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Preparing the Family for Succession*

by Jane Hilburt-Davis

Introduction

Succession is a major challenge for any company and even more difficult for family businesses who must consider both the family and the business in the transition. Interestingly, in a 2007/2008 Pricewaterhouse Coopers Family Business Survey of the respondents who said they anticipate a change in ownership within the next five years, although ¾ anticipate the ownership will pass to the next generation, 44% have no succession plan; and only ½ had chosen a successor! The question is: what’s the delay? Why is there no succession plan or successor chosen at this late stage?  Granted, this is difficult work but two things can make it easier: preparing and involving the family and appreciating the necessary stages everyone goes through before being able to take action.

The Importance of the Family

In the 2007 American Family Business Survey, interpreted by Kennesaw State University and underwritten by Mass Mutual and the Family Firm Institute, the business owner’s spouse was seen as the most trusted advisor, followed by the accountant, then business peer, with the owner’s parent listed as 4th, followed by lawyer and financial services.  Family unity and cohesion were cited as critical to family business success, in fact “unity of the ownership group is significantly associated with family commitment to the business in each generation, predictions of sales growth, and demonstrations of past growth; the more family unity, the more they grew in the last three years and the more they expect to grow in the future.”  The only conclusion that can be drawn from this is that the family cohesion must be considered in the succession process.

To better understand the challenges of succession let’s take a look at the work of James Prochaska and Carlo DiClemente* who have studied the several predictable, well-defined stages that individuals should and do go through while changing behavior.  Their work focuses primarily on those struggling with addictions and, because it has useful applications for both the family and the business during the succession process, I suggest in this article practical tasks to be completed in each phase. Importantly, readiness for action depends on the foundation laid in the earlier stages. Applied to the family business system, this means that the family and predecessor’s stages must be in synch.  If the family is in the Action stage and the predecessor** is still in the Contemplation stage, succession will be stalled until the predecessor catches up.

The Stages of Change

  1. Precontemplation  In this stage, usually early in the business, there is no awareness of a need for succession planning. In fact, it is the farthest thing from the ‘precontemplator’s’ mind. “Who me?  I’m many years from succession planning!” Neither family nor predecessor is ready for any action but can, at this stage, and should begin to build the foundation for a future successful transition.  The building materials for the foundation include both procedures and structures:
    Critical Tasks in this stage:
    • Build healthy family and business boundaries
    • Develop a conflict management procedure.  This can lessen the tensions that hound family businesses, particularly during a succession process.  In the survey cited above, 79% of the family businesses have not adopted any procedures for resolving conflicts between family members.  The most contentious matter cited was the future strategy of the business, an issue very much in play during succession.
    • Raise responsible children!
  1. Contemplation In this stage, ‘contemplators’ become aware of the problem and will usually say, “OK, I realize that I need to plan for succession but maybe in the next few years.”  The contemplator, still not ready for action, is beginning to consider it, visualize plans, but has made no commitment yet. There is normally a great deal of ambivalence at this stage. “I understand that succession is a challenge and necessary but not yet.  I’m still years away.” (‘Chronic contemplators’ are those leaders who get stuck in this stage, “I’ll think about it in the near future”, and never do.)
    Critical Tasks in this stage: 
    • Discuss together the negatives and positives of succession planning for both the family and the business.
    • Establish a Family Council established, including education, open communications.
    • Gather information about possible succession plans, how others have accomplished it
    • Develop a strategic plan for family and business
    • Assess if the predecessor is stuck in the ‘chronic contemplator’ or just slower in moving from this stage to the next.
  1. Preparation  ‘Preparers’ intend to take some action sooner rather than later. They may have already taken some few steps toward a succession plan. For example, they may have discussed it in general terms the last time they met with their accountant. They begin to talk to Gen 2 about “When I step down”. This stage requires a commitment of time, energy and resources and support for the family and the predecessor who is struggling with the idea of stepping down ‘sometime’. It involves concrete preparation for the transition.
    Critical Tasks in this stage:
    • Conduct in the Family Council serious discussions about the decision and how the family can support the decisions made, concerns, questions, and suggestions.  If there is competition within the family for the successor position, this must be dealt with forthrightly and directly.  The continued goal is continuing to build a meritocracy.  These frank discussions establish family buy-in and support for the plan.
    • Assess what is needed to get a buy in from the family and non-family managers in the business
    • Create an effective, independent Board of Directors
    • Develop a succession plan that includes choice of the successor and timing of the transition
  1. Action In this stage, ‘actors’ begin to make behavioral changes, taking concrete steps in the succession planning. As with any change, the actions also bring up feelings of loss and possibly guilt and failure.  “I haven’t accomplished all I wanted, so I need to scrap this plan to retire and just work harder.”  Often, this includes regrets involving not spending enough time mentoring the next generation or developing other interests and hobbies. Prochaska and DiClemente estimate that, at any one time, only 10 to 15 percent of all people are actually in the action stage.  This is the time that support is needed for the predecessor from the family who must deal with feelings of loss and appreciate the long term benefits for the family and the business.  The next generation has taken over.
    Critical Tasks in this stage:
    • Practice new behaviors: letting go
    • Implement the new processes, procedures, and responsibilities, including compensation, roles and responsibilities, job descriptions.
    • Family continues to give support to the predecessor and successor.
  1. Maintenance  In this stage, “maintainors’ continue to keep their commitment to new behaviors. This includes a consolidation of the new roles and responsibilities initiated in the Action Phase. They work to prevent relapse and consolidate their gains.  “I can’t resist coming into the office every day or even calling from vacation to check on things as I used to.” The retired CEO has passed the baton and pursues his ‘new life’, taking on new roles and responsibilities, inside or outside the company.  The new leader or leaders take over, and make the hard decisions.
    Critical Tasks in this stage:
    • Reinforce the ‘retired’ predecessor’s new roles
    • Discuss openly the challenges for the family, the predecessor and successor.
    • Do what needs to be done to prevent relapse

Conclusion

Navigating succession requires ‘two-way’ support and appreciating the work needed in each of the stages of change. So, for example, pushing for action while either the family or the predecessor is still in the contemplative stage just won’t work.  Before getting impatient, ask these questions:  (1) Are we in different stages?  (2) Is there unfinished business, tasks not completed or unresolved issues, from the previous stages that have stalled or slowed the process? (3) Has communication shut down?   If the answer is ‘yes’, go back to the previous stage and do what needs to be done. For example, many family companies attempt succession before setting up a Family Council or a Board of Directors and without that support, governance, and direction, it won’t work.  Building family cohesion; developing open communications and healthy boundaries between the business and the family; and establishing a strong foundation are all vital for a successful succession process.


* Originally published in Family Business Magazine

 


* Prochaska, J. O., DiClemente, C. C., & Norcross, J. (1992). In search of how people change. American Psychologist, 47, 1102-1114.

** Predecessor is used here to denote the current leader who is retiring, the founder, owner or CEO.

 

 

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