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I have been a consultant to family businesses for over two decades. The work that I and my colleagues (other mental health specialists, business experts, attorneys, accountants and estate planners) do is somewhat unique. Our goal is to help keep the business in the family. We use effective psychological and business practices to keep business concerns from disrupting the family and family dynamics from disrupting the business. Our approach is family first and business second. We believe that if the family values and ethics are not honored, the business will be severely and negatively affected.

Most Family businesses find themselves looking for consultants at times of great changes in the business climate or when the family members’ roles shift. The most common time for the latter is during periods of succession from one generation to another. The succession is so complex in most family businesses, that there is a common saying in the field, "coveralls to coveralls in three generations." Our job is to help those businesses develop family dynasties when that is their wish.

The following article was written for the Family Business Forum at Santa Clara University in 2001.

Other programs of interest
     Middle class millionaire
     Couples and money

Jerrold Lee Shapiro, Ph.D., ABMP, CGP
Professor Counseling Psychology, Santa Clara University; Family Business Consultant

Approximately 80% of all businesses in the United States today are family owned or controlled. According to Arthur Andersen/Mass Mutual (1997), a full 42 percent of family-owned businesses expect a succession within the next five years. Amazingly, two-thirds of these family businesses don't have a strategic succession plan in place. Yet, it is generally acknowledged that one of the most vulnerable times for family business is during succession transitions. Will yours be ready?

Any time a family business's leader dies or retires, the power vacuum can produce a whirlwind of emotions - fear, sadness, jealousy, anger, resentment -capable of bringing down the firm. In addition, there is a design flaw in the family-business model. Most of the first generation family business entrepreneurs began businesses because they had little tolerance for working for someone else. This type of personality often makes for the kind of hard-work success with which we are quite familiar - the American dream in bold profusion. Unfortunately, the very strength of their style is what undermines the transition to their children. Many of these entrepreneurs tend to play it "close to the vest:" sharing crucial business information minimally, shying away from outside guidance, and feeling uncomfortable taking advice from their own children. These first generation entrepreneurs most likely ran and grew their businesses without a lot of planning, "flying by the seat of their pants." They are often comfortable making spur-of-the-moment decisions rather than implementing a long-term strategy In short, they are accustomed to doing exactly what will sabotage a smooth succession.

If this scenario seems uncomfortably familiar, there are steps that any family business can take to avert a succession crisis and keep the company intact and on course. Here, for both business founders and their successors are six guidelines for making a less troublesome transition.

1. Identify the current needs of the business and those qualities of success that are currently appropriate.

The oldest son or other "heir apparent" may not be appropriate when the present and identifiable future form of the business is considered.

The child who is most like the founder is often a poor choice for a business in a more mature stage of its development.

The child who's been more deferential to dad or grandma, married "appropriately," or was the uninspired but "good child is likely to be a poor choice as the next president

Instead, a clear separation between family and business allows for a much more effective succession. First, families need to identify the responsibility, education, and experience criteria for a successor. Then, focus on the family members who fit those criteria: not the other way around. A second advantage of this strategy is in families where more than one child is vying for the top spot in a business. The emphasis is on qualification and performance rather than personal compatibility with the first generation owner.

2. NO Secrets.

Don't try to save someone's hurt feelings by delaying information. Once the successor is chosen and a plan is ready, tell everyone in the family and also critical non-family employees. These secrets are rarely maintained and even when they are, everyone knows that something is afoot and paranoia will rule the day. You can't make everyone happy, but you can give everyone a fair chance to know what's happening and to plan their future. It is best if there is a series of formal disclosures with specific details about responsibilities, positions, the transition process and the likelihood that non-family members’ jobs will be safe. If everybody knows that the successor is chosen logically and based on reasonable criteria, they will likely adjust well to the new regime.

3. Consider the critical non-family employees.

To enhance commitment to the company, you must make it clear where the bloodline glass ceiling will limit employees' advancement. At the very least, these employees should have a competitive package and assurances that their positions will be secure during and after the succession. Their loyalty may be to the owner as a person, more than to the business. If so, a personal approach by the owner with a formal non-family employment agreement may be appropriate. They need to be assured that their jobs and advancement track are clear. If feasible, equity in the company may be shared. Be aware that without this the only way they can advance is by playing on the divisions within the family

4. Demand some "off the job" training

Effective family businesses standardly require that members of all succeeding generations are sufficiently trained before taking a leadership role in the business. Many successful businesses require a certain number of years of work with a competitor or in a related industry. That may be the person's only opportunity to be a worker without special status.

Often the method of succession to top spots is prescribed (i.e. years as a manager, years as a VP and then the top spot).

It is advisable to have the family member report directly to a non-relative during some of these years. Most family businesses make it possible for all members to have summer or vacation jobs while they are in school to learn the business from the ground up, just like the owner had to. These vacation jobs cannot be considered the leadership track.

5. Exit Gracefully

Set a date to leave and do so. Avoid the common error of being a "meddling retiree." If you trust your chosen successor, let him or her run the business without undermining confidence among employees and customers as to who is really in control.

Before leaving, designate specifically those areas of the business in which retirees may remain involved.

Beware of the addiction of power and the temptation to interfere in day-to-day decisions of the company

Determine your compensation prior to leaving. Understand that once you sell or turn over the company to your successor, you cannot change the deal even if it's with your own children.

Take your proceeds from the sale or your retirement funds and diversify. Do not leave it primarily in the family business. That's a prescription for guilt, anger and resentment.

6. Get expert help and get it BEFORE the crisis

Entrepreneurs may be expert in the day-to-day intricacies of their family business, but that doesn't mean they are equipped to cope with the special challenges and intricacies of succession. Among these professionals areestate planning specialists(financial advisers and accountants) to minimize damaging tax burdens when the company transfers to a new generation.

Attorneys will help set up asset protection, valuations, protection from creditors or improper claimants, the method by which the business is inherited (i.e. blood line only; by marriage, etc.,) and distribution to in-business and out-of- business family members. Attorneys also provide general expertise, buy and sell agreements, stockholder agreements, management contracts, the distribution of voting and nonvoting stock, or restrictions on transfers of ownership interests.

Experts in family dynamics. This is the most likely consultant to be missed. It's frequently a big omission. At the time of succession especially, there is a strong need to separate business and family needs. These specialists allow family dynamics from intruding into the business and equally important, business problems from harming the family. They also effectively help with the creation and functioning of a family council and with implementing steps 1-5..

Most important is that any experts are less effective, and much more expensive, when they are called inafterthe crisis. Indeed, they should be in place well before any hint of succession is discussed. That way they will be more trusted and can work preventatively rather than having to undo a serious breech.

Additional information or queries may be made to Dr. Jerrold L. Shapiro, Counseling Psychology, Santa Clara University, Santa Clara, CA 95053. (408) 554-4012; e-mail jshapiro@scu.edu

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