, the founder should establish the working hours, who they report to and direct accountabilities.
  9. Develop a family partnership creed that includes a vision, mission, statement of values and other relevant policies that outline each family member's relationship to the other and to the business.

    Develop a formal written succession plan. Initiate a program for phasing out your day-to-day detailed involvement. In making the transition from operations to planning, the founder has to develop an agreement and a timetable with the next generation leaders... the children.

    Create a shareholders agreement. Identify a method to transfer shares so that there is a rationale to the dilution of ownership. The key is to give stock only to individuals who have the ability to increase its value. (Make sure you leave other assets to children who are not in the business.)

  10. Develop training and mentoring programs that will provide the successor(s) with a total perspective of the business. Introduce your next generation leader(s) to all your significant contacts (customers, company, management, bankers, lawyers, accountants, consultants, etc.).
  11. Find another important activity outside the business to commit your personal attention and time to.

    Set a definite date for leaving the operations helm. Stick to it.

Manage the Transition Process

The degree to which the family-owned business' transition-related plans are executed effectively hinges upon the founder's ability to manage transitions successfully. While changes can be made, transitions must be managed.

A transition has both procedural and psychological dimensions. The procedural dimension involves taking those steps specified in the transition plan to bring about the desired organizational or individual change. The psychological dimension encompasses the "adjustment" process that each involved individual – founder, family, shareholder, firm member – must go through positively in order to successfully implement the transition.

Transition management is the process of guiding and controlling, to the extent possible, the implementation of the transition plan through the transition period. It focuses upon "how things are done" and addresses both procedural and psychological considerations in order to provide that environment which is most conducive to achieving the desired results. It entails initiating the plan as developed and revising it on an on-going basis in response to changing conditions. It means somehow resolving all the anticipated – and unanticipated – concerns and consequences stemming from the transition change effort – the social and emotional upheaval – in as productive a fashion as possible.

To function in the role of transition manager, the founder must engage in a continuous "balancing act". S/he must push forward with the substantive aspects of the transition plan. At the same time, s/he must be sensitive to the fact that there are malevolent forces at work – both within him/herself and all of those affected by the transition – which could either stop, change altogether or radically alter its course and intent. Recognizing this, the founder must be ready to confront him/herself; proceed gradually and incrementally; listen to others; and work in collaboration to build the acceptance, ownership and support throughout the family-owned business so as to facilitate the necessary changes and transitions.

In addition to the business family continuity planning steps mentioned in the previous section, founders could also do the following in order to be most effective in discharging the responsibilities of "transition manager".

  1. Accept the role and responsibility of transition manager. Examine yourself critically. Make those required personal changes and adjustments.
  2. Understand that transitions are extremely complex and cause significant upheaval and tension. Acknowledge that problems can occur in the transitions and study the requirements for successful transition.
  3. Form a core team of significant individuals to assist in the transition planning and implementation process. Educate and train them in the requirements of transition management. Solicit professional assistance, as required.

    Write the transition plan to incorporate steps designed to deal with the rational and psychologically aspects of the transition/continuity process.

    Communicate clearly the new vision espoused in the transition plan, including the underlying rationale, changes required and check for reactions. Work individually with those who have the greatest difficulty with the espoused changes.

  4. Provide sufficient opportunities and time for a learning and transition period.
  5. Monitor the implementation to ensure that it is accomplishing the desired organizational results and the individual psychological responses required to sustain the transition.
  6. Use the transition process to build an ongoing transition capability into the firm. Design the transition and prepare others to continue the business into the future.
  7. Remember to listen, acknowledge and validate the next generation and to explore ways to gradually reduce the tension associated with the transition process so that it can proceed and succeed.

The Founder and the Future

The founder's overriding responsibility in transition of the family-owned business is to the future – his/her own, the firm's, the shareholder's and that of the family's. Responsibility of this scope is awesome and many founders get stuck at various points along the journey. Yet, the nature of the challenge is simple – to do what can be done to continually move things forward on all fronts.

Some thoughts of Dag Hammarskjold, the late Secretary General of the United Nations, from his book "Markings", are instructive in this regard:

Do what you can – and the task will rest lightly in your hand, so lightly that you will be able to look forward to the more difficult test, which may be awaiting you. Forward! Whatever distance I have covered, it does not give me the right to halt. Forward! It is the attention given to the last stages before the summit, which decides the value of all that went before.

Based upon my experience in working with the founders and partners of family-owned businesses, the majority are competent to accept the full scope and nature of the transition challenge.

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