Have you watched the television show “Succession?” And who hasn’t? Logan Roy is trying to figure out who should head up his company – Waystar Royco. Are you struggling with the same question with your family business? What if it is time to think about passing your company on to the next generation, but, there is no one ready to pass it to?
Don’t panic! The situation arises more frequently these days for several reasons. It could be you have no children to pass the company to, there could be a lack of trust in the offspring to lead the company, a lack of interest in the heirs or a conflict between family members when it is time to pass the reins.
There are other options which include transitioning the business to outside leadership – perhaps while a family heir is being groomed – or to its employees through an employee stock ownership plan, or ESOP; selling the business; or simply closing it.
Often, the reflexive response is to sell. Given today’s pace of disruptive change, no one will fault you since the market for private companies continues strong. Plus, financial advisors and attorneys assisting owners in such succession matters are typically incented to advise selling the business (if they generate revenue only when a transaction occurs, as is often the case).
In my experience family owners move too quickly to a sale. Instead, they should consider all the alternatives and benefits that can derive from keeping the business operating as a family concern. This is an area I have spent much time talking to company owners about all their ownership alternatives.
First, take an honest and dispassionate reality check and determine if the business truly possesses the requisite capital, products, infrastructure, leadership, committed employees and innovation to continue to thrive. If it does not, a sale may maximize value. But if the business possesses these critical strengths, then the family can create more wealth by continuing to operate it.
According to a study conducted by KMPG and the Step Project the family business leaders in their study stated that choosing the right successor will, indeed, be their most important legacy and a moment of personal pride.
In determining what to do, an owner should ask these questions: How important is the business to the family and its legacy? Are you sensitive to the disruption a sale will have on employees? On your community? Have you considered an ESOP? Who within the family could be groomed to take charge? And can an outsider as CEO keep a strong family business thriving?
If your answers incline you towards keeping the company, two approaches exist for bringing forward the next CEO for a family business when one is not immediately present:
No. 1: Coach a family member Remember, the second generation needn’t be a carbon copy of the successful founder, because those skills aren’t necessarily what’s needed in the next generation(s). What’s generally required is engagement, pride and commitment.
Indeed, mapping skills needed for the business against those of possible future family leaders or employees should be ongoing. There is a wealth of training and coaching opportunities that exist for family businesses. Coaching can bring forward the skills necessary.
No. 2: Hire an outside CEO. Yes, this takes time. Typically, it requires six months to find the person and another six months to know if the executive is a good fit. If it is, the outsider can be hired for the long-term or act as the regent until the likely family heir develops the necessary leadership skills. Compensation should be structured to reward performance and, if the executive will be handing over the reins, to encourage turning the business over in good shape.
Be mindful that it may take more than once to bring the right outsider onboard. That was the experience of one of my clients, a nationally known family-owned company, whose second outside president, who had worked with the company at one time, was the right person to lead the company. Now president and chief operating officer, he became CEO in 2020 when the chairperson and CEO, the daughter of the founder, retired. Since he joined as No. 2, the business has continued to thrive.
The message here: Don’t despair and rush to sell your business if an heir isn’t apparent. With the investment of some energy and time, alternatives that can keep the business in the family and retain its distinct culture and values are at hand. I’d love to sit down with Logan Roy and talk about his options.