How to discern if succession planning is right for your business and the steps you should take to prepare for it.
My grandfather was proprietor of a furniture shop in a rural town in Pennsylvania. A third-generation business, it was not only a prominent fixture in the small, close-knit community for decades but also the source that provided a comfortable living for a long lineage of families, including my father’s and his siblings. I have many fond memories of our monthly visits and spending time helping my grandfather in the shop and never expected that, when he was ready to retire and pass the baton of ownership, no one in the extended family would step forward. While it surprised me, it also sparked a curiosity early on about entrepreneurship and building a business, particularly what it takes to start one and keep it going.
At minimum, a conversation about the value of business continuity is essential long before a founder or current owner steps downs. And here’s why: Not every business is suited for succession. My grandfather’s furniture store offers a great example because, among the most critical factors, having someone other than the owner feeling that same connection to the business ranks at the top.
While not all family-owned businesses reach the heights of a Walmart, Berkshire Hathaway or Ford Motor Company, they are an American cornerstone and foundational to the U.S. economy. According to SCORE (Service Corps of Retired Executives), these businesses employ 60% of the U.S. workforce—accounting for 78% of all new jobs generated and 64% of the gross domestic product (GDP). Even among the most successful, however, only 30% survive a second generation, 12% a third generation and 3% more than a fourth and beyond, attributing successful ownership transfer to good governance and positive culture.
Once the conversation determining the likelihood of business continuity takes places, the next step is developing a plan, which begins with defining a vision for growth and the people who will rise to the occasion. Many people assume successful business owners began with lofty goals, but most often the opposite is true. Consider Sam Walton, founder of Walmart. In his book, Made in America: My Story, Walton explains why he opened a 5&10 store in Bentonville, Arkansas after gaining some retail experience when he returned from serving in the army. In addition to his desire to offer lower prices and provide excellent customer service, he wanted to accommodate his wife’s preference to live in a small town and his enjoyment of hunting, which the region offered. This clear vision was enough to drive the success of his first store and the eventual opening of the first Walmart in Rogers, Arkansas in 1962 at the age of 44.
Walton credits the success of Walmart, which went public just eight years later, to 10 core principles, including a shared vision among employees to bring more value to customers, as well as a share in profits. Fifty years later, Walmart is the world’s largest retailer, with approximately half the stock owned by members of the Walton family—now the richest family in America.
With a clear vision for growth, the next logical step is to take inventory of people and their unique skills to identify high-potential leadership talent from within and outside of the family. It’s important to recognize competencies and leadership characteristics such as being a forward thinker with the ability to see behind corners, anticipate change and embrace new technologies while inspiring teams on the path to growth.
According to family business succession-planning experts like Egon Zehnder, the hierarchy for leadership consideration should start several years in advance, focusing on family first, followed by internal talent and finally external executives who fit the culture and embrace the values. It’s important to note that the best and most suitable successors don’t necessarily come from the inside. Conducting global research with 50 leading family-owned businesses, the firm found that 38% of CEOs were family members. Of the 62% from outside the family, 54% were promoted from within while 46% were external hires.
Gaining institutional knowledge and giving the successor time to learn and develop is also an obvious step toward a successful transition. Where that is achieved, however, is less apparent. It is not uncommon for a family member or members to gain industry experience outside of the family business before returning to prepare for leadership roles. This not only increases credibility with non-family members in the business but also can help boost the individual’s confidence. It also provides an opportunity to learn a business or industry from other perspectives and bring new skills to the role, which can be invaluable.
Finally, it sends a message that the family leader is willing to let members explore other career paths and make choices on their own rather than fall into the entitlement trap of handing a business to an inexperienced and ill-prepared family member, which can deeply impact company morale and motivation. It happens more often than not, which is why so many successors are chosen from outside the family. In any case, it is important to keep family members engaged, whether on advisory boards and committees or as major shareholders if the company goes public.
When done right, succession planning can usurp significant challenges, many of which result from assumptions that the next generation will want to take over, or that there is plenty of time to prepare. Considering the rapid pace of changing customer demographics and advancing technology, succession planning should be a strategic part of building a family-owned business from the start. Particularly now as the shift to digital is upon us, there is no better time than the present to begin the conversation.
