Why Succession Planning in a Family Owned Business is Difficult

I have not only worked my entire career in some form of a family owned or controlled business but have assisted many families with succession planning for their business. This is the most contentious project that I ever undertake because, in most cases, family and business cannot be separated objectively. Someone much smarter than I coined the phrase, “Blood is thicker than Money.”

All outsiders find this statement to be very accurate and I am no exception. The unfortunate truth is that only an outsider can be objective in family business succession planning if the business is truly the main priority.

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The most amazing thing I have found in succession planning is that it truly begins at the birth of the next generation. Think for a minute about your children and when you started teaching them how to become the person you want to carry your name in the world after they graduate college and leave your house. It isn’t when you are ready to retire but when they are born and you start teaching them the values and behavior you believe, as a parent, are good for them and society.

Many of my clients have serious issues accepting this fact because, as with all parents, they are sure they did everything right with their children. Their kids never took drugs, never broke the law, got a great education and are ready to be great leaders. Only twice in over 35 years have I found a business owner who told me his kids were not capable of running the family business. In both cases, we sold the business when retirement was confronted and the owner and his family lived happily ever after. I have also seen several family businesses that worked through succession planning and have a great second and third generation business.

My first job out of college was with an extremely small mom and pop manufacturer. Only one of four sons was involved at the start. Mom and Dad grew this into a sizeable business with several good outside professionals in senior management. As the business grew and became more profitable, the other three sons joined the business. The family and a great business started the inevitable succession dance. I left this company after nine years when all four sons had been promoted to senior management positions and the serious race to succession started for the second generation.

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The owner did choose the right son to lead the organization and he truly did, in most cases, objectively separate the business from family. He ultimately solved the family’s succession plan by selling the business which allowed all family members to retire. I have always admired the owner of this company because he was able to remember that the business was a separate entity which financed the family’s health and well being. This is a success story, in my opinion, because the owner did not start this business until later in life. Mom and Dad had spent the majority of their lives raising and instilling great values in their four sons. Their succession planning began almost 40 years before they even bought their business.

The stereotypical family business starts with Mom and Dad working full time until the children start coming. Mom normally stays at home raising the kids while dad continues working 70 to 90 hours a week growing a great company. Dad normally gives the kids anything and everything they want because he works very hard and is not able to spend much quality time with them. The kids go to great schools and are overpaid as entry level employees in the family business during the summers. Dad truly believes they have great business instincts because they have watched him grow the business and have been around the business since they were old enough to walk. This is an oversimplification but it rings close to the truth in many of the clients and organizations I have worked with over my career.

On one extreme of this stereotype, we have what I have coined the “Idiot Generation.” These are truly the kids who come into the family business after college and don’t really have any desire to do anything but spend the family money. The value they have been taught as children is that the Bank of Mommy and Daddy is always open. One client many years ago was a second generation retail business. The second generation was a hard working couple of sons who had taken over a struggling operation from their father and worked very hard to ensure their mom and dad were taken care of in retirement.

In the meantime, they grew a great business and enjoyed the luxuries provided by their company. Their children drove brand new Mercedes convertibles in high school, spent summers in Europe, graduated from prestigious business colleges and then told their parents they had no desire to work hard but enjoyed spending money and living the good life. This is the “Idiot Generation.” I admired the business acumen, vision and charisma of their fathers but quickly saw that these values were never passed to the third generation. This business has now been sold and the third generation are sadly unproductive members of society. My concept of the “Idiot Generation” is that it occurs only every second or third generation. Afterward the money dries up and hard work is a requirement for the following generation.

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The common thread here is that training for our next generation of business leaders begins when they are born and not when they graduate from college and definitely not when the owner begins to think about retiring. Some of our great business leaders – Andrew Carnegie, Jack Welch, Michael Bloomberg, Warren Buffett, and Walt Disney- learned their values, passion, common sense and teamwork before they became teenagers from their parents and family members. Without this succession planning, we would never have known these individuals.

One situation that must be admired is the 100 plus year family control of PACCAR Inc. I was fortunate enough to spend fifteen years of my career working with the family owned Peterbilt dealerships in North America. The fourth generation of the Pigott family is now at the helm. Each generation has increased the company value and put his stamp on this organization. The current Chairman has also exceeded expectations during his short tenure. The company is always profitable and expanding in a very cyclical capital intensive industry. It is extremely difficult for a multi-billion dollar global public entity to handle succession planning in a normal environment so to do this within one family is remarkable and clearly demonstrates the values within the Pigott family. The “Idiot Generation” has missed this family altogether.

One family business succession trait that I borrowed from a successful entrepreneur ensures that the business is treated appropriately. I have seen this used successfully in at least four different situations. Simply put, each generation must work outside the family business after completion of college for at least nine years before rejoining the business. While the time period can be variable, this rule requires that the next generation starts his or her business career with no family ties and becomes an independently successful business person. In several instances, I have seen the next generation never join the business but go on to success in non-business ventures and I have also seen them enter the family business as independent, confident outsiders with a new view on the company. What I found very satisfying in all cases is that none of the sons or daughters used the term “dad” during business hours because this seemed unprofessional to them.

Small businesses make up the vast majority of the U.S. business infrastructure and the succession from generation to generation is a difficult process and decision under the best circumstances. The current generation must ensure retirement funds are available for all their hard work while their parental feelings naturally drive them toward letting the next generation take over their company. The next generation, on the other hand, wants to make changes in the organization and take more risk than their parents feel is warranted. This same discussion will be continuing when my children are ready to turn their businesses over to my grandchildren. We should all work hard at instilling proper values, vision and common sense in our children to ensure proper succession planning.