EMA Journal • PMAA Journal Fall 2018 • Building A Legacy: Transitioning Into Retirement

No one ever argues against proper planning. So why do so few family businesses do it well? And why do some never do it at all?

Preparing for the inevitable, the handing of the reins of leadership from one generation to the next, is often fraught with psychodynamics and drama. Children don’t want parents to think they are trying to push them out, and they may have their own ideas for the company’s direction. Parents are reluctant and scared of turning their creation over to less experienced hands, of losing contact with friends in the industry and of becoming irrelevant.

But a lot is riding on carrying the transition off smoothly, not the least of which is the company’s employees who — facing fundamental change — want assurances of continuity during such uncertain times, and who want to know how their livelihoods are going to be impacted.

“Succession planning” can be an intimidating phrase, but it only refers to a strategy for identifying and developing future leaders at a company at all levels. The process should identify and train successors to seamlessly take over in case of retirement, illness or death. The fact that more families have non-traditional structures than ever before only serves to complicate the matter.

A poll by TD Wealth showed that 44 percent of attorneys, trust officers and accountants cited family conflicts as the biggest threat to estate planning. “We see more blended families, multiple ex-spouses, kids from prior marriages and situations where one spouse is much younger than the other,” Ray Radigan, head of private trust at TD Wealth, said. “These fact patterns can pose problems.”

Indeed, statistics from the Family Business Institute show that just 30 percent of family businesses survive into the second generation, just 12 percent are viable into the third and a mere 3 percent beyond that.

But while small businesses often see their fortunes decline after the first generation of leaders exits, effective succession planning can certainly improve the odds of continued success. Here’s how.

The sooner entrepreneurs begin thinking of their eventual succession, the better. Giving the next generation experience in a variety of departments and roles not only builds skill sets and provides a more well-rounded view of the company, but can shed light on their strengths and weaknesses. Including them in strategic planning meetings will also prepare them for leadership and help ensure the continuity of corporate culture.

Research from Baker Tilly International (in cooperation with Baker Tilly Pitcher Partners and Swinburne University) that included 2,500 family firms in 55 nations resulted in a number of guiding principles for succession planning. They include the following ideas, which both generations would be wise to keep in mind before and during the process:

Drafting a succession plan is like preparing a business plan — a great idea that few entrepreneurs actually follow through on. But a written plan can concretize both the method and hoped-for results, from promoting executives and charting a time frame for transition, to defining ownership, clarifying transfer of funds and tax variables, and understanding the implications for estate plans.

The outgoing parties need to decide how they wish to exit. For instance, do parents want to sever their ties to the family business completely? Liquidate the company or sell it to outsiders? Continue with full or partial ownership? Have ongoing management or consulting duties?

It isn’t always the children who stand to take over a family business. If extended family or non-family staffers are better suited to run the business, they can and often should be named as replacements even over the objections of those who may feel passed over. Children or grandchildren who do not show aptitude or interest should never be pressured to do so.

Predictive assessment tools, like questionnaires and simulations, exist and can tell who the more likely leaders are. Expand the parameters of leadership beyond basic job functions to include the ability to coach employees — surely a skill that leaders must possess, but one that is frequently overlooked or underestimated. An important part of this evaluation is getting a sense of how committed the employee is to the company’s future. Even family members can opt to switch careers or think short-term. Finding those who are in it for the long haul, or are at least open to that possibility, can be essential.

Daniel Goleman, who for more than a decade reported on brain and behavioral sciences for The New York Times, says future leaders can be identified as those who “seek out creative challenges, love to learn, and take great pride in a job well done. They also display an unflagging energy to do things better. They are also eager to explore new approaches to their work.”

Formal training and mentoring of future leaders over a period of time is necessary for them to gravitate smoothly into a leadership role. Shadowing and training should be key ingredients.

Vacations and business trips can be used productively by allowing potential successors to run things and make decisions for finite periods of time. Their decisions and demeanors can then be assessed based on real-life scenarios.

Developing future leaders, family members or not, is better in a variety of ways — cost, corporate culture, loyalty — than raiding or vying with competitors for talent. Having a good “farm system” pays long-lasting dividends.

Succession planning can be an entrepreneur’s final accomplishment — and it should be his or her best.