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Timothy R. Clark: Succession planning in a family business

Published: Monday, July 16 2012 8:29 a.m. MDT

In family and closely held businesses, founders tend to look to their children to take the reigns when they're ready to call it quits. Sometimes it works. We often joke that the first generation makes the wealth, the second maintains it and the third destroys it. Of course, that’s not a completely fair statement, but there’s a lot of truth to it.

The fact remains that succession planning in family and closely held businesses is often done poorly, leading to what can be disastrous consequences. Family businesses often fail to adopt, or simply abandon, solid business practices when it comes to appointing a successor. Blood is thicker than water, so family considerations win out. Here are a few questions to ponder in the process.

Who can formulate strategy, execute strategy and manage risk?

When it’s time to find a new CEO for a public company, we normally plan a couple of years in advance. We try to find the very best person for the job. What that means is finding a person to do three things: 1. Formulate the business strategy. 2. Executive the strategy. 3. Manage risk along the way. These three responsibilities come together in the stewardship of a CEO. In a family or closely held business, it’s no different. Are you looking for the best person for the job?

What’s best for the business? What’s best for the family?

In family and closely held businesses, however, there’s an added layer of complexity. Yes, we ask what’s best for the business, but we have another question to ask: What’s best for the family? People can destroy wealth. And wealth can destroy people. So we have to delve further into the capacity of potential leaders in the next generation: Can the person create wealth? But also, can the person handle wealth? Many family businesses have succeeded at an intolerable cost to the individuals and families who own them. They are rich in money and poor in happiness.

Do you invoke the language of rights?

In a public company, we don’t ask questions about family. The ties of kinship have no standing. The sole consideration is the success of the business. Yet in family businesses, people often employ the language of rights. They speak of succession as an entitlement. My experience is that once a family business begins to invoke the language of rights as it relates to succession — as if someone has a natural or inherited right to run the business — the family begins to develop impaired judgment in the process.

Do you have clearly defined decision-making criteria?

A family business has the exact same leadership requirements of strategy, execution and risk management. The language of rights shifts the discussion away from those requirements and often leads to poor decision-making based on poor decision criteria. When families meet to discuss succession, they often don’t have clearly established criteria for making the decision in the first place. As a consequence, they default to lineage and political influence instead of conducting a sound assessment of capability.

What expectations have you created for your children?

If you have socialized your children by saying, “Someday you’ll be running the show,” you may have created an entitlement based on lineage. That’s dangerous. The best family business owners I know take a very different tack. They set the expectation of preparation and experience. Some even insist their children work outside of the business for a time so they can be accountable to other people, learn how other industries work and build a platform of personal credibility outside of parental purview or family influence.

The wisest founders I know realize that it’s rare for a child to step in and run a business with the same passion and drive that fueled the parent. Yet it’s common even for those founders to provide the opportunities to their children that they, themselves, never had, and in the course they are overly benevolent. How, then, do you re-create that same level of hunger and determination in the next generation? In family businesses, we often see the entrepreneurial fire dim in the second generation as an unintended consequence, because the success of the business is not the earned success of the children.

My advice: Invite the children to go away, earn their own success and then fill out an application.

Timothy R. Clark is the founder of TRClark LLC, a management consulting and leadership development organization. His newest book, "The Employee Engagement Mindset," has just been released from McGraw-Hill. Email: trclark@trclark.net

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