How Entrepreneurs Should Handle Succession

Harvard Business Review

October 15, 2009

by Marshall Goldsmith

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.

My last post examined some of the most important factors responsible for this anomaly. This post will provide 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.