Why Family Businesses Ignore Succession Planning

By Robert Gariano

Many famous Chicago companies began as family businesses and have grown into successful and profitable enterprises. Companies like Grainger (NYSE:GWW), Oil-Dri (NYSE:ODC), Northern Trust (NASDAQ:NTRS), and John Sanfillipo & Son (NASDAQ:JBSS) are all examples of valuable publicly traded companies that were started by families in the Chicago area.

There is one attribute that all of the early leaders these successful companies possessed that allowed their businesses to grow into major companies. The founders of these companies were all committed to the long term growth of their businesses through leadership development. They all recognized that the businesses with the most talented leadership invariably won in the competitive marketplace. Success and growth involved a commitment to succession planning and leadership development.

Despite the obvious benefits of leadership development and succession planning many privately owned companies avoid this critical activity.  Founders of smaller companies with big ambitions should recognize these inhibitions and take steps to overcome them. There are at least five reasons that founders delay or avoid succession planning steps. Careful consideration can remove these obstacles to growth.

1.    Many founders of successful businesses are reluctant to give up control of the business and allow other leaders to take the reins of their company. It is true that new leaders may take the business into new areas and change the practices that have initially brought success to the enterprise. Nevertheless, with an involved board and a strong set of embedded values, these new ideas and directions will usually be a source of strength and opportunity for the enterprise. As one founder said as he heard ideas from the new leader recruited to take his company public, “We have to recognize that a new broom sweeps clean.”

2.    There are many variables involved in succession planning. The founder may be tempted to wait for a comprehensive and complete solution before deciding on new leadership actions. There are complicated questions of estate planning, board involvement, family aspirations, and business direction that must be considered. The founder should recognize that there is never a complete and perfect plan. The founder should start with a basic plan and then begin to tailor the individual steps to fit the emerging situation. A business founder who led his company through a successful initial public offering said, “Our plans changed several times in the months before the ipo as the market and competition changed, but we were always ready to chang the details of our plan to suit the situation. We were always ready to skate towards the puck.”

3.    Succession planning involves making difficult human decisions that can hurt peoples’ feelings. The founder should remember that delaying difficult leadership decisions can make these decisions even more difficult later and, if ignored, may finally endanger the entire enterprise. Thoughtful and logical succession planning includes performance evaluations and honest discussions with individuals in the business. While sometimes these discussions are difficult, candid discussions are almost never unexpected and usually turn into constructive actions.

4.    Often the founder says that she is too busy to do thoughtful succession planning and that hiring experts to help can be expensive and intrusive. But in retrospect, there is no more important role for the founder. The process of developing and recruiting the next generation of leaders for the company may be the single most important legacy that any founder can leave for their company. Without long term leadership plans, the growth and prosperity of the enterprise will be threatened. Customers, employees, and all the other constituents of the company rely upon the founder to lay the foundation for the future leadership of the business.

5.    Many small company leaders feel that their companies are too small to have a succession plan. They dread the odor of bureaucracy that might be a part of the performance evaluation process. However, the best and most talented people join companies that have growth plans that pave the way for exciting and competitive future growth. The most talented employees expect to have honest discussions about their work. They want to work for companies that provide training and career opportunities. These ideas are not confined to big organizations with extensive human resource departments. Even small companies should recognize the value of leadership development in attracting talent and building the value of the company. The best employees today expect to be part of such teams.

Starting a new business is a bold adventure in our environment of complex regulations and a rapidly changing, technically sophisticated global market place. As the new enterprise grows the founder will need to begin making plans for the business to prosper well into the future. This may require accessing capital through an initial public offering, allocating ownership among a new generation of shareholders, or simply growing into new products and geographies. All of these plans should be based on a foundation of succession planning and leadership development. There is no greater or more valuable legacy for the founder than ensuring that the enterprise has talented and committed leadership as a foundation for future growth.