Don’t Treat Your Family Business as a Royal Dynasty

Long ago, in some countries, kingdoms used to be passed to the oldest child — and often, the oldest male. While this may have had advantages in ancient monarchies, it has no place in family businesses.

In the case of family-owned businesses, it is still sometimes the practice to install the oldest child, and the oldest son, as the successor CEO.

Experience shows that this often leads to inefficiencies and mistakes that jeopardize the continued existence of these family businesses. An old saying, “shirtsleeves to shirtsleeves in three generations,” describes the fact that many family businesses that are passed down to children and then grandchildren tend not to survive through the third generation. There are a lot of reasons for this and it’s not a given. However, mistakes in leadership can cause a company to decline and perhaps to even go out of business.

So instead of automatically assuming the oldest child, or the oldest male child should take over the reins of the business, a more disciplined approach might be advisable. Just because individuals are the oldest child in their families certainly does not mean they are the most qualified to run businesses.

To determine the best choice of a family member to run the business, the current senior owners should consider applying the following seven common-sense steps:

  1. Determine if any of the next generation of children are interested in working in, and more importantly, managing the business.
  2. Decide which one of the children interested has the best skill sets to actually manage the business. This might require outside assistance from trusted advisors or business consultants to determine which child is best suited. Enlisting outside help will eliminate any biases the senior generation might have for — or against — certain offspring.
  3. If more than one individual is interested, and despite assessing the skill sets, a hasty decision should not be made as to a definitive successor. The planning for succession should start many years before the actual need for a successor to take over. If there is more than one viable successor, all such potential successors should be given the opportunity to win the job. This is no different than the process that often happens in publicly held companies and in many large private businesses. Each qualified, viable candidate should be allowed to fill a position at the company and to progress up the ladder of management.
  4. If possible, positions held within the company by the candidates should be rotated so that the candidates can gain experience in many areas of the operation of the business. Not only will this better groom the ultimate future leader but it will provide depth to the management team (assuming there is more than one candidate).
  5. After a reasonable period of time, the “decision team” should select the best candidate and meet with him or her to discuss expectations, compensation, contract terms (a contract is recommended) and other terms of employment and position.
  6. If there were multiple candidates, then owners should meet with the candidate(s) not selected to become the CEO. There will be more decisions to be made here. Is the candidate going to stay on with the company in some executive position? If so, that requires making sure that the individual is going to be able to work as a team (with the CEO and the other candidate or candidates). If it is not in the interest of the company for multiple candidates to remain at the company, those discussions will be required. Do not make the mistake of keeping a candidate with the company simply because he or she is a family member. If the individual is not a fit for the company or cannot work together with the selected CEO as a team, the company is better off terminating the relationship sooner than later.
  7. Current management needs to develop a well-communicated plan of the transition of power to the newly selected CEO. This might take place in a period of a few months or even over a period of years. Regardless, lines of authority, decision making, etc. need to be clearly delineated during this transition period.

The transition of operating control of a business can be difficult. It requires planning, discipline and communication. Once a plan is implemented, it should be adhered to strictly unless there are extenuating circumstances. Your professional advisers have the experience and skill in these types of situations so reliance on them to assist in the process can be an effective way to help make it a success.

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