In our third and final installment on labor, employment and benefits law issues unique to family businesses we discuss the importance of succession planning.
A great obstacle for family businesses is passing the torch successfully from one generation to the next. To overcome this challenge, family businesses must engage in succession planning and recognize the special “people” aspect of this planning.
While succession planning involves buy/sell agreements, estate planning, etc., it also involves taking into account the people and the family dynamic involved in transferring a business from one generation to the next. In many cases this is the most challenging issue. The following are some best practices the family business should not ignore. These steps need to be modified based on the size of the business and the complexity of the transition.
COMMUNICATE, COMMUNICATE, COMMUNICATE
Communication is vital in a family business because there may be misperceptions when transferring the business from one generation to the next. The second generation of family business employees may think they are ready to take over the reins and are going to be handed the keys to the kingdom any day now. The first generation may think these youngsters are not ready. These opposed perceptions are due to a fundamental breakdown in communication.
The current owners of the business must communicate to the future leaders their exit plans and vision for the transition. Realistic assessments of talent (or lack thereof) and how to improve such shortfalls, as well as how to accommodate the desires of the generation in control, must be openly discussed and addressed. The future leaders must communicate their expectations. If not out in the open, the assumed future leaders of the business will exit out of frustration that their day to lead may never come.
ENSURE COMPLIANCE AND BEST PRACTICES
Before you can transfer the company to the next generation you must have something of value to transfer. The company must be in compliance with all laws and best practices. If not, you are simply passing problems to the next generation. Worse yet, you may be transferring a business that simply can’t succeed into the future.
SOMEONE MUST OWN
SUCCESSION PLANNING PROCESS
In a family business it makes the most sense for members of both generations to lead the succession planning effort. This assumes the older generation sees the need for the process and recognizes the time is right. Until this happens this process cannot progress.
This planning should start with the leaders of both generations (assuming these people are clearly recognized). Having a smaller group makes it easier to lead a process like this. Meeting times should be formally set so the press of business doesn’t derail this process. Once a basic plan is set, meetings with all of the family members are needed to plan/discuss the steps needed to ensure a successful transition and agree upon a timetable. If needed, and the company can afford it, an outside mediator should be considered to help this process.
These meetings also allow each member of the family to relay expectations and concerns regarding the transition.
ENSURE THE NEXT GENERATION
IS ADEQUATELY TRAINED TO LEAD
Most family businesses put off succession planning because it can lead to family drama. If one family member is chosen to be the next CEO, this means others were rejected. This creates family drama because the chosen one may be perceived as the favored child and this causes problems at home and at work.
However, no matter who is chosen to lead the company into the next era, the leader must be adequately trained. We suggest requiring educational criteria and on-the-job training just as a nonfamily business would. In a perfect world, each family member would work outside of the family business before working inside. This gives the family member employee a broader and better perspective on how businesses run. Consider having each family member learn jobs in every department of the company. If family members have outside experience and intimately understand how the business is run, nonfamily members are more likely to respect the family members and see that they have “paid their dues.” These steps may be the best options for minimizing resentment from nonfamily members toward the family.
Robert G. Brody is the founder and managing member of Brody and Associates LLC, a management-side labor, employment and benefits law firm. He can be reached at email@example.com or 203-454-0560.
Katherine M. Bogard is an associate with Brody and Associates, LLC in Westport. She can be reached at firstname.lastname@example.org or 203-454-0560.