Henry Hutcheson, President, Family Business USA
What would happen to your family, your business and your wealth if you were to become incapacitated right in the middle of this sentence? What would happen if you actually died? Who would be responsible for what, and does everyone know not only their responsibilities, but everyone else’s? What would happen to the ownership of the business? While this may all sound harsh, the family business owner can only speculate on what might happen unless contingency plans have been discussed, agreed to, and documented.
A method to get at the heart of this issue is to conduct a “fire drill” -schedule a mandatory conference call one morning from home and invite all family members in the business and key managers. Once everyone is gathered around wondering what’s going on, tell them that you are perfectly fine, but you want them to spend the day pretending you have just had a heart attack and are in coma. Instruct them to react accordingly and be prepared to discuss the following morning what steps they took and why. That following morning you will probably find that there are more questions than answers.
So what are some steps that can be taken in order to ensure the business can continue to operate smoothly even though it has just lost its leader?
I know of a family business that experienced a serious tragedy: the founder, and true heart and soul of the business, had suddenly died of a heart attack at the age of 53. He had three children, all working in the business, and each was married with each spouse also working in the business. Mom, however, had never worked a day in the business. But she was now the new 100% owner of the business. When the kids came to her looking for instructions, she didn’t have any. When asked if Dad had told her what do if this were to ever happen, she had no answers. At which point the children and spouses all began jockeying for position to influence Mom to enact their opinion of the best course of action. You can imagine the family discord that ensued, not to mention the chaos in the business. Customers were either confused or neglected, long time non-family employees began floating their resumes. Sadly the business folded.
What could have been done? Dad could have taken Mom aside and told her his wishes were he to die. This is certainly the bare minimum. Better would be to call a family meeting and at least declare your wishes. Even better would be to actually open the question up to discussion such that the entire family can weigh in on the best course of action.
The best course of action would be to have sat down with all relevant parties, discussed the matter, come to an agreement, or at least an understanding, and then to document everything down. It would also be wise to get some input from an estate planning attorney and a tax advisor. And if you think you may have trouble conducting the family meetings to discuss this, get a qualified facilitator.
What about when it comes to preparing the next generation? You may have your eye on a specific family member to take over your business or simply run an important part of the business. Perhaps you’ve groomed multiple next generation family members and non-family members to run the business in the future. What would happen if they were unable to come into work one day due to a tragedy or simply decided one day that they simply did not want to do this job anymore? I had a client where one of the siblings decided the business was not for him and simply wanted to focus on meditation and spiritual healing.
One common method is to always be training and cross-training. It can be very tempting to want to zero in on a particular area and then let the next gen stay in that position. I had a client with three children, with one as the seemingly obvious next generation leader, except for one thing – for 20 years he had only ever been the head of production! No engineering, no accounting, no marketing. I had another client with three next generation children, all slotted into their natural positions, each with complaints about how their siblings ran their departments. So with the support of the current generation, the three siblings each moved into each other’s job for a year.
So while they trained one sibling, they were bring trained by the other. Not only did this this create an awareness of how difficult the other’s job was, and not only did it strengthen the communication among the siblings, it strengthened the likelihood that the business would continue if one of the siblings were to discontinue working in the business.
And just as any smart business person would cross-train staff over time to reduce the reliance on certain people in key roles, cross-training others to understand even the basics can go a long way.
One common error many family businesses make is to ignore family members who are not in the business. There is a family business I know where the heir apparent son, through a process of soul-searching, had come to the realization that he really did not want to run the company. He wanted to focus on other things in life. While meeting with the daughter, who was highly successful in a different company in a different city, I asked her what her opinion was about the future of the company. She declared that she was probably the best solution to the problem. Her parents never thought to ask if she was interested in leaving her current job and coming back to the family business. Sometimes family members can come in from completely different areas and be effective, as long as they have the requisite ability and desire to perform. I am not saying you should drag your kids into the business and everything will be fine. What I am saying is that if you have lost a key next generation family member in the business, you should not completely ignore what other family members might bring.
Advisory board/board of directors
One of the most important steps a family business can take to when preparing a succession plan is to install good governance: documented policies and procedures, a written family constitution, and having an advisory board. Many small to medium sized family businesses think they are too small for a board. They are wrong. This misperception comes mostly from their belief that the word “Board” means Board of Directors, with legal responsibility. Many times this makes the most sense. However, having an advisory board can serve much of the same purpose, especially when comes to contingency plans.
There are many benefits to having a board of advisors. You can staff it with individuals who have some knowledge and background in the key areas of the business. What is most important with any board is to put independent minded people on it: not your golfing buddy who ran a company, and not your cousin who is a sales whiz. You need a group of folks who are each willing and able to give you honest feedback without fear of reprisal. And once in place, it begins to act like a fine wine –it gets better with age as it can provide a long-term sense of continuity. However, you always need some rotation in the board, else it will get stale.
If the heir apparent fall seriously ill, or the current generation leader, it would be a personal and business tragedy. A good advisory board can play an invaluable role in assisting a family business through difficult times like this. While the family is grieving, they can engage in the business temporarily to hold down the fort, and they can consider what the best options are for the business going forward. Certainly they are not a silver bullet. But they can act as a wonderful safety net if things go wrong in the family business.
As a final point, don’t overlook the possibility of bringing in non-family members to run all or part of the business. My family’s business Olan Mills did this and it worked out very well. There is a difference between owning a business and running a business. Most if not all larger family businesses like Ford, Walmart, and Mars have family members who are owners and sit on the board, however, someone else who is a very good at running the business is the CEO or President.
Losing a key family member in the business is not something anyone wants to think about. Probably the most important thing a family business owner can do is to simply acknowledge that it is a possibility and to recognize the severe consequences of not planning for it. If you can do this, then you are half way there to developing a good contingency plan for you, your family, and your business.