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Family Business - Pitfalls and Positives of Transferring the Business to the Next Generation

The pandemic has been a reminder of just how unpredictable business – and life – can be. As a result, it has put succession planning on the minds of many CEOs who are running family businesses. Some older CEOs are fast-tracking their retirement plans; other family companies want young blood and fresh perspectives at the top as the organization adjusts to new workplace environments, decentralized employees, and a shifting global marketplace.

To help CEO patriarchs and matriarchs start planning for the next generation of leadership, I asked CEO Coaching International’s Ramona Cappello and Mike Marchi to discuss common pros and cons of family succession plans that they’ve addressed with their entrepreneur coaching clients. As you’re working on your own plan, think about how you can harness the positives and mitigate the negatives so that this transition will be a smooth step towards a BIG new chapter for your family business.

Pitfall: Your heirs might not have inherited your values.

Whether you founded this company or inherited your leadership role, your family’s corporate values have probably informed how you do the job of CEO. Being in charge also taught you lessons about work ethic, time management, and decision-making that the smartest kids in the world can’t learn from the best business school. It’s not easy to bridge these differences in experience and perspective. And in some cases, it’s not possible.

“The next generation may not believe what their parents or grandparents did,” says Ramona Cappello. “Or they may decide they want to ‘make their mark’ and deviate from generations of heritage. They may also not be as hard working as previous generations, which can result in employees not feeling as committed or being resentful of a boss whose work ethic they do not respect.”

Executive Coach Ramona Cappello: Dysfunctional family management can create a void in the secondary layer of management.

Another lesson all CEOs learn is the importance of vision and total commitment. Do your heirs see a path for more growth? Are they willing to work hard for it? Or do they just see a comfy corner office that they “deserve”?

Warns Mike Marchi, “If the next generation isn’t passionate about the company and the business, they can destroy the value created by the prior generation by not going all-in as CEO. They might also make poor decisions because they are not as invested in the business as their parents were. Also, if the next generation is not capable of running the business and just get the job because they are the heir, this can also destroy significant company value.”

Positive: Groom your next C-suite your way, on your schedule.

In many cases, the reason an unprepared heir ends up in a job he or she isn’t ready for is a lack of planning. A sudden death, major market shakeup, or revolt in the boardroom isn’t the time to be sorting out who should be in charge. If the CEO has had the long-term foresight to make a long-term family succession plan, he or she has an opportunity to, essentially, interview, train, and hire the best young talent available.

Mike Marchi says this process could be planned out years, or even decades in advance, allowing for some testing and trial and error. “The family can rotate the next generation through multiple functions to learn each function from the ground up,” he says. “They can move the family member outside the company for 3 to 5 years to understand the outside market and then move them back into the company and into multiple functional leadership positions. This gives heirs a chance to really learn the business from the ground up.”

The added benefit of this long-term approach is the CEO can also mold heirs to appreciate what’s special about the company’s culture and values. “CEOs can ensure the family ideals are kept alive and honored,” Ramona Cappello says. “This may happen by exposing, educating, and inspiring them to learn the heritage of the business, while also learning the immense responsibilities of being a member of the family. It also builds the confidence of the individual, as well as that of others in the company to know that this family member has earned the role they are filling.”

CEO Coach Mike Marchi: If the next generation isn’t passionate about the company and the business, they can destroy the value created by the prior generation by not going all-in as CEO..

Pitfall: Not enough top jobs to go around.

What happens when there are too many wannabe CEOs in the proverbial conference room?
Without a clear family succession plan, lots of fighting.

Ramona notes that in some cases, “There may be too many capable family members who refuse to align or work together to lead the company.” But even if every heir is a business genius, family squabbles in the C-suite will only lead to stagnation, bad press, and a dangerous talent drain. After all, the best companies hire the best people, period. What happens if the best CFO candidate isn’t part of the family tree?

“Dysfunctional family management can create a void in the secondary layer of management,” Ramona says. “Top performers see the ceiling to their job potential due to the family holding the top roles in the company. This may result in more turnover at lower levels than is healthy for the organization.”

Mike Marchi says family business owners also risk letting confusion at the top spread to the entire company. He asks, “If I’m a sales manager, whom do I talk to about a major issue? Do I talk to the new CEO? What if I see the old CEO, the mother, in the office? Do I bring an issue to her? What if she tells me to do something different than the new boss? Who’s really in charge? Whom do I follow? Whom do I trust?”

A superstar sales manager isn’t going to wait around for your family to settle on answers. He’s going to start polishing his resume.

If you have a large family and a successful business, there are bound to be some hurt feelings and bruised egos once you settle on an heir apparent. Just remember that shared ownership is no ownership. Ultimately, the most important decisions fall to the CEO – including, in this case, picking your success

Positive: Maintain stability and ownership for generations to come.

Every successful facet of your business requires a BIG vision and an actionable plan to realize it. If your vision doesn’t include a snapshot of your family company once you’re done running it, it’s time to start filling in that part of the picture.

Take a talented child or grandchild under your wing. If they’re already working for your company, are they coasting by on their last name or are they exemplifying the values that make your company special? Are there other places in the company where that heir could gain experience, grow, and flourish?

“The grooming of the next generation has the critical advantage of providing stability for the running of the business,” Ramona says. “This ensures the company maintains a long-term view of growth and financial health. It also creates less volatility given that generations are exposed to the views of the previous generations for decades before they lead the organization.”

That kind of institutional stability isn’t just going to keep your customers and employees happy. It’s going to keep your family’s legacy in the family long after you’ve retired.

“A family member who has been with the company in multiple roles for years will be able to step into the CEO role with minimal disruption,” Mike says. “If groomed properly, the new CEO can keep the company growing. That keeps the legacy and the company values moving in the same direction and lays the groundwork for successful transfer of ownership within the family for multiple generations.”

About CEO Coaching International

CEO Coaching International works with CEOs and their leadership teams to achieve extraordinary results quarter after quarter, year after year. Known globally for its success in coaching growth-focused entrepreneurs to meaningful exits, CEO Coaching International has coached more than 1,000 CEOs and entrepreneurs in more than 60 countries and 45 industries. The coaches at CEO Coaching International are former CEOs, presidents, or executives who have made BIG happen. The firm’s coaches have led double-digit sales and profit growth in businesses ranging in size from startups to over $10 billion, and many are founders that have led their companies through successful eight, nine, and ten-figure exits. Companies working with CEO Coaching International for two years or more have experienced an average revenue CAGR of 31% (2.6X the U.S. average) and an average EBITDA CAGR of 52.3% (more than 5X the U.S. average).

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