There’s an old saying regarding family-owned businesses: “Shirtsleeves to shirtsleeves in three generations.” It means the first-generation owner started in shirtsleeves and built the company up from nothing but, by the third generation, the would-be owner is back in shirtsleeves with nothing because the business failed or was sold.
Although you can’t guarantee your company will buck this trend, you can take extra care when choosing a successor to give your family business a fighting chance. Here are seven steps to consider:
1. Make no assumptions. Many business owners assume their son or daughter wants to run the company or that a particular child is right for the role. But such an assumption can doom the company and create a miserable situation for the child.
2. Decide which family members are viable candidates if any. External parties such as professional advisors or an advisory board can provide invaluable input. Outsiders are more likely to be impartial and have no vested interest in your decision. They might help you realize that someone who’s not in your family is the best choice.
3. Look at skills and temperament. Once you’ve settled on a few candidates, hold private meetings with each to discuss the leadership role. Get a feel for whether anyone you’re considering may lack the skills, temperament, or interest to run the business.
4. Give each candidate a fair shot. Treat your business like what it is, a business. Like any public company, you should allow each qualified candidate to take on responsibilities and prove their worth to you and their potential future employees.
5. Rotate the jobs each candidate performs. Let them gain experience in different areas of the business, gradually increase their responsibilities and set more rigorous goals. You’ll groom not only a better leader but also create a more in-depth management team.
6. Communicate your decision. After a reasonable period, pick your successor. Meet with your chosen candidate to discuss the timeline, future compensation, and financial structure of this transition. Be sure to sit down with those not selected and explain your choice. Be forewarned: This can be a difficult, emotional time for family members.
7. Work with your successor for a smooth transition of power.Once you’ve picked a successor, he or she effectively becomes a business partner. It’s up to the two of you to gradually shift responsibilities from one generation to the next. Don’t underestimate the human element and how much time and effort will be required to make this succession work. And don’t forget, we’re here help you meet and overcome these critical challenges.