Thursday, June 23, 2011

How to decide which child will be the successor to your family-owned business

Last month, we began a series on the four phases of succession planning for family-owned businesses. We explored the initiation phase – that period when it begins to become apparent whether a child or other family member will eventually fill your shoes as head of the organization.

This time around we’ll take a look at the selection process, perhaps the most difficult step of the entire course of transition, especially if it comes down to choosing among a number of children. And there’s an additional challenge if none of the children is or will be ready to take the helm…or if there’s a better choice outside the family.

Chalk it up to “just the way it is” but if the next generation leader is one of several children, the selection may be construed by siblings as “oh, sure, he was always your favorite.” This perception can be disastrous to the entire family unit and as such, some business owners avoid the issue, adopting the attitude of “let them figure it out when I’m gone.”

And then there are those who favor the “eldest takes all” approach. In some cases, however, the oldest may not be the best qualified, so placing restrictions – be it age or gender – on succession is rarely the best idea.

To keep things fair, family-business owners may want to embrace a successor selection model developed for corporate executive succession. In this model, the family business leaders can develop company objectives and goals for the future head of the company – essentially a job description that spells out specific results, skills, education, experience, and possibly even personality traits.

For example, if a business has set its sights on significant growth in the next five years, the potential successor would be required to have a thorough understanding of business operations, business development, valuations and financial statements, in addition to the ability to negotiate and good relationships with banking and lending institutions.

There are many benefits to designing such a job description. First, it removes the emotional aspect from the selection process; second it provides the business with a set of future objectives; and lastly, the company founder can rest easier knowing goals are in place that will ensure a growing, healthy business.

Next month we’ll delve into the successor training/education process – yet another delicate matter that is often best left to someone other than the owner.

About our Benefits Installment Author: James E. (Jim) Moniz, CEO of Northeast VisionLink, a Massachusetts firm that specializes in structuring executive compensation. James E. Moniz is a national speaker on the topic of wealth management and on executive compensation. Jim Moniz will be presenting at this years SHRM conference in Phoenx, be sure to check out our presentation: “Creating and Sustaining a Competitive Advantage, The Role and Impact of Effective Compensation and Rewards Strategies”

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