Why Every Business Owner Needs to Think About This Difficult Subject

How will you ensure the survival of your business after you’re gone? In a new book, Rochelle Clarke writes about the importance of succession planning.

Rochelle Clarke By Rochelle Clarke

Picking the next generation of leaders is a critical part of succession planning.

Picking the next generation of leaders is a critical part of succession planning. (Credit: Rawpixel on Unsplash)

Are you building a family business?

Most entrepreneurs don’t think in those terms. They’ve got a product or a service and a vision for how it might change their community, the market, and even the world.

Entrepreneurs see themselves blazing new trails, but they often don’t see the landscape 20 years ahead. What changes when the number one concern moves from establishing a foothold to maintaining a legacy? What happens when the top priority shifts from starting a new tradition to preserving one that’s been long- and hard-earned?

And where do the key players who helped build the company—whether family members by blood or by sweat—fit into that future? How will they factor into the company’s transition from its first generation of leadership into its second?

[Related: Learn about how one founder found a successor]

Preparing for the Inevitable

Entrepreneurs are first-generation family businesses. According to current statistics, only 30% of businesses survive long enough to be passed on to the second generation. Given those long odds, it is incumbent upon business owners to think well—and early!— about how to approach business succession.

Unfortunately, as we often see in our work with businesses, those preparations take a back seat to the everyday hustle of running a company. Years pass without even a peep about succession. And when the owner either reaches the end of her wick or, sadly, she passes away unexpectedly, the company is left in a leaderless lurch.

Death is a difficult subject. We don’t like to talk about it. And we certainly don’t want to dull the enthusiasm of a new startup with thoughts about such morbid details.

But think we must.

According to one study, the death of a founder can lead to major setbacks for a company. In it, researchers compared businesses over 10 years old where the founder died to ones where the founder was living. In the former, businesses experienced a 60% drop in sales, a 17% slide in employment, and a 20% lower survival rate.

So, as awkward and uncomfortable as it may be, entrepreneurs must start thinking about business continuity today. Hopefully, they won’t have to execute their transition plans anytime soon. But, if they must, they’ll be ready.

Planning for Succession

Business continuity plans are important because they prevent employees and stakeholders from having to guess about the day to day operations of the company. A good succession plan with the long term in mind will include (at a minimum) named successors and specific continuity instructions.

Whatever the plan, it must be written down. We’ve found that only about half of family businesses in the U.S. have a written plan. In Canada, that share drops to 17%. Without a written plan, those businesses are almost certain to flounder as key employees struggle with one another for power and essential operations get lost in the shuffle.

The essential element in developing this business continuity plan is identifying a successor. Anyone who has ever taken a course in First Aid and CPR knows that, when someone collapses, you have to point to a specific person and say, “You, go call 911.” Why? Because, if you say “someone get help,” nobody will know what they’re supposed to be doing.

Family business transition is much the same—especially when it comes on the heels of an unexpected departure. Without a business continuity plan in place it is likely that everyone may run around like a chicken with their head cut off while no central authority picks up the baton or, as mentioned above, several different powers begin to fight over control.

[Related: Deciding to Join the Family Business. Sort of.]

Talk Away Ambiguity

Especially if you have settled on keeping the business in the family, it is crucial that you identify and communicate with your chosen successor earlier rather than later.

The first benefit of these early conversations is ownership. When a stakeholder knows they’re next in line, they’ll be all the more eager to see to the welfare of the company and develop themselves in advance for the position.

Another crucial benefit of open communication is its power to dispel ambiguity. In transparent dialogue, expectations are clarified and solidified. Successors are given the information they need to pick up and carry the torch well.

In my new book, The 5 Critical Conversations: A Comprehensive Guide for the Family Business, I focus on the critical conversations owners need to have with their future successors:

  1. Foundation Conversation — As the owner and successor contemplate embarking on the succession journey, this conversation helps uncover intentions and passions and puts them both on the same page.
  2. Owner’s Decision — Once a successor has been identified, the next step is communicating that decision to the relevant stakeholders in the company.
  3. Successor’s Decision — Owners can’t take successors’ continued interest for granted. This ongoing conversation is the opportunity for the successor to clearly state his agreement or disagreement with the succession path.
  4. Performance Discussions —What will the owner expect of their successor? What standards will the latter be held to? This conversation handles a number of performance related topics including accountability and work/life balance.
  5. The Exit Conversation — Finally, how will the owner decide whether, when and how she should exit the company? Is this a decision that she makes on her own or does it need to be made with her best interest in mind? This conversation handles this reality with tact and empathy.
Conclusion

Entrepreneurship is exciting; it lets us put our unique stamp on the world. But, for all that excitement in the present, we can’t neglect our obligation to the future. How will you ensure the survival of your business after you’re gone? And how will your closest supporters in building that business—your second generation—factor into the process?

It’s never too early to start thinking about and preparing your answers to those questions.

Rochelle Clarke is the founder of Succession Strength, a firm that helps family businesses identify and overcome transition hurdles. She is also the author of the new book, The 5 Critical Succession Conversations, A Comprehensive Guide for the Family Business.

Posted: October 16, 2018

Rochelle ClarkeWhy Every Business Owner Needs to Think About This Difficult Subject