Why Succession Planning Matters

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Owners need to plan for who's going to run the company, who's going to own it, and how taxes will be kept in check. Each will require different planning techniques, and trade-offs are inevitable.

Management succession planning frequently faces the problem of too many offspring wanting the top job. When that happens, current leadership often has to dispense with the ideal of giving everyone equal power and offer controlling interest to the person or persons best prepared. On the other hand, it is possible that no one from the next generation is interested in or capable of leading. In that case, you may have to go outside and find the best-matched candidate—which requires a very different skill set.

Saving the Life of a Business

Ownership succession is usually split from management succession because next-generation members may want to retain their equity in the business, but not take on significant operating roles at the company. You may want to give exactly equal shares to everyone, but those who work in the business may feel they are entitled to more. Likewise, those who don't work in the business may feel the same way about their own shares. After all, they may reason, they're not drawing salaries, so they should get a bigger share of dividends and profit-sharing.

Tax planning means dealing with technicalities. Various documents and structures, ranging from trusts to buy-sell agreements to appropriate insurance, will likely reduce taxes or provide resources to pay them or both. While it may seem macabre to plan so carefully for what may turn out to be the founder's unexpected death, the importance of tax planning cannot be understated. A few dollars and a few hours drawing up the right documents today can literally save your business' life later (see BusinessWeek SmallBiz, June/July 2007, "Creating a Legacy").

Upon gaining an appreciation for the complexities and significance of succession planning, you are ready for the next step: involving others. Bring the family into the planning. Getting the heirs in now will reduce the likelihood of problems later. Moreover, consider talking to key nonfamily employees, important stakeholders, and professional advisers. Getting broad support will make all the difference during the unsettled period surrounding a business transition.

Having a Clear Leader Is Key

When talking to others about succession, realism must be your foundation. This is no time for wishful thinking, hoping that an uninterested or incapable son or daughter will suddenly become full of passion and business skills. Objectively evaluate—ideally with the help of knowledgeable outsiders—candidates for their experience and potential. After this tough decision, take the systematic steps to pass the reins of leadership. This may take some time, but remember, the best successions are those that end with a clean and certain break. In other words, after you give up the reins, get off the wagon.

Don't get too caught up in fairness and equity. Sometimes the best thing for everyone is to have a clear leader in whom the most power is vested. As part of your realistic evaluation, decide whether it's best to have equal shares of ownership and influence for everyone, or whether the potential for conflict will make it better to have someone who can make decisions without waiting for consensus.

Now it's time to develop the next generation. Set objective standards for the skills and experience the job will require, then promote the candidates' education and work experience, both inside and outside the family business. This step in particular may require several years, which is why it's important to start planning now.

Get Professional Help

Finally, seek outside help. Even if you would never use an outside adviser for any other decision, consider the value that an experienced professional can bring to this important event. In case you balk at the possible expense or the distraction on top of your other duties, consider that poor succession planning is more likely to sink your company than any other risk. And just by doing it you'll place yourself in an elite group. Unlike the vast majority of those who ignore succession planning, you'll be working to reap the rewards of succession in a different and smarter way.

Unlike Sumner Redstone, you may never preside over an $8 billion empire. But your business life does share one common element with Redstone and all other leaders of family businesses: the puzzle of planning for your own succession. And, as Redstone's latest troubles illustrate, no time is too early to start considering this issue and building your skills, because you may be doing it—again and again—even when you're nearly 20 years past traditional retirement age.

James Olan Hutcheson is the founder and president of ReGeneration Partners, a consulting group that works exclusively with family-owned and family-managed enterprises. He writes a monthly columnon family business.