Thursday, October 07, 2010

Entrepreneurs and Succession

In my book, Succession: Are You Ready? I describe the challenge of succession for the CEOs of major corporations. I'd like to address the unique challenges for succession in entrepreneurial family businesses.

My good friend and colleague, Dr. Steven Berglas, and I are currently writing a book that addresses this specific question. Given major demographic trends in the United States, this topic has become more critical today than at any time in our country's history.

Millions of aging Baby Boomers who have founded businesses are now past or approaching the age of sixty. In a related vein, more than half of all family businesses expect a leadership change by 2013.

Entrepreneurial founders can unwittingly sabotage the succession process.

While it is often challenging for major corporate executives to pass the baton of leadership, Steven and I believe that the succession process can be even more difficult for entrepreneurial leaders — especially founders. Whereas corporate CEOs are taught to consider the care and feeding of a successor part of their job description, entrepreneurial founders often avoid even considering succession until those around them start clamoring for the process to begin.

Similarly, corporate leaders are accustomed to making career transitions. They typically start in operational roles or first-line management and work their way up the ladder to the top. By the time they become CEOs they have made many transitions. The same cannot be said for founders. After they start their companies they often remain exclusively committed to the CEO role for decades. On one hand, the extended tenure as "top dog" provides founders great benefits, both personally and professionally. On the other hand, after being in charge of a business for decades, when they contemplate passing the baton they react as anyone would to something very unfamiliar: with trepidation and avoidance.

How Sabotage Occurs

Successful entrepreneurial founders:

* Are usually driven people. They like to win. They are used to relying on themselves — and taking personal responsibility for decisions. It can be very difficult for a driven winner to let go and create an environment where others take the lead and do the winning. This hesitancy can inhibit successful transition — even in cases when the incumbent leader has every intention for the succession to work.

* Are a big deal in their communities. They often play important roles in local society. Leading a successful business brings social prestige and status. It can be hard to give up adoration and respect. While many founders claim to have little interest in social status — they are just as human as the rest of us. The prospect of facing a decline in status can make unconscious sabotage a real possibility.

* Are the go-to people in their world. They are not accustomed to asking for help, assistance, or directions while working their way out of a morass. Unlike corporate CEOs who have many advisors — both right- and left-hand men and women — assisting them. This may seem like a trivial concern — how hard is it to learn to ask for help — but if you have never said, "gimme a hand with this," doing so for the first time at age 60 may feel like an admission of weakness — or even worse — old age!

* Have usually focused on one market over a long period time. They are not jacks-of-all-trades. Corporate leaders generally have to deal with a wide range of products, markets and geographies and get exposed to a variety of jobs (or Boards) they can segue into should they wish to work after passing the baton. Not so for founders. Their specialization and focus on a restricted market niche can make it hard for them to transition to a new role in a different type of business. Facing the prospect of leaving — with no place to go — founders may feel their interests are better served by staying right where they are.

* Often have their name on the door of the business. Even if they don't literally have their name on the door, they are personally identified with the business. It is their business. For founders, leaving the business can feel like leaving an important part of their personal identity. It is hard to be replaced, especially when the replacement is not only doing what you did but becoming who you were.

* Are often parents, whose children may be involved in the succession process. While it can be difficult for corporate leaders to choose between two candidates who are equally respected, it can be much more difficult for founders to choose between two children who they equally love. This Sophie's Choice dilemma may make it harder to decide and easier to postpone the selection decision.

The Good News

The good news for entrepreneurial business founders is that they are inherently less risk averse than "corporate types." In fact, we believe that there exists a direct correlation between the success of the business they must plan to cede control of and their ability to take, or at least tolerate, risks. Therefore, we are confident that once founders makes the decision to engage in succession planning, they can do so with the same passion and commitment that drove them to achieve success in the first place.

Entrepreneurs who create and build businesses from scratch are nothing if not street smart. They know business, as well as the trends that impact businesses. I am not certain that all successful family business founders know this statistic: most (60-70%) of all family businesses that lose a founder to retirement or death are sold or liquidated — i.e. not passed on to the founder's heirs.

Many theories attempt to explain why entrepreneurial ventures fail to thrive under the stewardship of a founder's heirs. Most pin it on the loss of founders' charismatic leadership and their personal devotion to the business. Assuming this is so, the fact that so many founders fail to prepare for the life of their "other child" — the business — after they are gone is very unfortunate.

Suggestions to Founders Who are Facing Succession

Our goal: To prevent the ancient Chinese adage about family firms — Shirtsleeves to shirtsleeves in three generations — from proving true.

Given the devastation brought upon an entrepreneurial venture that has not prepared for a founder's departure, I advise all business founders to follow the procedures outlined below as soon as possible, even if they have no intention of retiring before age 99. It's an ounce of prevention that is worth infinitely more than a pound of cure.

The first step in preparing for an entrepreneurs' passing the baton involves adjusting their perspective vis-à-vis the leadership role they have held:

* In preparing for transition, founders first need to face the reality of the personal dependence that their companies — and their families — may have on them. Founders need to begin managing the practical implications of departure long before they leave the business.

* If founders plan to pass the baton of leadership to their children, they need to realize that this may well become not only a financial drama but also an emotional drama. Surprising heirs and potential leaders after the death of the founder is a terrible idea. Founders need to have thorough communication with family members about both who is going to do what as well as who is going to get what before the actual transition occurs.

* Founders need to pick a successor before they leave, and not put off this difficult decision until the last minute. This can be especially tough for parents, who have to balance their desire for the future success of the business with their desire for the future success of their children.

* Founding parents need to get objective third-party advice during the selection process. Even if the selection decision is made, it can be hard for parents to realistically assess the developmental needs of their own children. We have seen founding parents be both unrealistically positive — and unrealistically negative — about their children's potential for leadership.

* In some cases, eternal advisory boards may facilitate the succession process. Even though the founder may make the final call, family members may be more likely to accept the decision when external advisors make the recommendation.

* Parents and siblings need to be aware of — and avoid whenever possible — a common problem that Dr. Berglas defines as splitting. Splitting occurs when family stakeholders may go to Mom if they don't like what Dad is doing (or vice versa). They may also go to siblings and develop "sides" that end up in conflict. If founders are not careful, the succession process may begin to resemble the Survivor TV series more than an orderly transition that benefits the business. By counseling children about the dangers of splitting before it happens, founders can reduce the odds that it will happen.

In planning for transition, founders need to not only consider the needs of the business, they need to consider their own needs.

* Entrepreneurial founders typically prefer action to introspection. If they do not consider their own needs before the transition, their needs will begin to become obvious as the transition time nears. Transition is challenging — especially for founders. While many founders may seem themselves as tough business people, they may be very emotionally vulnerable when it comes time to let go of their business. By facing up to their own fears and concerns, they can be more honest in communication and planning with successors.

* Family members need to be advised to help more and judge less during the transition process. If family members are aware of the founder's vulnerability during this process they will react more with sympathy — and less with cynicism or judgment. The more supportive the families members are, the more likely the process will work effectively.

* One simple piece of advice that I give any of my friends who are getting a divorce is to reach an agreement as soon as possible. No matter how unfavorable the settlement may seem before the lawyers get involved, it is almost always better (for both parties) than the settlement after the lawyers get involved. I have the same advice for entrepreneurial leaders and their families. Reach an agreement concerning succession — make peace that everyone will not get everything that they want — and live with it. If a founder dies or leaves the business and a legal dispute follows — everyone will probably lose. Lawyers will make lots of money, family members will damage relationships, and competitors will rejoice — and may even recruit family factions to join them.

* Finally, entrepreneurial leaders need to find something else to do before they depart. If they don't, they will probably drive their spouses, adult children, and leaders of their business crazy. By finding work that will provide happiness and meaning after leaving the business, leaders can be much more effective in planning for transition while leading the business.

Life is good.

Marshall

My newest book, MOJO, is a New York Times (advice), Wall Street Journal (business), USAToday (money) and Publisher's Weekly (non-fiction) best seller. It is now available online and at major bookstores.

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