Psychology of Succession Planning

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• Psychology of Succession Planning
• Guess Whos (Not) Coming to Dinner
• Presented by
• Dennis I. Blender, Ph.D.

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• Every family
• is
• unique

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• Every family
• is
• uniquely
• the same

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Family Business Model
Business
Family
Ownership
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Family Business Model 1 Family
member 2 Staff member (non-family, not an
owner) 3 Owner (non-family member, not working
in business) 4 Family member in the business 5
Family member/owner, not in business 6 Staff
member, owner, not family 7 Family member,
owner, in business
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2
1
7
5
6
1
3
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Business
Family
Ownership

• Family Business Model
• Family
• Structure
• Values, traditions
• Family system dynamics
• Business
• Industry, size
• Life cycle
• Strategy, culture
• Ownership
• Structure
• Distribution
• Governance

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Family Businesses inthe United States

• Family firms comprise 80-90 of all business
  enterprises in North America.
• Family owned businesses account for
• 37 of Fortune 500 companies,
• 60 of all public companies,
• 78 of all new jobs,
• 60 of total U.S. employment.
• 30 of family-owned firms survive into the second
  generation. 12 will survive into the third
  generation. 3 operate at fourth generation and
  beyond.
• By 2005, virtually all closely-held and
  family-owned businesses will lose their primary
  owner to death or retirement ( post-WWII
  generation entrepreneurs).

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Family Businesses inthe United States

• 3 primary causes of failure of family-owned
  firms
• Inadequate estate planning,
• Failure to prepare and provide for transition to
  the next generation, and
• Lack of funds to pay estate taxes.
• The founders death precipitates nearly 50 of
  family firms to collapse.
• Fewer than 30 of family-owned firms have a
  written strategic plan.
• 43 of family-owned businesses will have changed
  leadership hands by 2003.
• More than 25 of family firms expect the next CEO
  to be a woman.

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Family Businesses inthe United States

• 70 of family business owners cite life insurance
  as their top source of funds to pay for death
  taxes.
• 25 of senior generation family business
  shareholders have not completed any estate
  planning other than writing a will.
• 81 want the business to stay in the family.
• 20 are not confident of the next generations
  commitment to the business.
• Of primary importance among family firm wealth
  holders is not only transferring their financial
  wealth but also transferring their values
  surrounding their wealth.
• The oldest family-owned business operating in the
  U.S. Zildjian Cymbal Co. founded in 1623 in
  Constantinople (and moved to U.S. in 1929).

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Continuing Evolution of the Family, the
Business, and Ownership
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Family Axis

• Young Business Family
• Adults under 40, kids under 18
• Creating workable family, marriage
• Work-family balance
• Entering the Business
• Adults between 35-55, kids in teens, twenties
• Managing midlife transition
• Independence of children
• Facilitating a process for initial career
  decisions
• Working Together
• Adults between 50-65, kids between 20-45
• Cross-generational cooperation, communication
• Encouraging positive conflict management
• Passing the Baton
• Adults 60
• Senior generation disengagement
• Generational transfer of leadership

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Business Axis

• Start-up
• Informal organization structure
• Simple model (one product, service)
• Survival
• Expansion/Formalization
• Increasing structure, multiple products lines
• Evolving owner role and professionalism
• Strategic planning policies, systems
• Cash management
• Maturity
• Stable (or declining) customer base
• Well-established routines
• Strategic re-focus, re-investment
• Management/ownership commitment - variable
• Rejuvenation
• New strategic direction
• Renewed commitment, leadership
• Willing to change, re-direct

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Ownership Axis

• Controlling Owner
• Ownership control in one individual
• Generating capital
• Balancing control with other stakeholders
• Choosing next generation
• Sibling Partnership
• Two or more siblings
• Developing shared control
• Defining roles of non-employed owners
• Retaining capital
• Controlling family branches
• Cousin Consortium
• Many cousin shareholders
• Mixture of employed and non-employed owners
• Managing complexity of family
• Creating family business capital market

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Common Transition Stage

• Family - Passing the Baton
• Leadership transfer
• Founders willingness to release control
• Next generations ability to assume control
• Founder looking at retirement
• Next generation looking to make their mark
• Business Maturity
• Examining the current state of the business
• Establishing new strategic direction
• Determining needs of the business (financial,
  human resources, etc)
• Ownership - Controlling Owner
• Passing ownership to others
• Passing control to others
• Understanding needs of different generations
• Psychological readiness to move forward

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The Family Dream
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• The Family Dream
• A deeply held vision of the family business in
  the future
• An imagined possibility that generates
  excitement and commitment.
• Serves as a beacon.
• Adds meaning, purpose and inspiration.
• Helps rank priorities and guides decision
  making.
• Individual dreams of the founder are usually
  connected to aspirations for the family business.
• Not all family members share the same dream
• Place to work
• Place for my children to work
• Source of unlimited income
• Opportunity for a legacy

Business
Ownership
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Clandestine Planning
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The Psychology of Transition

• Common sources of succession conflict
• Leadership
• Who will be next leader?
• Control
• How to share, empower, distribute?
• New vs. old
• Products
• Procedures
• People
• Sharing between the ins and outs
• Family vs. family
• Family vs. non-family
• Transition timing
• Black sheep and the prodigal son/daughter
• Blood vs. marriage
• Compensation
• Internal vs. external equity

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The Psychology of Transition

• Family Patterns
• Traditions and values
• Methods of communication
• Enmeshment and disengaged
• Degree of triangulation

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The Psychology of Transition

• Individual Patterns
• Personal dreams and aspirations
• Developmental stage
• Assessment of skills and abilities

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Conflict Resolution
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The Psychology of Transition

• Methods of Conflict Resolution - Intrapersonal
• Minority decisions
• Majority decisions
• Compromise
• Consensus/win-win
• No deal
• Methods of Conflict Resolution - Interpersonal
• Withdrawers
• Smoothers
• Compromisers
• Fighters
• Problem solvers

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The Psychology of Transition

• Promoting Healthy Dialogue
• Mutual purpose
• Mutual trust and respect
• Mutual communication and meaning

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The Psychology of Transition
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The Psychology of Transition

• Successor Selection
• Identify future business challenges
• Define strategic implications
• Develop leadership requirements
• Gather information about likely candidates
• Internal and external
• Assess candidates capabilities
• Skills, abilities, personality
• Strengths and weaknesses
• Perceptions of others

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The Psychology of Transition

• Successor Selection (continued)
• 6. Internal candidates
• a) Competence
• b) Time to develop
• 7. External candidates
• a) Compatibility
• 8. Proceed with choice
• a) Implications, consequences
• b) Establish time table
• 9. Make announcement
• 10. Cross fingers

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• The Psychology of
  Transition
• General Observations
• Succession is a journey. To succeed, the family
  must keep the ultimate destination in mind.
• Succession is often driven by the biological
  clock.
• Transitions are normal and predictable.
• Family patterns are easy to identify and
  extremely hard to change.
• An active, deliberative exploration of all
  options and implications is critical to
  successful planning.
• Consider the short-term and long-term interests
  of the business and family members.
• Continuity planning requires anticipating future
  challenges and developing strategies to address
  them before they happen.

Business
Ownership
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BCG Principles and Approach

• The family business is the client.
• Respect and honor the preservation of the family
  values.
• Use knowledge, experience and observations to
  educate and anticipate likely results.
• Facilitate goal setting and implementation
  strategies without being judgmental.
• Facilitate solutions through dialogue and
  communication.
• Collaboration amongst professionals through an
  interdisciplinary approach best serves the
  clients needs.