By Matthew Kerzner, Ph.D.

Managing Director

New England Center for Family Business Excellence

Family-owned businesses (“FOBs”) are organized around a set of family norms and culture that stem from the owner. In an FOB, both the work and home settings can become emotionally charged by other family members who may not have the same set of standards. There is a need for FOBs to develop business practices and philosophy while balancing the relationship between family and business in order to succeed. The success of an FOB is based on several factors, from the founder’s business management skills, including the formation of a solid foundation for successors, to the successor transition process.

Succession planning within FOBs is thought of as the process of identifying high-potential employees who could run a business in the years to come. High potential employees are thought of as those individuals whose current and future contributions and efforts are key to the success of a business. If leaders of family businesses cannot find the right fit to lead their workforce, they may need to sell the business or liquidate the assets, impacting the company, the employees, and the family. Thus, CEOs or owners of FOBs need to think carefully when choosing a successor who can take over and preserve the business.

Researchers report that in the next five years, in 40% of FOBs, CEOs will change hands with no plans of a successor. FOBs put off planning for a variety of reasons, including CEOs or owners who feel they are not prepared and that it is too early to plan. In addition, CEOs or owners cannot find adequate tools to start the planning transition. Furthermore, some do not want to think about leaving and may have experienced conflicts with family members or employees.

Since FOBs make up a significant portion of the economy and job market, the investment in long-term survival through succession planning is of the utmost importance. There is a growing interest in succession planning within FOBs, but there seems to be a limited amount of research that explores how succession planning is used within them. This reinforces the significance of this qualitative study.

Succession planning is a process that can impact the likelihood that FOBs survive into the next generation. Succession planning can also help retain employees who have the potential to be considered in a succession plan. Although 74% of FOBs may have a succession plan in place, more research is needed to see if this plan is efficient and effective. It is important to determine exactly how the CEO or owners perceive such a succession plan to help secure the business’s success into the next generation.

Employers have expectations that employees will perform to reach the business goals and in return, the employees have an expectation that the business will survive over time. Researchers demonstrate that businesses that utilize succession planning yield better returns on operating efficiencies and find better ways to maximize organizational resources. This can help improve the overall organizational health of the business and employee engagement if employees have a clear understanding of the company’s direction. Organizational health refers to the business’s overall mission, vision, and values, not just the financial aspect of a business. Employee engagement is defined as how employees feel they are connected to their work and how much ownership has in making decisions and impacting the success of the company.

A well-planned succession planning transition enables family businesses to identify effective leaders who can bring the business to the next stage of success. Organizational survival is possible with succession planning, as businesses can reach their goals and objectives over a long period of time, even with new leadership. Research demonstrates that businesses that strategically and systematically put an effective succession planning transition in place increase their chances of survival to the next generation. Many businesses with the most longevity have success deeply rooted in their succession planning transitions and start thinking of succession planning when key people assume new positions.

Family-owned business leaders need to look at both the internal and external labor markets when developing their succession planning transitions. An internal labor market consists of the business’s opportunities for leadership positions and qualified employees within the business. An external labor market is a collection of leadership opportunities and qualified people who are external from the business in which the opportunities exist. Owners of family businesses need to think about their legacies and how they would like to exit the business, having the next leader in place, and maintaining their family’s infrastructure. I always tell my clients that a succession planning transition consists of an exit strategy, the development of family governance, growth and value enhancement, an execution and accountability plan, leadership development and, finally, the succession plan itself.

If you are interested in this service and setting up a complimentary visit to discuss in further detail, please call Phyllis Levine, Director of Administration, at (845)391-8214 Ext. 3001 or via email to phyllis.levine@hvtdc.org.