The Guide to Family Business Succession Planning

Any business going through a succession process has its challenges, but there are extra elements to family business succession that make the process even more complex. 

Most family businesses operate under the assumption that a son, daughter or other family member will take the top job eventually; but the success of the company depends on its leaders thinking like any other high-growth business. Asking the question: Do we have the skill sets, experience and behaviours within the family to continue the growth of the company? 

The uniqueness of the family business context means there is a higher emotional investment that colours decision making. This guide is aimed at helping family business owners and their investors navigate the complexities of family business succession and offer best practice advice on how to manage the succession planning process.

Contents

• Why family business succession is different

• Challenges to family business succession planning

• Family business succession planning strategies

• How to use people analytics

• A blueprint for family business succession planning

If you would like to learn more about succession planning including what it is and why it’s important to all high-growth companies, not just the family-owned ones, take a look at our Comprehensive Guide to Succession Planning.

Why family business succession is different

A family business is like any other business, except in the most important aspect – its leadership. The desire to maintain a family legacy can have far reaching impacts, especially on its ability to continue to grow, as the capability of its designated successors is based on a familial relationship rather than judgement.

While succession in other kinds of companies is about finding and positioning the best person for the job, family business succession is a transition from one generation to the next; and sometimes keeping leadership within the family can be more of a priority than ensuring a clear growth strategy.

Family leadership has its advantages. The business is the family and the family is the business, so there is a high level of trust between its leaders; and since the business may be the primary source of wealth for the family, there is a shared commitment to its success.

Businesses and people are normally separate entities. A leader can join and leave at any time but when family is involved, people and business are intertwined. As the next generation, the successors grow up immersed in the business. It’s in the workplace and at home.

Ironically family business owners  often miss the purpose of the business. Is their legacy to the next generation the business itself or the wealth that it creates? Predetermined ideas of succession can blind the current generation to the fact that leadership is not necessarily best left in the hands of the next.

Challenges of family business succession

Here are a few of the watch-outs that can be helped by early succession planning.

1. Incompatibility

Good family business succession planning is about choosing judgement over luck. It’s lucky if a son, daughter or wider family member is the right person to become the leader of the company. But you cannot trust the future of a business to luck.

It can be hard to accept, but family may not not always be the best choice. While a family member will often know the business inside and out, they may not have what it takes to continue its success or grow it further it; 

However, even if a key family member is incompatible with a CEO role, this does not mean that they don’t have something to offer the business. It can take time, but finding the right role for them will not only be good for the company but will ensure family harmony.

2.  Functional dysfunction

Like many business leaders, those in family businesses may be self-taught and learn management as they go. The fact that they may have only ever worked for the family business, and this kind of structure is all they’ve ever known, can lead to a kind of dysfunction in the organisation.

Family members being considered as successors need opportunities to learn best-in-class organisational management so they can bring their learnings back to the family.

2. The generational age gap

Even if the next generation is building the skill set required to continue the family business’s growth journey, sometimes they haven’t had time to build relevant experience for a leadership position. For example, if a father or mother is handing down to a son or daughter, there may be as much as a 20-30 year age gap. If a family member is not yet the right person for the job, there needs to be space in the plans for an experienced outsider to take charge in the meantime. 

3. Third generation spread

The handover of a company from the first, founding generation to the second is quite different to the handover from the second to the third. The second has grown up throughout the primary growth journey, watching mum or dad, aunt or uncle, build a business from the ground up.

When it comes time for the third generation, there are usually more children to account for. Siblings and cousins compete for control, and their parents think that their kids are the best choice.

This is a challenge, but it’s also an opportunity to implement the kind of succession planning that keeps the peace but looking at the right roles for the individuals ensuring the company thrives.

Family business succession planning strategies

Now we’ve laid out the challenges, how do we overcome them?

1. Changing the paradigm

A family must get past the idea that their next leader has to be a family member. It might be them, but it shouldn’t have to be. Only once the paradigm of family succession is broken can they approach succession planning in a more effective way. 

2. Clearing the emotional hurdle

A fundamental part of good succession management is to stay objective. This is the case for all successions, but it is especially pertinent when it comes to families. Just starting the conversation is the hardest part of the process.

Staying objective while a part of the family is unrealistic because of the added layer of familial bonds so bringing in a third party to manage honest and open conversations is a must. 

A third party can cut through interpersonal dynamics and assess the potential candidates in the family, looking at their skill sets, experience and behavioural profile, to create an objective assessment of their suitability for leadership. People analytics tools can remove emotion and bias from the succession planning process as they will identify the skill sets and behaviours required to continue to grow the business, and then create a detailed profile of each potential leader in the family to show who is best suited for which part of the business.

Once everyone is presented with a clear mirror of themselves, it can support their own personal development. 

The family member who may have had the weight of expectation on them to become CEO but secretly preferred operations now has the objective backing of data to prove their desired direction right. The father or mother who was unable to tell their beloved child that they didn’t think the top job was for them, can now have someone else do it for them with objective facts and a supportive plan for their role in the future.

3. Maintaining buy-in

Family business succession only works if the key members of the family remain bought into the objective process. The challenge is preventing a reversion to type, giving into emotion and placing a family member in a role before they are ready.

4. Nurturing talent within the family

Once the individuals in the next generation have been assessed, the profile given by people analytics tools will also show where they have potential to further grow and develop. Some family members may have what it takes behaviourally to be a leader, but lack the skills and experience. Creating a personalised leadership development plan for each of them can help them close those gaps and ready themselves forthe future . 

Leadership development can take some time depending on the requirements, so it’s best to start succession planning as early as possible.

See our guide to leadership development programmes for tips on implementing one for your business.

5. Ensure diversity and balance

This is important no matter the type of business. It has been proven that cognitive diversity is linked to higher performance, and a lack of diversity can lead to groupthink. In a management team, groupthink causes complacency, poorer innovation and creativity, as opposing voices are suppressed.

If the succession talent pool is limited to a few family members, support their future success by building a team around them with diverse functional experience and behaviours. A team that is balanced with various behaviours that complement one another is more likely to succeed. They will be able to challenge one another and will avoid a slide into groupthink.

How to best use people analytics

Using data-backed people analytics (such as ours) you can look at the structure needed for a business to scale. It analyses where the business is now, and where you want it to be. It then finds peers, other companies on the same kind of growth journey as you, and studies how they are shaped and how their businesses are built. It finds out what the structure needs to look like, regardless of family ties.

Behaviours over personalities

When assessing potential leaders, a key element of finding their compatibility with senior roles is to understand their innate behaviours and how those behaviours influence their decisions and their interactions with other leaders. While personality traits show "who they are", behaviours show "how they act".

Through our work, we have spent years studying the link between leadership teams and business performance; we have built a model that assesses the behavioural profiles of leaders and leadership teams with a specific focus on the needs of high-growth businesses.

Behavioural assessment tools examine whether people with certain behavioural profiles have what it takes to lead. They offer a detailed analysis, and surface the behaviours of other people that they complement. Our behavioural assessment,PACE, is free to take.

A blueprint for family business succession planning

All companies should conduct succession planning to ensure performance does not drop during a leadership transition. During investment journeys, this is vitally important to remain aligned with the value creation plan.

We have developed a 7 step succession planning framework that family businesses can follow once they are willing to look beyond their family members for leadership roles.

1. Be clear on your value creation plan

2. Identify gaps within a leadership team

3. Identify high-potential talent within the business

4. Model the impact of leadership change before it’s taken

5. Map out the timeline

6. Build development plans 

7. Monitor & ensure the long-term sustainability of your leadership team

You can read more in our article about how to manage succession planning in private equity investment journeys.