Making a nonfamily successor the head of the family business

Setting expectations and redefining roles can ease a leadership transition. 

For family-owned businesses, the dream is often for the next generation to take up the reins and continue the legacy. After all, your business likely represents a significant part of your family wealth, but it’s likely the most significant gain may come when the business is sold. So, it makes sense, for both practical and emotional reasons, to ensure the longevity of the business and the transferability of its inherent value the best way you know how. And that may mean considering a nonfamily member to lead your company into the future, hopefully strengthening it along the way, until you and your family are ready (or need) to sell it.

A nonfamily member may be your best – and sometimes your only – option. We don’t necessarily get to choose when we step aside or whether our children will have the interest or ability to follow in our footsteps. So you’ll need an exit plan you’re comfortable with and allows you to maintain and grow the value of the business you’ve worked so hard to build, especially if its value plays a significant role in your retirement income plan.

Like your other financial plans, succession should be part of your continuing dialogue with your financial advisor and professional team. The specifics of your life and needs will drive the conversation, but the following guidance may help you set the table for those essential discussions. 

Reframe ownership

A family-owned business doesn’t have to be a family-run business. The wealth of a thriving enterprise can provide heirs a foundation for launching new ventures; it’s not uncommon for industrialist parents to pave the way for investor children. Stewardship, not management, then becomes their primary responsibility to the family legacy.

Then, as active owners, your family can continue to express influence on the business without the burden and expectations of executive leadership. There is another potential benefit: As a business grows, so may its list of stakeholders who will desire the stability and continuity that family involvement can provide while also preferring the acumen and experience of a nonfamily executive.

Formalized business governance structures can help preserve a meaningful role for the family while outlining their responsibilities and limitations.

Manage expectations

By being upfront about your plans with your family and senior employees, you may be able to mitigate friction caused by dashed expectations. If you have an heir apparent, make it clear to others who may also harbor a belief that they are next in line.

If you haven’t chosen a successor, make your preferences and criteria for selection clear. For the sake of relationships, your family and your business, it’s best to avoid having a family member or senior employee discover they’ve been working toward something that was always going to be out of reach.

Established family governance documents and business governance structures can be useful tools of prudence and transparency, formalizing decisions in a way that will be clear to all parties while protecting the integrity of the business. They won’t, however, replace candid conversations with your loved ones about their personal goals, your expectations and the needs of the business.

Take action

• Create family governance documents with your financial advisor, family members and professional team
• Let leading family members and employees know your succession goals
• Have ongoing conversations with up-and-coming family members about their goals

Take the time

While the phrase “the boss’s kid” conjures a particular narrative of unearned achievement, “he/she doesn’t get it” may similarly reflect a lack of confidence in a nonfamily successor. When preparing the field for your successor, time can be your ally if you use it well. If you foster a familiar relationship with your senior employees and family members, you can prepare them to have a strong working relationship when you’re ready to step aside.

Take action

• Create opportunities for family members to be involved with the business
• Host social gatherings that include the family, senior employees and potential successors

Manage your risks

Family governance and business governance documents, your estate plan, trusts and insurance coverage all represent different facets of risk management when you are the head of your family and the leader of your business. If you were unable to continue in those roles tomorrow, what happens next? Risk management helps you make your achievements more durable. Make sure it’s in writing.

Take action

• Review life insurance and beneficiaries
• Periodically review estate documents

Explore options

Business succession is a core business governance topic. You may benefit from reading from academic business leaders on the subject; your financial team should have some recommendations.

You may also decide that succession isn’t the right decision for your business. An outright sale of your business, partial sale or licensing of intellectual property may better serve your objectives.

Take action

• Seek advice from your financial advisor and other trusted business leaders
• Discuss alternative succession possibilities

Succession at the intersection of business and family

Succession involves two categories of issues that are utterly unlike one another. The first issues are the practical considerations, including contracts, equity, dividends and fiduciary responsibility. The others are human: love, family values and the expectations we have for one another.

For better or worse, these topics promise to intertwine. Transparency, consistency and communication are the tools of pragmatic business and family management, and through them, you may inspire the continuation of your values and the success of your business.

Sources: World Economic Forum; Harvard Law School; Family Business Magazine; forbes.com

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