How Family-Run Businesses Should Choose Future Leaders

Everything works better with planning, and succession in a family business is no different. Survival of a multi-generational business depends on it. Illustrative of this: Mark was one cousin of three in a business whose patriarch delegated responsibilities and left for Florida (the business was in NY). The eldest was the nephew; Mark, a natural leader, was the oldest son, and the youngest son was caught in the middle of the family dynamics.

There had been no succession discussion or any leadership development up to that time. The patriarch was not involved in the day-to-day operations, but returned every 3-4 months to check-in. The business was loosing market share and profitability. Having no equity, the cousins were frustrated in their inability to affect change in the business. Tensions were high when the patriarch was there.

Successful succession (these words having the same prefix always intrigues me) in family business requires both intention and planning. The attached article, How Family-Run Businesses Should Choose Future Leaders, describes a strong foundation for having conversation about leadership succession in a family business.  While primarily addressing the business context, the conversations also applies to the vision of the family itself in future generations.

“Zero-Sum” in Family Business

Zero Sums is represented by, or in the case of relationships the "belief" that the gain of one is a loss to another – the perspective of your gain being my loss is evident in business, politics and relationships.

In family businesses it is exceptionally devastating to the achievement of a multi-generational business as well as the sustainability of the family itself. Non-zero-sum or "positive sum" occurs when a win-win situation is achieved.

Ralph, third generation in a California real estate family business, was introduced to a family business mastermind group – where best management practices for family business success was the primary discussion among peers from several family businesses.

Ralph expressed finding a great deal of value from the mastermind – discussing his challenge in getting his father to listen to his ideas. Another participant talked about the challenge of curtailing his son who was bringing on ideas for change too soon and too fast.  Without the interference of their own family, they were able to hear the other’s perspective.

Ralph approached his family about the business paying for his participation in the group. A week later he called me saying that the family was not willing to cover the cost. One of the responses of his family members was that he would be getting something they were not.  

Family dynamics are complicated, and zero-sum mindsets within them are hazardous.  They destroy the potential.  To often it takes a “whack on the side of the head” to want change. A first step is to engender an intention for change; and, often, professional help is necessary to start making progress.

Health, Wealth and the Fiscal Cliff

Along with succession planning, both estate planning and wealth planning are critical to the success of a multi-generational family enterprise. Succession and estate planning are the two primary topics family business owners procrastinate most on.

While what will become of the estate tax next year is uncertain, it can be safely assumed that it will go up.  The current rate is 35% with an exemption of $5 million ($10 m for couples).  Restoring rates of 2009 would increase the rate to 45% with exemptions of $3.5 million ($7 m for couples). If congress does not act it will automatically return to the pre-2001 rates of 55% with exemptions of $1 million ($2 m for couples)

The challenge with estate taxes in family businesses it that often the cash available to family members is tied up in the business; and the next time the next generation has to liquidate the business to pay the estate tax will not be a first.

I know none of you are planning to die early to avoid a higher tax rate next year, and that this is a topic most of us would rather not have. There are actions you should take now, however, to not only minimize your children’s tax bill also provide resources for them to lead when they take over the business. Guidance from an (your) estate attorney, CPA, and financial advisor are needed to do the proper planning.

Insights on Family and Business

Five insights on family and business from a fourth-generation family business member.  I am interviewing family business leaders - asking their advice on developing a family business mastermind.  Along the way I am picking up valuable front-porch wisdom, such as:

1. If the current head of the business is dragging their feet on retiring it’s probably because they don't want to.  Rather than force the issue, find ways for them to continue doing something meaningful in the business.
2. The leader who says he or she cannot take a vacation is full of b.s.  No one is that important.
3. My relationship with my kids is more important than having them work in the business.
4. Encourage your children to follow their own vision, goals and dreams.
5. It takes a team to build a successful business.  A lone-ranger cannot do it.

A Tale of Two Families

There are two stories I often find myself telling in conversations to emphasize that multi-generational success in a family business requires intention and is a process that begins early ... because while the actual transfer of the operating and ownership agreements might be done in short period of time, developing the next generation to lead takes a lifetime.

I grew up in a family business in Scranton Pa. I had 2 friends, also from family businesses. Both were second generation, and both became involved in the businesses started by their fathers.

The father of one friend passed away suddenly when the son was in his late 20’s.  Shortly afterwards the son threw a party for the business that cost over $35,000 just for the music … in 1980 dollars. Most people pause hearing that, trying to get their mind around all the implications.

I can only speculate about the meaning of this for the son. Was it a celebration of a life well lived by the father, or, on the other side of the spectrum, that the son was now able to run the business his own way?

What was father and son’s relationship toward the business and each other? Did they have different leadership styles – each effective but held competitively rather than collaboratively?

I expect the family did not have the experience of openly discussing a vision and their values (what’s important to them) as a family business. To their defense, though, this process is more learned than intuitive. Too frequently, talking about the family in the context of the business is entrusted to a second priority, after achieving viability and profitability of the business itself.

The second family, with the help of a consultant, developed a number of policies for family members working in the business. The first policy helped the next generation understand the family values and culture, and it emphasized the family’s commitment to a family business.

If a family member had an interest in the family business, it was required of them, starting as early as 15 years of age, to attend the annual family business retreat. There, they saw who the leaders were, and watched decisions being made about the family and the business. They learned about the values, vision and goals of the business, and the saw the family in the context the business. They saw how next-generation leaders contributed, and they became part of the discussion of the family’s legacy.

A second policy was, if a family member wanted a management role in the family business they were required to work somewhere else in the industry, and get a raise and promotion, before applying to work in the family business. A third policy was that family members were hired according to need, and were given raises and promotions based on merit comparable to their industry standards. This family business is now in its 5th generation.

A significant factor in the success of any family business is good communication based on shared values. I thought it would be helpful to demonstrate a statement of purpose and values. S.C. Johnson, A Family Company, prepared their statement, This We Believe, in 1927.  They continue to bring them into their conversation with their family members, employees, product and service providers, and customers today. Click on the link to see them: This We Believe.

What does the head of a family business need to do to develop the leadership that will lead the business and family to the next generation?

Seven ways for preparing the next generation to lead the family and the business ... to the next, and the next generation.

1. Be a model of leadership yourself.
2. Demonstrate honor and respect for family members who are leaders.
3. Provide younger family members with opportunities to lead.
4. Encourage the development of individual & innate leadership styles, recognizing that all leadership is not same. Gabrielle Gillfords, Martin Luther King, Oprah Winfrey, Ronald Regan, General Patton, and Steve Jobs were all leaders with distinct effective leadership styles and traits.
5. Encourage their involvement in leadership activities elsewhere – school, professional associations, in the community, etc.
6. Encourage the attitude of “What do I want to accomplish for the family and in the business?”
7. Help them learn to identify leadership opportunities within and outside the family business.

Are you an entrepreneur or a leader?

CBS Money Watch recently published an article comparing and contrasting entrepreneurs and leaders.

The entrepreneurial leader, the author noted, are people who not only changed our lives but changed life as we know it. He noted as entrepreneurial leaders people such as Steve Jobs (Apple), Yvon Chouinard (Patagonia), Herb Kelleher (Southwest Airlines), Bill Gates (Microsoft), Henry Ford (Ford Motor Co.), and Sam Walton (Walmart).

While I very much liked the article, I thought it could possibly have been comparing leaders and managers.

And at the same time, I see significant value recognizing distinctions and nuances, when and where they exist, between manager, leader and entrepreneur. Awareness of and the ability to articulate distinctions demonstrate an intense knowledge and understanding. The Sami, for example, an Artic indigenous people, have hundreds of words for snow (Wikipedia).

What do you think? You can read the article at http://bit.ly/zvGiRl.