Four Myths about Family-Owned Business Succession

Family-owned businesses have existed for as long as businesses have been around. But only within the past two decades has their existence spawned a new enterprise, a field of study with its own consulting specialists, professional organizations, business-school courses, and literature. Unfortunately, myths, prejudices and assumptions have persisted long enough that they seem a natural part of the environment.

My list of myths and prejudices have been collected over a 25 years of consulting to family businesses, talking to other specialists, and listening to family members as they put their businesses in order.

Working Someplace Else First

The myth that tops my list usually takes the form of the following advice: “The best way to train your son or daughter to enter the family business is for them to work elsewhere first.” The justification for this can be grouped into the opportunity for personal growth (“It will increase his/her self-esteem”); the squelching of future conflict (“They’ll see it’s just as tough elsewhere”); and the acquisition of knowledge that could benefit the business (“She’ll be able to teach us a few things”).

The approach of “training-away-and-before” has never impressed me as an inoculation against family conflict, a means of personal growth, or a source of new business knowledge. The underlying assumptions are that the sole source of family conflict resides in the young man or woman, and that he or she will be more conforming when they return to the business.

All too often, however, this young person’s upsetting behavior is symptomatic of a larger family and/or business problem that is being denied. Trying to understand the problematic behavior as indicative of broader issues — as opposed to shipping it off — might be of more help to the family. Pre-existing family problems only await the return of the heir apparent.

If the goal is increased self-esteem, the end-product may just as frequently be a son or daughter who refuses to return to the family business, precisely because of their newly found self-esteem, or one who returns with a mind of her own that doesn’t fit the business culture, much less the family.

Enhanced business knowledge sometimes does result but only when the heir apparent has worked up to or started at top management levels in other firms. If they work their way up on the outside, their position is often too attractive and rewarding to leave. If and when they leave, it frequently coincides with the owner/parent’s advanced age and readiness to retire. Their knowledge and style all too often jars current practice, sending shock waves throughout the firm and creating resentment in their wake.

It’s not that the “farm system” doesn’t work. It can, provided that all players and coaches are clear about their respective goals, timetables, and mutual agreements. All too often, however, goals, motives, and intentions are so thickly glazed over that the outcome is anything but desirable.

The most successful outcomes take place when the son or daughter is deliberately tasked with returning in “x” number of years with new ideas. The mutual planning process is detailed and intensive, with accompanying research. (It’s interesting to note that family firms that engage in this type of planning often operate in this kind of deliberate manner.)

Fear of Mortality

Another common myth: The failure to prepare succession plans derives from the owner’s fear of facing up to his or her mortality, and that initiating succession highlights one’s impending or looming demise.

If a parent is fearful of facing mortality, the remedy is frequently a referral to therapy and a gingerly applied workaround, so that some semblance of a succession plan can get started, focusing on business issues with the goal of eventually getting to succession issues.

The real questions should be, “What is the owner avoiding by his apparent fear of dying? What does he not want to face as he looks into the proverbial jaws of death?”

My position is that the fear of death (that we all share) is not a basic reason for the lack of succession plans. I contend that our concerns about our mortality actually fuel the desire to plan for succession, so that we can face death without distraction.

Rather, failing to plan for succession is based on a desire to avoid dealing with existing family and business problems which might make the autumn of life problematic. Not wanting to upset the applecart entails not having to deal with certain aspects of self, such as:

  • The need to control and have everything done the way one wants
    Having to choose between several possible successors, inevitably antagonizing someone
  • Fearing that a successor might do better than we have, thereby diminishing what we have accomplished or showing where we failed

Family or Business: Which Comes First?

The third myth is: “The primary goal of the business is to keep the family together.” Stated differently, “Family comes before business and should always do so.” I can’t think of a more pernicious argument for preserving the status quo or for choosing an undesirable business option.

This myth has appeared as both slogan and rationale in many different contexts. Typical is the situation where all offspring, whether employed in the business or not, become potential heirs despite the wishes of those working in the business. Another scenario entails the heir who lacks the requisite skills to become president when another option (e.g., the sale of the business, a non-family member becoming president, etc.) would be by far the wiser choice. Or the founder sets up a convoluted management structure in place of selecting one offspring over another as president.

For tax, financial and inheritance reasons, businesses can and do have both working and non-working family owners. The problem is that too often, family members working in the family business grow to resent their partners/relatives who aren’t sweating it out in the trenches with them — especially when these non-working partners want to have business practices explained, dividend declarations justified, business strategies presented.

The feelings that emerge when the working member’s stance is questioned begin to play havoc with the ownership arrangement. Thus, a business owner, in wanting to will to his heirs in equal portions the fruits of his labors, only begets rotten fruit. What his heirs inherit is conflict that was only hinted at while he was alive, e.g., conflict about whether the heirs wanted partners at all, resentments about the freeloader of a brother being protected by the parents, etc.

Handing over the business to a less-than-adequate offspring in order to preserve family harmony most certainly can be seen as an attempt to avoid dealing with the owner/offspring relationship in the wider context of the family. The owner, in one kind of scenario, might have to confront his spouse’s protectiveness of this less-than-adequate son or daughter.

In employing relatives who are not functioning, the family-owned business is being used as a therapeutic community, thereby delaying the inevitable reality check this person has avoided. While it may keep the underlying problem under wraps, it harms the business, discourages employees, angers future caretakers of the business, and delays problem resolution.

To “preserve” the family, I have seen owners with competitive ambitious offspring buy additional businesses to keep everyone happy, leave the top decision-making position open by design, split up the business so everyone can have their own piece — everything but face the consequences of asking, “What’s best for the business?”

Better Times Ahead?

“When I take over, everything will be different,” and “The business failed because the son just didn’t have what the father had,” underscore a common theme — that the future of the business after succession can ignore the precedents set during the previous owner/founder’s tenure. In both instances, the successor has to deal with “hangovers” such as:

  • An inherited partner (e.g., father’s brother) who just draws a salary
  • Lack of capital investment in new equipment
  • Employees’ memories of the mythologized “old man”

The list of hangovers is potentially endless. Dealing with this transition period is made even more difficult when the founder is still in the picture, albeit in the background.

Business failures that occur under the new regime during and after the transition period are frequently attributed to the heir’s lack of skills. This may be true in some cases, but, then, in these very cases the founder’s failure to correctly evaluate and assess his successor is another hangover. It may be indicative of issues the founder thought best to leave unaddressed.

In other situations, the burden of the past and the psychological debt the successor feels towards the past prove too heavy for the business, notwithstanding the heir’s abilities and skills. The business may be financially too entrenched in one path to have the resources to find another strategic direction in time.

When a business fails during a successor’s reign, the cause is often a failure of the generations to discuss, much less agree on, direction, strategy, goals and vision of the future. In these cases, succession was often abrupt; training for succession was lacking; management was ill-prepared over time for succession. It was not simply and only the successor’s fault for the business failure.

Vistage member Bernard Liebowitz, Ph.D., is president of Liebowitz and Associates, a business management consulting firm based in Chicago, Illinois.

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