Red flags that a family business succession plan is weak
Without a thorough plan, families risk losing not only their business, but also their legacy
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Succession planning is a process layered in business and family history that can feel overwhelming. The idea of a patriarch or matriarch facing their mortality, combined with clashing egos and personalities among children and other relatives, can make the topic of succession feel too daunting to face.
Without a thorough plan, however, families risk losing not only their business, but also their legacy.
Here, three experts outline how patriarchs and matriarchs can feel safe initiating dialogue around succession planning, and why involving the younger generation in these plans is essential to saving their family’s wealth, as well as their family name.
Gerald Pulvermacher, CEO, Gerald Pulvermacher and Associates
Pulvermacher, a Florida-based organizational psychologist, consults with businesses active in the United States, Canada, Mexico, Europe, and Singapore. He also guest-lectures at the Telfer School of Management in Ottawa.
Why do family businesses need a clear succession plan?
“When you’re trying to create a succession plan for a family business, you’re not only concerned with the immediate next generation, but most patriarchs and matriarchs are trying to establish a succession plan that stands the test of time.
“A succession plan is essentially a playbook, and the playbook spells out the mission of the family business, its vision and its values. These are the touchstones that the founders of the business would like to see endure over time, even beyond the immediate next generation.
“A succession plan … also states what are the qualifications that the next generation needs to have in order to join the business, in order to be promoted to increasingly high levels of leadership. It also talks about compensation and how people get compensated, how differences are resolved and who is to be involved in what kinds of decisions. The succession plan states the governance structure for the family business, what happens if people are not performing, and the type of committees that are required to oversee the business (investment committees, shareholder committees, senior advisory committees). The plan also states whether spouses of family business members can be part of the business, and a variety of other issues unique to every family business.”
Why might a family business fail to attend to (or properly structure) a clear succession plan?
“One of the big reasons is that the patriarch or matriarch might believe that … it’s in the best interest of the family to sell the business when they are ready to step down, and then they just distribute the funds at the appropriate time.
“Another reason is that the patriarch or matriarch may believe that there aren’t family members capable or suitable or interested in running the family business.
“Another reason is that families might want to avoid very difficult conversations around succession. Depending on the family dynamics, they may want to avoid conversations that could involve conflict or affect the integrity of the family. The patriarch or matriarch may not be able to come to terms with their own mortality or their age. As a result, they do not want to get into a discussion around succession.
“The patriarch may think succession is a simple process, and they don’t understand that they need to plan for this. Or they realize that it’s a very complex process and they want to avoid it.”
What are some red flags or warning signs that a family business should look out for regarding a failing succession plan?
“The first one is if there are any existing family grudges, disappointments or unresolved conflicts, it will be very difficult to come to an agreement about what a family succession plan should look like.
“The next one is if there are several family members in the business, the patriarch or matriarch may have the view that they may want to treat all of the working family members equally rather than fairly and in the best interest of the business.
“Another one is if the family business advisor does not have the skills to surface underlying key issues that affect decision-making in the here and now.
“Another important sign is when the next generation has not been included at some point in the succession planning process.”
What can a family business do to turn their failing succession plan around and bring stability back?
“The first thing they can do is to engage a psychologist who has experience in this area. The reason why you want an industrial psychologist in the family business domain to do this is that psychologists are trained to help families balance the needs of the family with the needs of the business.
“The patriarch or matriarch needs to have an honest conversation with any challenging family member that might be muddying the waters and thereby making it difficult to develop a workable succession plan. A psychologist could help to mediate or broker an honest conversation with that individual or individuals. A psychologist can help a patriarch or matriarch communicate that the needs of the business and the needs of the broader family supersede the needs of one individual.”
Peter Jaskiewicz, Professor, University of Ottawa
Jaskiewicz is University Research Chair in Enduring Entrepreneurship, and Director, Family Enterprise Legacy Institute (FELI) at the Telfer School of Management at the University of Ottawa.
Why do family businesses need a clear succession plan?
“Without a clear succession plan many family businesses will fail. Succession planning can be a long and challenging process, which can take many, many years. But we need to ensure these family businesses continue to thrive – they are the backbone of our economy here in Canada, and, indeed, worldwide.
“There tends to be a greater focus on start-ups, and there’s no doubt that’s important. But the reality is we constantly lose successful businesses – businesses that could have endured a long time, been great employers, helped fuel our economy. And the main reason we lose them is not financial, but because that family business didn’t know how to deal with family dynamics and how to prepare the next generation.
“It’s estimated that more than 60 per cent of family businesses will be changing hands within the next decade. What we’ve found is that there are few resources for these businesses to properly plan that transition to the next generation. Our focus is on the proper training of the next generation, which includes practices on how to manage conflicts and difficult relationships and help start long-overdue discussions concerning the next generation’s role in the family and business.”
Why might a family business fail to attend to (or properly structure) a clear succession plan?
“If the senior generation is uncertain about their children’s willingness or ability, they will delay the succession conversation. On the other side, if the next generation don’t feel they have their parents’ support, they will pursue other opportunities. Communication between generations is essential: If parents don’t see it or believe it, they won’t invest in the succession process, undermining the likelihood of a successful transition. Developing plans with the next generation, communicating regularly and learning to rely on each other are essential, or succession might be imperiled before it starts.
“We find that when the parents know they have competent and willing next generation members, they are more motivated to work hard and prepare the business to be at peak level when they pass it over. They invest in the business heavily before retirement. They are motivated and jump forward before the succession, and the next generation members are catapulted to a healthy business. This entrepreneurial leap allows the business to take off under the helm of the next generation.”
What are some red flags or warning signs that a family business should look out for regarding a failing succession plan?
“One of the biggest red flags is if the next generation doesn’t feel listened to, or that their questions aren’t being addressed. Next-generation members are often misunderstood or ignored, instead of involved.
“You need to understand the next generation to understand the underlying issues and be able to develop best practices to address these issues. There is sometimes a big disconnect between the two generations and, ultimately, you need two to tango.”
What can a family business do to turn their failing succession plan around and bring stability back?
“The most important thing is to ensure there is no disconnect between the senior and next generation, and that both generations are able to have open, honest discussions around the board-room and dining-room tables.
“Accessing outside help is also key. Family businesses are often reluctant to ask for help due to the personal nature of their needs, even though many of these businesses have problems that need to be addressed. Talking about business is one thing, but talking about family is so much more personal and private. Family businesses need a safe space to talk about things like succession planning.”
Matthew Fleming, Partner, Stonehage Fleming
Fleming is head of family governance and succession at Jersey-based global multi-family office Stonehage Fleming.
Why do family businesses need a clear succession plan?
“It doesn’t matter whether it’s a family business or not. If a business has ambition beyond a five-year time frame, then it needs a succession plan. The complication comes with the word ‘family,’ which automatically creates an enigmatic layer.
“Either a business with a family working in it needs a succession plan that enables the family to keep working in the business or the family needs a succession plan that enables the right members of the family to play the right role within the business.
Why might a family business fail to attend to (or properly structure) a clear succession plan?
“Firstly because aging family members have to address the big issues that they don’t want to address. These include mortality, loss of control, handing over the reins to the next generation and having to trust other people.
“It is also because leadership, wealth and influence need to be responsibly received as well as responsibly given. It is easy to blame the older generation because historically that’s where most of the blame sits. However, the next generation has a role to play in helping a succession plan be clearly and properly created.”
What are some red flags or warning signs that a family business should look out for regarding a failing succession plan?
“Firstly, the main red flag is that there isn’t a succession plan in place.
“Secondly, it is a business or succession plan that is built on the concept that the next generation must play the same role as the current generation lead. You cannot tell one generation to run it in the way that the older generation has run it previously.
“Thirdly, it is by the current generation lead agreeing to a succession plan but essentially just extending their influence in the business – the equivalent of handing over the keys to a car but having a firm hold on the hand brake.
“Fourthly, a failing succession plan is one with a lack of engagement of non-executives and external advice in helping to address the integrity and rigour of the succession plan.”
What can a family business do to turn their failing succession plan around and bring stability back?
“Get the succession plan right in the first place; instill purpose and clarity so it is easily revisited; bring back transparency and ensure that the successor is being allowed to succeed.
“Lastly, be honest about your successes, capability, desire, and emotional intelligence. Ultimately, it’s centred around communication.”
Responses have been lightly edited for clarity and length.
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