“The final test of greatness in a CEO is how well he chooses a successor and whether they can step aside and let their successor run the company.” — Peter Drucker, Management Theory Pioneer
The value locked up in a family business lies within the next generation of leadership, for two reasons. First, you can’t get out if you don’t have leadership in place to continue the company (whether you are selling the business to them or to a third party – there is no business without them); and second, their ability to run and grow the business successfully is how you will convert your illiquid net worth into cash.
Statistics suggest this is a daunting task. Only 33% of family businesses make it to the second generation, and only 15% or less make it to the third generation. “Shirtsleeves to shirtsleeves in three generations”. You will exit your business…either on your terms or someone else’s.
It’s not just choosing your successor, it is stepping aside. And if you plant yourself too long in the CEO seat, it becomes increasingly more difficult for the next person to step in, let alone for you to step out.
There are 5.5 million family-owned businesses in the United States. These companies comprise over half of the nation’s GDP and create three-quarters of all new jobs. Many family business experts believe that one common cause of failure in family businesses is a lack of transition planning and preparation. Leaders of family-owned businesses often stay at the helm for 20 years or more, and as a result, their exits have a major impact on the company. Their shadows become long. These long tenures can also make it difficult for organizations to cope with rapid shifts in technology, business models, and societal beliefs.
In order to increase the odds of succession planning in family businesses, the key is to start now. Developing new leaders takes time. Transitioning power and authority takes time. This isn’t just about finding the right person, and that will take time as well. Sometimes the chosen successor doesn’t work out, meaning more time will be required for the transition.
Succession is tricky in family businesses. On the one hand, it’s important that the next generation carries on the entrepreneurial spirit that has driven the organization’s success, while on the other hand, it’s important that the current generation doesn’t become too complacent and unwilling to change, holding on to power and authority too long.
As you take on succession in your company, stay proactive. It is an iterative process. With careful succession planning, you can turn a potential nightmare into an opportunity.