Successful Transition May Be Your Single Most Important Key to Immortality
by Paul I. Karofksy, Ed.M.
“As tough as it is, as hard as it seems, implementing a successful succession/transition plan is the ultimate reward for any chief executive in a family business… the successful perpetuation of your family business may just be the closest you will ever come to immortality.”
Only about 10 percent of family owned businesses make it beyond the second generation, Paul Karofsky, Ed.M. and director of the Family Business Center at Northeastern University told members of the Rothman Institute’s Family Business Forum during an all-day seminar in Madison in June. He attributed the low rate to, first and foremost, a lack of planning, followed by the owner/founder’s inability to let go, reluctance by the parent(s) to choose a successor from among the siblings, and owners for whom there is no life beyond the business.
Family business, he said, need not be a “life sentence,” noting that the average non-family CEO spends between four and seven years in a company.
He outlined what he termed “seven easy steps to pass the baton:”
1. Share a positive message early on.
Be realistic and speak positively about the business. Share the family history. Family values, he noted, are the essence of a family business. Create a family council and rotate the chairmanship. Meet once a month… quarterly… you decide, he said. Spend time together away from the business and invite the kids to work with you even when they are young. “Tune in to them and they will tune in to you,” he said.
2. Education – Encourage the kids to go to the max.
Help your children focus on training for leadership. Encourage interaction with keen, challenging minds… competition for excellence, and teach them to discover, explore and use their imagination. Have them take courses that will stimulate and force them to think, evaluate and make decisions. “In the real world,” Karofsky noted, “it’s the results – even more important than the knowledge – that count.”
3. Encourage outside work experience.
Let the kids experience another boss, make their mistakes elsewhere and learn the basics from another source. Working outside the family business, he said, will give them a chance to grow and gain self confidence. It will also enable them to develop a different perspective, one that may enhance the family business.
4. Pay Fairly
Teach children financial values at an early age and resist giving your kids what your parents did or did not give you. Pay them for what they do. It will increase their self esteem. Overpaying may keep them in the business, but it may not be in their or the company’s best interests, he noted.
5. Don’t have your children report to you until a succession plan is complete or they are seasoned.
Children need objective performance evaluations that are not emotionally charged. Give children their own area of responsibility and start early, when they’re young, even if it’s just making sure the grass is cut, the sidewalks are clean. Image, he noted, is very important.
6. Plan early for succession.
Some reluctance to dealing with succession/transition is natural, but advance planning can prevent a disaster, should an unexpected emergency, illness or disability occur. There are lots of penetrating questions, issues that need to be resolved, but it is up to the owner/the CEO/the leader to get the ball rolling, according to Karofsky. The kids, he said, don’t want to appear to be forcing a parent out. He did suggest that by citing their own career plans and objectives, the younger generation could stimulate discussion.
7. When the time comes – let go!
The phasing of transition should be gradual. If properly handled, he said, it can be “exquisite” not unlike a relay race, you run together for a short time in tandem, and then slowly slow down and exit. Do not return, he advised. Move on. These may be your best years, owners were told.
“As tough as it is, as hard as it seems, implementing a successful succession/transition plan is the ultimate reward for any chief executive in a family business… the successful perpetuation of your family business may just be the closest you will ever come to immortality,” Karofsky told the ruling generation.
Karofsky used several family case studies as examples of dealing with the unexpected and empowerment. Among them:
CASE NO. 1:
The audience was asked to consider the case of 26-year old Barry who was meeting with his parents to review the firm’s financial statements. Barry, Karofsky said, opened the conversation by voicing his frustration over an order which he said the production department “screwed up,” forcing him to make a special trip to the airport to meet the customer’s deadline. The father reacted by stating he would get the production and customer service people together in the morning and straighten things out. Barry’s mother, on the other hand, while acknowledging the importance of meeting a customer’s needs, suggested that he (Barry) needed to take a look at the overall picture. People, she said, are human and sometimes make mistakes. It had been the company’s best month, yet, she noted, adding, ” and production was stressed out.” Both reactions only added to Barry’s frustration.
The audience response was mixed. Some felt the father was exercising leadership where Barry failed, others felt he was showing support for his son. The younger members of the audience felt he was taking over. The mother was also seen as siding with those who fouled up the order over her son and the customer. Some wanted to know if this was the only mismanaged order during the month. Still others felt Barry’s comments were inappropriate, that they had no bearing no the agenda.
Barry, Karofsky explained, simply needed “to vent” his frustration and would probably have worked things out on his own. That while he wanted his parents to be aware, Barry was not really looking to either for a solution. Their reaction, he said, diminished his authority, and may have further antagonized an already volatile situation.
CASE NO. 2:
This second case involved two brothers who had shared an equal partnership for 20 years marked by success, trust and open communication, and were now ready to pass ownership on to the next generation. One brother had two sons, both of whom were in the business; the other, only one son, who was also in the business. All three boys were described as capable, hard working and equally responsible and supportive of each other.
The big decision, Karofsky said, was whether each of the three should be given a third of the business, or if the two brothers should share their father’s 50 percent with the other 50 percent going to the other brother’s sole offspring.
Again, audience reaction was mixed with some questioning whether the father of the one son had the right to give away a portion of his son’s inheritance.
The two owners, Karofsky said, decided that the three boys should each get an equal share – a third of the company.
The father with the one son, Karofsky emphasized, did not take anything from his son, instead, he said, “he gave his son the best possible of gifts… two equal partners who would continue to work and support him.” Giving each an equal share eliminated any chance of resentment and/or friction that might have destroyed the relationship and ultimately the company, he said. There are ways, it was noted, including insurance or a partial buyout by the father with the two sons, that could be used to ensure equal ownership without jeopardizing the single son’s inheritance. But, the question, here, Karofsky pointed out, was not about funding but rather equal versus unequal ownership.
CASE NO. 3:
This case involved a small production company which the founding couple had hoped to pass on to their son and daughter. Both had pursued individual career paths outside before coming into the family business. Each had their own style and it soon became obvious that they would never be able to work together. The father and son were also like oil and water, unable to agree on anything.
The daughter, eager to follow her own original career path, eventually managed to work out an exit strategy with her parents and brother. Determined to keep the business in the family, the couple then decided to bring in an interim non-family executive who could help position them for the transition while serving as mentor in preparing their son. In this case, he noted, a competent outsider would provide the necessary buffer between father and son and aid the transition when the time came.
Active and Non-Active family members
Ownership of a company, Karofsky said, should be passed on to those who are active in the business. Other assets, he added, may be distributed to non-active family members. “It’s the only way to avoid conflict while ensuring continuity,” he said.
He advised the older generation to provide proper training and mentoring to empower the younger generation. As for the succeeding generation, he said, “you’ve also got to empower yourself, prove that you have the right stuff, that you are capable, given the authority and opportunity, to ultimately run the company.”