Small and family-owned businesses that delay creating succession plans are endangering their company’s survival, according to Henry Hutcheson, founder and president of the consulting group Family Business USA in Chapel Hill, N.C.
“It’s pretty stark if you look at what happens to family-owned businesses after there’s a change in leadership,” Hutcheson said.
Statistics from the U.S. Small Business Administration show that two-thirds of family-owned businesses will not survive a leadership change. Since most small businesses in the United States are initially launched and run by families, the high failure rate has a tremendous impact on the country’s business and job growth—not to mention the thousands of people these businesses employ.
“Succession planning doesn’t have immediate payback, and human nature is to tuck away investment or longer-term projects,” said Les Dakens, a principal with Pineridge Consulting, during a March 2, 2015, roundtable discussion sponsored by the Canadian HR Reporter. “If you’re in a small business, you’ll be faced with a lot of different daily priorities, and your boss most likely isn’t going to be asking you, ‘So how’s your succession planning coming along?’ ”
But delaying succession planning—especially for family businesses, where the decisions are based on emotion as well as strategy and capability—can have fatal consequences for a company, Hutcheson asserted.
“When you are in a family-business situation, decisions on who will be the next CEO can be emotional and not attached to the business reality or strategic plans,” said Hutcheson. “It’s a tough decision to make and often parents want their children or possibly their grandchildren to follow in their footsteps.”
Leadership decisions based on family ties may not match with a company’s business plan or strategy for growth. This disconnect haunts many small to midsize businesses, whether they are family-owned or not, said Paul Juniper, director of the Queen’s University Industrial Relations Centre in Kingston, Ont.
“In smaller-sized companies, succession planning is seldom integrated with the business strategy and just doesn’t connect with the business needs,” Juniper said during the Canadian HR Reporter roundtable discussion.
Hutcheson claimed said that the solution to this problem comes down to the core choice of deciding what’s best for the survival of the business.
“And often what’s best to ensure the success of the business doesn’t match up with the owners’ hope and dreams for their family members,” he said. “Families mean unconditional love and support, but business just isn’t that way. Unconditional love and support don’t equate into profits.”
Hutcheson said human resource professionals can help small business owners create a succession plan based on business needs instead of emotion.
“Some smaller businesses may have an HR person on staff or have someone who handles the HR role, and these people must be key players when developing a good succession plan,” he said. “It can also be a good idea to bring in an outside consultant who will look at the company’s situation objectively. It can be a very tough and emotional decision to make, but if survival of the business is a paramount concern, then this is a decision that must be made.”
No Room for Growth
A conundrum which many growing, smaller-sized employers face is how to attract and hire talent while offering limited opportunities for promotions and career growth. High-potential candidates may find a lot to like in a growing company, but then become quickly disillusioned because a viable succession plan doesn’t exist.
“It can be a huge problem, and many smaller businesses end up losing good people because of it,” said Hutcheson. “In cases like this, honesty is always the best policy. Business owners have to spell out what the person’s role is and what their vision is for the future of the company.”
Hutcheson pointed to several examples where people outside a company were hired as interim CEOs and given the specific goal of mentoring and preparing others to eventually take the reins of the business.
“It does depend a lot on the person hired, and what they want out of their job,” he said. “But that’s part of the process, letting someone know what the expectations are and what their role will be. Everyone has to be on the same page.”
In addition, business leaders need to be flexible and find the best ways to use the talents of people who may not be part of the family or employees who may be newcomers to a growing business. Again, HR has an important role to play by assessing and keeping the business owners informed of their company’s “bench strength.”
“Often, people who have good potential can be overlooked because ‘They aren’t family’ or ‘They weren’t with us from the beginning.’ But that’s not what’s really important here. What’s important is what they bring to the business, and what value they can add,” Hutcheson said.
Leaders who are reluctant to retire or give up control of the business are another huge stumbling block for developing a good succession plan. This problem is prevalent in nearly every size business, but it’s especially problematic in small and family-owned companies.
“I call it the sticky baton syndrome,” Hutcheson said. “Often business owners don’t want to let go. They built the business and in many ways it defines their life and their psychology. So it can be a very tough problem to overcome.”
Some succession planning experts recommend a phased process in which a business owner steps away gradually. By appealing to personal interests, businesses can find and define new roles for their older leaders.
“It’s all about keeping them active and feeling like they are still contributing to the business,” Hutcheson said. “The last thing you want to do in a situation like this is make a business owner feel like they are being pushed to the side for younger blood.”
Helping business leaders prepare to move on and pass “the sticky baton” can be the missing piece to creating an effective succession plan, Hutcheson concluded.
Bill Leonard is a senior writer for SHRM.
Some Executives Doubtful Succession Plans Really Work