Complex Family Business Succession; Why Talent and Vision Matter

Family business succession is more than a generational shift in title and responsibility. It is most often a powerful transfer of values, talent and vision. For some families it is a time of great upheaval, for others, a smooth passing of the baton. In this THOUGHT LEADER interview noted family business advisor John Messervey shares his advice on this especially challenging transition.

TL: You have guided hundreds of family business succession plans in your career, what do you believe really matters?

JM: Succession is about leadership. It is a transition when many of the unspoken issues in a family come to the surface demanding resolution. It is a time of difficult discussions… the performance of family managers, family financial security, a reevaluation of risk, the competence of the next generation, the economics of sharing, the separation of ownership and management issues, the pruning of the stock, spousal needs, the “hold or sell?” decision, health concerns, disruptive market forces, family and non-family issues, new leadership, strategy and much more.

TL: That is a long and rather overwhelming list.

JM: Yes, and that is why family business succession is such a challenge. Moving from generation to generation is such a confluence of issues that outside help is not just advised, it is essential. Experienced advisors should be a priority for every family business as the family discussions are delicate and often difficult.

“Privilege brings responsibility. Each generation has a choice; either live off what you have or invest and create a future.”

TL: How do you manage those discussions?

JM: Much of my work is preventive medicine. We define successful outcomes for the succession process, stay solution focused and offer mutual respect. My job is to help the family find a “middle ground” between the generations and among all of the constituents. There may be control issues, unspoken fears, an anxious young management team and a business with no mission or vision. A well-managed succession process can accelerate personal growth and unlock business opportunities.

TL: You often speak of “pruning the tree” at each generational transfer of ownership.

JM: Yes, too often families just keep piling on owners, diluting shares and setting the seeds for future conflict. The value of minority shares in a closely held businesses can be vastly overestimated by minority stockholders. There are significant discounts for lack of marketability and for lack of control. Too many family members either ignore or fail to understand those limitations. Usually, the true value is only realized when a family business is sold.

TL: You seem to have a keen focus on the client’s family dynamics.

JM: That is where the tire hits the road. On paper, succession can be a financial “columns and rows” spreadsheet with a rather vague timeline. Unfortunately, without addressing the unspoken family issues, many succession plans fail.

TL: I imagine the “sell option” might be a difficult discussion?

JM: Yes, but it should take place during every generation to generation transition. I call it, “sell, sell, hold, hold.” Using a four part matrix, should the family sell ownership and hold management or hold ownership and add outside, non-family management? Or, should the family hold management and ownership or should they sell the company and exit management?

TL: How do they decide?

JM: Well, there are many factors in this decision… unresolvable family differences, risk tolerances, current state of the market, potential disruptors, talent level and experience of family and non-family management, future profitability projections, access to growth capital, technology, and extraneous issues (global, labor, environmental, regulatory, litigation, etc.) One way to start a discussion is the rather simple question, “if we had the after tax money we would receive from selling, would we be interested in buying a company like ours?” Another question is, “honestly, do we have the talent within our family to drive this business into the next level?”

Finally, the sell, sell, hold, hold question cuts to the heart of owning a family business. Do you view the business as a short term asset to sell and create liquid wealth for the family or do you view the business as a multi-generation “hold at all costs” asset of the family? For some families in business, the pruning question also includes a thorough evaluation of multiple businesses. Some of my clients own 20-30-40 enterprises. Their reasons for holding ownership of each should also be evaluated.

TL: Either way, the talent of the rising generation is a critical factor?

JM: Hope is not a strategy for next generation managers. Far too many family businesses fail to appreciate the extraordinary and unique talent required to continue to grow an enterprise. Rising sons and daughters should achieve an impressive resume of demonstrated competence, including mentors in leadership, relationship building, communication, finance, technology, globalization… the list goes on and on. They need to be team builders – a talent essential for true and effective leadership. Even a team of highly competent and experienced heirs must work through their competitive instincts and/or sibling rivalry. They need to reach a workable arrangement to grow the business.

TL: Someday this will all be yours?

JM: Ironically some heirs are in a very tough spot. The younger generation is often told, “Just be patient—someday this will all be yours.” I am not a fan of the “someday” promise. That phrase has been the source of much family conflict. Like a baseball player watching every game from the bench, the younger generation just wants to know when he or she will get in the game. For many I have observed their deadline is age 40. For very large family businesses, that age may be 50—never later. If the head of a family business is keeping succession plans quiet, there may a good reason.

TL: Should they work elsewhere prior to joining the family business?

JM: Absolutely. One family used this model. Any heir joining their family business must acquire a job on their own, become economically self-sufficient (without parental assistance) and earn at least one promotion. The twenties are an ideal decade to not work in the family business. Like a cafeteria line, it is time to sample what you love to do. I have seen

many heirs join their family business immediately following college; many are miserable. They have been seduced by the ease of employment, excess salary, cushy benefits and more. The family business need not be the employer of last resort. And, it is important that an heir can push back and say, “I really don’t want to do this.” The question of joining the family business cuts both ways.

TL: Is there a cutting of the umbilical cord?

JM: Paradoxically, heirs need to complete a “psychosocial moratorium” with their parents. That is, an essential separation must have occurred. You can see this shift from a parent to child relationship to an adult to adult relationship. As adults, each brings something to the table, including respect for their individual and collective contributions. Given the sensitivity between say, fathers and sons, mentors are especially helpful in coaching the next generation. I often ask the next generation heirs to list their 25 life accomplishments. That simple exercise is a powerful summary of their talents, interests and experience. To grow a company, an heir needs superior interpersonal skills – they don’t need to be the smartest person in the room, just a leader with an inspiring vision.

TL: Let’s turn our focus to the other side of succession—what are the primary issues facing the older generation?

JM: There are two major dynamics that have changed significantly since I started crafting succession plans. First, demographically, almost everyone is living far longer than anticipated. The age of 65 is an obsolete benchmark. Does one plan to leave the family business and be unemployed for 25+ years? Sixty-five may be the new fifty. Secondly, no one knows with any certainty the future cost of healthcare in America. From “affordable care” to medical technology, we are the first generation to suddenly face a very long life expectancy. We used to add ten years for high net worth estate plans, now the numbers in the algebra of aging are higher and often just a guess.

TL: How do your clients manage this transition?

JM: For many seniors, life is very different at 78 than 72. Over eighty, one is usually more sedentary. The real question of succession and aging is a redefinition of one’s identity. Once you are out of the game, so to speak, you have to answer, “Who am I?” None of my clients want the label, “retired.” The “R” word is tantamount to irrelevant and out of touch. I advise the senior generation that they are in transition. Next chapter, turn the page… it can be a glorious period in one’s life. I often challenge them to, “finish strong!”

TL: There must be other family dynamics?

JM: Yes indeed. One particularly interesting family triangle occurs when the last child leaves the nest. That critical time is when the older generation marriage must be reinvented—transitioning from parenting to new interests, life goals and relationships. Unfortunately, too many parents fail to take this step. They mistakenly enlist a child to form a relationship triangle by adding them to the family business. The office, title, salary, nearby house and country club membership for the son or daughter usually follow. The triangle keeps the cooling

marriage stable. Use the litmus test of family business, “if his or her last name wasn’t on the letterhead or front door, would that person have a job in your family business?” If not, I call that artificial employment. I rarely see it work.

TL: Any other family issues come to mind?

JM: There are two other relatively minor, but interesting behaviors I have observed. If the older generation does not have a nourishing hobby or if they do not have solid friendships, (beyond a long list of acquaintances) there is a strong tendency for them to become bored and meddle. While presenting cases at the Menninger Management Institute years ago, I recall their term, the entrepreneur’s “mother/mistress” dynamic. The family business becomes the mother that so nourishes them and the mistress that so stimulates them. When that dynamic changes, the entire family system can be shaken to its foundation. Some of my entrepreneurial clients are addicted to risk. Without their hands on the family business, they fear a very boring life.

TL: How about implementation of succession plans?

JM: Few plans have specific start and end dates. A better plan has achievements and targeted benchmarks woven in the plan for each generation, guided by a competent and experienced board of directors.

TL: Beyond the family members, let’s explore how succession impacts the management team.

JM: Non family managers are keen observers of the succession process. Too often the entire management team quietly ages, along with the founders. Ideally, you want a bench of solid veterans, a group of experienced and energetic middle management and fresh ideas among a next generation of up and comers. The expectations among the next generation non family managers are also becoming more complex and are often woven into the process.

TL: So there is a significant difference between management and ownership succession?

JM: Yes, too often families in business get tangled up failing to properly separate management succession from ownership succession. These are best handled as somewhat separate discussions. Management is your contribution to increase stockholder value through your ability to add value, solve problems and work effectively. Ownership is equity including the right of appreciation, which is normally paid when the enterprise is sold in a liquidity event.

TL: The succession process seems like a time for top to bottom reexamination and renewal.

JM: Absolutely. I often share the perennially nagging “CEO” question, “Are we what we ought to be with the right people and right products in the right markets, or should we be something else?” The most long lived, successful family business are Darwinian—they constantly adapt to changing environments, markets, opportunities and family dynamics.