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A Better Partnership

Publications

Sep 2007
01
September 01, 2007

Management and the Family Business Succession Plan

Family business succession planning inevitably requires planning for the transition of management of the family business. Doing so presents its own challenges. Two of these challenges are dealing with nonfamily managers and dealing with the family member who is not suited for a leadership role in the business.

Dealing With Nonfamily Management

In circumstances where nonfamily employees occupy key management roles but family members are anticipated to assume leadership of the company down the road, retaining nonfamily management can present special challenges. Nonfamily managers may fear the loss of their positions or the blocking of their career paths and development. Consequently, the nonfamily employee may be tempted to seek positions elsewhere. If this occurs before the family member is ready to assume a leadership role, the loss of the nonfamily employee can damage the prospects of the business.

Making nonfamily employees feel valued and creating an atmosphere where their contributions are appreciated and respected is essential. However, even in cases where nonfamily employees feel valued, management may "see the writing on the wall" that Junior will displace or occupy positions otherwise on the career path of senior management.

In these situations, communication is critical to addressing the concerns of nonfamily management. In some cases, the views of nonfamily management may be an inaccurate perception, and the concern can be alleviated if good communication exists regarding the family's plan, with a clear timetable and set of expectations spelled out. In other circumstances, this perception may be accurate. When this is the case, an equity-based compensation plan or a deferred compensation program (with an appropriate vesting schedule that increases the likelihood that nonfamily management will remain with the company for the needed period) can provide senior management with an incentive to remain with the business for the necessary period of time until the family member is groomed and ready to succeed to positions of leadership and responsibility.

What to Do When the Heir Apparent Isn't

What is a family to do when the heir apparent proves inadequate to the task and is not suited for the CEO position or other important leadership role? Hopefully the family has made it clear over the years that leadership roles must be earned and are not an entitlement by birth. A regular and rigorous review process for family members similar to that used with other employees also will provide needed objectivity and benchmarks against which performance can be measured.

Even where a family's formal or informal family employment policies make it possible to ease a family member out of a position or to redirect his or her career path, the question still remains what to do with the business when no family member is in line to assume leadership of the organization.

In many cases the family feels it has no choice but to sell the business, and in some cases this is the right response to the situation. However, many family-owned businesses are successfully operated as family investments and led by nonfamily members. In circumstances where the business becomes a family investment, changes may be required or appropriate in the management team, the governance structure, the company's approach to growth and sharing of economic returns, and to providing an adequate and tax-advantaged source of return on the family's investment.

Conclusion

Through the succession planning process families will address a variety of management succession questions and issues. The difficulties raised by these questions are not insurmountable, and, with careful planning, the family will have a stronger and more successful business and management team.

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