Family Business Succession Planning Strategies

Effective SME Family Business Succession Strategies

Fred Burke, C.G.A. - Chief Operating Officer, Intercorp Excelle Incorporated

1880 Ormont Drive, Toronto Ontario, Canada M9L 2V4

Phone: (Canada code 011) 416-744-2124Fax 416-744-9083

Email: Fred1@rogers.com website: www.CGA-Canada.orgDuring my business career, Ive had the opportunity to work within well known multinationals, including one of the worlds largest privately family run Consumer packaged goods companys, Mars Incorporated. For the past six years, as Chief Operating Officer of a medium sized family run business, Intercorp Excelle Incorporated, Ive now seen first hand, entrepreneurship flourish at the grass roots level as well. I believe that there are many similarities in the way the largest and smallest of these entrepreneurial organizations achieve success, and effectively manage their company so that they may pass them on to the next generation. How can an effective planning process be used in family-run entrepreneurial organizations? Very few family-run companies are successfully passed on to the second and third generations, primarily due to ineffective succession planning and a lack of an agreed strategic vision. In fact, less than half of viable small and medium sized businesses are able to survive past the first generation. Implementing an effective plan will protect the companys culture, ability to successfully implement the long-term strategy and smooth transition phase necessary to pass control to the next generation.

Aim of this Study

The goal of this paper is to clearly understand the key elements within the effective succession plan, focusing on small family-run businesses. There exist specific enablers and defined processes starting with a business case which identify successor candidates based on leadership capability and organizational continuity. As well, this paper identifies strengths and weaknesses dealing with challenges of implementing a successful succession plan.

In addition there are a number of questions which must be dealt with in order to fully comprehend the complexities of various succession strategies. A well defined succession plan must deal with;

1) Identifying the most capable person to manage the organization at some predetermined time in the future.

2) How to attract and retain talented family members and employees who can effectively manage and grow with the business.

3) Managing change and transition in culture within the organization so that numerous pitfalls are avoided.

4) How to enable retiring beneficial owners to satisfy ongoing involvement and income needs.

5) Understanding the role of a Board of Directors or Advisors in the succession plan strategy and effective estate planning.

Approach and Methodology

The diagram below presents the five pre-dominate stages to a succession planning methodology. Surrounding the various stages are on-going enablers, such as a well defined and effectively communicated strategic plan, leadership support, competitive compensation and high-level performance management tools and processes. Succession planning is a board governance function and on-going responsibility, focusing on senior level leadership positions deemed to be critical to the future operations of the organization. The combination of these key enablers will drive organizational and leadership continuity - necessary elements of organizational success.

Stage One: Understanding the Business Case for Proactive Succession Planning

Recognition that there is a need for a business case is a very critical first step. Many entrepreneurs believe that their business encompasses both personal and professional life, their vision, and their passion an extension of themselves. As such, especially in the infancy stages of business development these entrepreneurs honestly feel that they will nurture and grow their businesses until they are unable to do so. For the most part, they welcome their children into the business based on trust and a sense that their children have or will gain the same level of passion as themselves. They believe that the business will automatically transition to their children at an undetermined time in the future when they are unable to carry on and the need to pro-act or plan this transition is not required. Perhaps it is the fear of facing a point in time when they are unable or unfit to carry on.

Stage one therefore requires the entrepreneur to articulate a clear vision and company mission which envelops the culture and values of the business. This mission statement is the foundation for developing a strong strategic planning process which incorporates the development of a longer term business plan. Requiring the entrepreneur to envision where the business will be five, ten and twenty years into the future creates a situation which necessitates decisions on required organizational structure and effective leadership. This also focuses creative debate around assessing the degree to which the owners retirement and attrition issues will impact on desired business objectives.

There are numerous considerations in order to build a business case model which ideally will work for the business owner. Factors which must be considered for perpetuating a business include:

1. Understanding the industry sector, market share, competition and barriers to growth.

2. Long term business strategy for growth and required investments in capital and infrastructure.

3. Interest and desires of other family members involved in the business currently and their potential involvement in the future.

4. Age, experience and education of the beneficial owners and family members.

5. Independent business valuation and potential to increase brand equity over time.

The Organizations Strategic Planning Process

The need for a formal strategic planning process and succession plan are integrated elements of family business success. Formalizing a mission statement is a key first step for the beneficial owners in order to clearly articulate and communicate the vision, culture and values desired throughout the entire organization. Many entrepreneurs will suggest that a written mission and value statement is not necessary however completing this task ultimately commits the entire organization, including family members to accept and implement that vision. Ultimately the strength of the strategic planning process directly impacts on the transition of the business to the next generation at some point in the future based on their commitment to the business plan and development of the envisioned culture. This also reduces the risk of family differences in what direction the business strategy should go, since those issues usually are sorted out in a healthy, structured analytical debate in the preparation of a business plan.

The creation of the business plan is a total company effort, usually involving all family members and senior management identifying key roles, responsibilities and organizational structure. For successful organizations the planning process is an ongoing business activity. The business plan is reviewed annually, modified if necessary and validated against the long term vision and values of the companys owners. The business case model for succession planning differs from the ongoing planning activities in that it occurs at certain points in time when the family business has either reached a certain critical mass or family members become interested in working in the business and express a desire to develop their careers with the organization. These situations necessitate consideration of organizational and leadership continuity. Input from all aspects of the business plan strategy is necessary in order to develop a realistic business case for succession planning.

Stage Two: Identification of Target Roles and Positions

Organizational resources required to support the business plan represent a key step in the process. The second stage of the model is aimed at identifying the critical workforce segments within the business. It is important to recognize that this should not be based on slotting people into specific roles or responsibilities (i.e.: developing roles for key employees or family members). Rather it is an assessment of particular resource requirements necessary to achieve business plan targets. The objectives of Stage two are to review current and future talent requirements. A key aspect of the review is in identifying key positions required at various stages of the business plan growth initiatives which may or may not exist presently. This stage also set priorities among the various key or at risk positions identified.

Role of the Board of Directors or Advisors

The earliest stage at which external management experience and expertise is injected into the succession planning process, the more apt that plan is able to fit with the business plan. An independent viewpoint act as a reality check or steering mechanism in the process to ensure that the right organizational structure is in place to enhance the business ability to succeed through the transition phase. This independent viewpoint also reinforces the need for timely succession planning, as well as structured estate and tax planning. A succession plan strategy and its implementation are most effective when facilitated by independent counseling from a number of sources and tempers the emotional issues usually faced when planning family transition.

Stage Three Core Competencies and Skills

Once key, at risk positions are identified in the business plan, core competencies and skill sets for each necessary to perform successfully in the target roles must be identified. This will provide a baseline for assessing performance, and gaps within the current workforce including family members. It can also serve as a framework for future recruiting of talent required to meet business plan strategic goals and key objectives. By focusing on the broader organizational requirements of the business, it will become must clearer for the entrepreneur and family members to assess where developmental gaps exist and if there is an interest from family members to gain the necessary skills and competencies required to fill those key positions.

Balancing Business and Personal needs within the Family Business Enterprise

A major element of the succession planning process is to identify individual family members outside needs and activities with those of the organizations. In order for family members to be considered for key positions or as successor candidates there is an inherent commitment to develop the skills and competencies necessary over time which meet the business needs at some point in the future. This is a complex area which involves a number of interrelated actions including trust and confidence, delegation of decision making, personal sacrifices in order to learn the business and assuming leadership roles and responsibilities.

Key family members involved within the business must be treated as equal employees in order to gain respect from non-family staff members however they do have other responsibilities over and above just assisting in executing the vision. They must also develop new innovative ways of working together based on changing circumstances. They must transition into new and different roles in order to gain a broad business sense, and get involved in corporate policy and strategy as integral members of the board of directors or advisors. In this way, they become acutely aware of the business needs and key position roles determined in Stage 2 and Stage 3. Family members must be fully informed, involved and have access to opportunities in order to develop an effective succession strategy.

Stage Four Identification and Assessment of Successor Candidates

This stage of the model involves the identification and evaluation of potential candidates, which often requires the assessment of both internal and external individuals. The business case establishes strategic direction and performance measurements required to lead and guide the organization towards the delivery of those strategic goals. Stage four also involves the development and implementation of a rigorous, competency - based performance management process to identify high potential candidates within the organization. If potential candidates, including family members are not identified through this management process then a reliable and fair selection process for searching out external qualified candidates may be necessary.

It is imperative that the family work with an outside expert during these stages of developing the business case. They will greatly benefit from the presence of an experienced sounding board and communication facilitator who can control family emotions in this critical stage. Sharing this information with all family members openly is very important, so that they fully understand that there is no free pass as the successor candidate and that they must possess the necessary business and educational qualifications, just like any other applicant.

The importance of a Positive Work Environment

The culture of the organization must be well defined and consistently reinforced. It must recognize and reward current employees and family members equally, train and promote from within while attracting new talent and knowledge to the organization based on an accepted and pre-determined business strategy. There is a strong argument that leaders are not born, rather that they develop over time by learning new skills and competencies. Family members be given the opportunity to discover there natural management styles and understand the differences in their personalities and business philosophies. Identifying whether one family member has the ability to acquire those skills and competencies necessary to lead the organization as the successor candidate is the key outcome of the succession plan. A family member may be identified as a potential successor candidate but may not want the responsibility, whereas another may desire to be the leader, but does not want to invest the time to develop the skills and competencies necessary in order to be effective.

Stage Five Developmental Programs

This final stage of the succession planning model consists of a review of current and required training and development practices. The objectives focus on ensuring that potential successors are receiving sufficient development opportunities, including formal training internally and externally on an on-going basis. This training should involve independent feedback, job development opportunities and formal evaluations of progress, special assignments and projects in addition to a formal mentoring program.

Part of the ongoing training and development activities once a successor candidate has been identified during stage four, should consider accepting positions outside the family organization and environment for a period of time. This experience is invaluable to the candidate who is able to develop business experiences outside the comforting environment of the family business. The identified successor can assess different cultures and values, new mentors and innovative ideas eventually bringing those experiences back to the organization.

On-going Education and Personal Development

The most crucial step of implementing a successful succession strategy involves on-going formal feedback and assessment. In addition to in-house training, external team-building exercises and regularly scheduled family retreats become critical in developing the succession strategy. The knowledge the can be gained from a family retreat session can teach the family how to successfully manage the delicate relationship between family and business. The education and learning experiences should be very broad ranging from general management and leadership instruction, assessment of diversification opportunities and specific evaluation of business practices, to wealth management, family investment strategies and even parenting skills. Through these ongoing interactive sessions, participants understand better what their needs and desires are versus those of the owners and the business. They also gain consensus on identifying the skills and competencies of a successor candidate and whether that person is a qualified family member or external candidate is a decision made in the best interests of the business and maximizing value.

The Desired Outcome: Organization Continuity and Leadership Capability

If the succession plan strategy suggests that leadership of the business should transition to a chosen family successor, this may necessitate a longer transitional period before that leadership role is actually assumed. In many cases the outcomes of stages 2 and 3 of the succession planning model will determine that key positions will be filled through an external search for talented non-family executives allowing family members to develop and grow in the interim period. Therefore, the actual succession planning process is initiated well before the beneficial owner is contemplating retirement.

In other cases, the succession strategy process determines that non-family members desire to remain actively involved in the business beyond the time that the entrepreneur wants to transition out or retire from active leadership. This suggests a number of options exist hiring talented outside management to run the day to day operations for the family and generate an ongoing income or dividend stream, or divesting of the business at the right strategic time in order to obtain maximum value for the shareholders. It is best not to force family members to choose the family business as their vocation. They must explore and develop their own talents and make their own decisions. They must feel the passion for involvement and if they choose to enter the business at some point in the future after exploring other business opportunities then the company will greatly benefit from their outside perspective.

In either event, this is part of a well thought out business case which has considered all aspects of organizational continuity. Business ownership has always been about created wealth and value for the shareholders, and if this is accomplished without the need to transition leadership to the next generation then the right decision has been made. Concluding Remarks

Succession Planning is most likely one of the most complex, emotional business issues family organizations will face. A successful strategy involves acceptance of an agreed process and effective board governance. The succession strategy must be developed in conjunction with an agreed business plan and needs to be balanced with ongoing organization wide planning. There are on-going enablers which assist the business owner in developing the business case for proactive succession planning. Input from independent board advisors and experienced outside experts who facilitate the process is absolutely necessary so family members can openly share and understand the necessary qualifications of a successor candidate and express their willingness and desires for continued involvement and commitment to the family business.

The involvement of all family members, whether involved directly in the day to day operations of the company or not is critically important as the succession plan is implemented. The underlying business strategy is determined through a formal vision and mission statement which is reinforced through a strong well-defined culture and organizational values. Each stage of the succession planning model must be fully analyzed and debated. The end result of all this strategizing and communication is to mobilize all employees in addition to family members and the beneficial owners in order to create synergy and organizational continuity.

References

American Management Association: Family Business Succession Planning Winter 2003

Bamberger, 1. (ed.): Product/Market Strategies of Small and Mediumsized Enterprises, Aldershot etc. 1994

Cohen, D. S. : The Talent Edge A behavioural Approach to Hiring, Developing, and Keeping Top Performers, 2002

Deloitte & Touche: Strategic Succession Planning Developing and Retaining Talent, Sustaining Vision, Culture and Leadership 2002

de Vries, B. A.: Industrialization and Employment. The Role of Small and Medium-sized Manufacturing Firms, in: International Economic Development and Resource Transfer, Institute of World Economics, Kiel 1980

Donckels, R./A. Miettinen. (eds.): Entrepreneurship and SME Research On its Way to the Next Milllenium, Aldershot 1997

Kao, R. W. Y.: Small Business Management. A Strategic Emphasis, Toronto 1984

Entrepreneurship. A Wealth-creation and Value-adding Process, New York-London etc. 1995

Levy, B.: Obstacles to Developing Indigenous Small and Medium Enterprises. An Empirical Assessment, in: World Bank Economic Review 7, no. 1 (1993)

Business Case for Proactive Succession Planning

Identification

Assessment

Of Successor

Candidates

Organizational and Leadership Continuity

Leadership Development

Programs

On-going Enablers: Well Defined Strategic Planning Process

On-going Enablers: Leadership Support - Performance Management

Identification of Target Roles and Positions

Core Competencies and Skills

Determined

3