Heir Preparation & Selection

Deciding who leads the company next (whether in the first chair or a supporting role) is a key responsibility of the current company leadership and ownership.  However, it is a decision and process that is often left late, or not done nearly as well as it could be. That is understandable – especially in a small to mid-sized company (where there is a smaller group of insiders for consideration) and family-owned businesses, where several extra factors come into play.

Part of the challenge is that the current leadership (who may well also be the owners) are already busy with handling the day to day challenges of the business. Getting to an important but non-urgent task is often difficult. Added to this, assessing the readiness – or preparing – of the next leadership for assuming the top role is not something most smaller company leaders have ever done before, so a lack of familiarity adds to the reasons why it gets pushed off.  A recent study by US Trust indicates that less than 40% of business owners have a written and agreed plan for the orderly succession of their business (women, Millennials and the wealthiest business owners are the most likely to have a succession plan).

There is no common template for this task, and so I tend to see a few common approaches. One approach is the “kick the can down the road” approach. With no sense of urgency, today’s leaders tackle the things they believe are critical today, and leave the less familiar and messy task of heir preparation and selection for tomorrow.  This is common, whether there is an opportunity to pass the business on inside the family or not. Even when the plan in the founder’s mind is to sell the business, or have a non-family member take over eventually, pushing it off is typical.

Of course, this is not prudent or proactive. The value of the business is enhanced when there is a sustainable leadership team in place for the longer haul. Also, it takes time to develop the next generation of leadership. This is especially true when you consider that the challenges of the next ten years will undoubtedly be different than the last 10 years – and this often dictates a different mix of skills and experience.

Assessing the skills and experience of the next leader can be tough – and this is particularly true for the current leader, whose objectivity is skewed by their own background, and (in the case of the family business) factors which are often outside the company context. If a husband and wife own the business and differ on which of their kids should lead next, the potential for marital discord adds to the challenge of heir selection. If there is only one child who is logical to lead next, that simplifies the choice, but then begs the question of whether the one possible family member is really right for the role. Putting an heir in place who is not ready, willing and able does no one any favors – not the heir, the company, or the parents whose retirement may hinge on the company remaining profitable and successful. Moreover, parents are notoriously non-objective (this can go both ways – hypercritical or not critical enough) with their own kids.

Selecting and preparing the next leaders takes time, and often benefits from an external perspective. Companies with boards that have external members (advisory or fiduciary) have this built in. Advisors can be of help too, but sometimes the most important thing is simply beginning and tackling the task. This creates more certainty for the company, the upcoming leaders and comfort for those leading the company today – a win-win for all.