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Wednesday, Oct 4, 2023

Families Must Be Comfortable With Succession Issues

If family businesses consistently make one mistake, it’s that they fail to devise succession plans, according to Larry Hollar. Author of “Your Successor’s Binder” and “Keep Your Business Close and Your Family Closer,” Hollar discussed the major challenges family businesses face Sept. 20 in a presentation organized by the Family Business Center at California State University, Northridge. Hollar is president of Rocky Ford, Colo.-based family enterprise Hollar Seeds. He believes a major reason family business owners delay devising succession plans is because they are uncomfortable addressing issues of mortality. “People don’t want to consider their death,” he explained. As a result, such businesses put off setting a date for the elder of the business to leave or fail to put a plan in writing. “What people don’t realize,” said Marta Vago, a family business consultant who sits on the advisory board of CSUN’s Family Business Center, “is that you can have a succession scenario without somebody having to die.” Discomfort with death isn’t the only reason family business owners oft delay devising succession plans. Family Business Center director David T. Russell said that, to an extent, the set-up of the businesses themselves are to blame. “Family business by definition are usually formed in an informal way,” he said. “That, plus the pressing nature of business and growth (detracts from) addressing many of the issues that come out in such a succession planning. Because you’re trying to meet payroll and trying to grow the business, things that might seem of a less pressing nature (are forgotten).” Back and forth When family businesses delay creating a succession plan it can result in the elder of the business bouncing in and out of retirement, a move that can be damaging to a company if the elder is no longer as savvy about operations as in the past. “A lot of entrepreneurs really don’t want to retire,” Vago said. “Entrepreneurs work 16 hours a day. All of a sudden there’s nothing to do. Often, they don’t have hobbies, so they go to work because they have nothing else to do. This gets in the way of a successful succession.” In some instances, particularly when the company founder’s view is that he is the company and the company is he, succession is not contemplated at all. “They never consider leaving,” Hollar said. Vago suggests that family business owners read books about succession planning if they need guidance about the process because “the last thing a business can afford is a big surprise at the leadership level,” she said. When families are lacking such plans they may not have the right people in the right place at the right time, she added. “It isn’t a smooth transition from one leader to another. The sad thing is that many family businesses go out of business because they botch their succession. They weren’t proactive enough. They waited for someone to die or someone to become incapacitated.” Advice from outsiders In addition to succession planning, another challenge family businesses face is obtaining input from non-relatives. “I feel very strongly that family businesses ought to be getting advice from outsiders,” Hollar said. At present, Hollar Seeds has one outside advisor to its board of directors. “If I could make my personal wish come true, we would have three outsiders on the board along with the four that are currently there.” Hollar, however, has had trouble convincing his colleagues of that due to concerns about confidentiality. “Family businesses by nature are very secretive,” he explained. Vago is familiar with the reluctance of family business owners to bring in an outside viewpoint. But, she argues, “if you’re only talking to the same people all the time, you’re going to lose touch with what’s going on outside.” By allowing outside input, family businesses may be able to access information and expertise that those on their boards may lack. “Many go out of business because they don’t allow new information to come in,” Vago said. “They’re too nearsighted. In the meantime, the marketplace is changing. It has become a global marketplace, and a lot of family businesses are not keeping up.” Moreover, outside advisors may be able to reduce tension and react levelheadedly when the family members in the business struggle to leave their emotions out of the matters at hand, according to Vago. That brings to mind the fostering of harmonious relationships between family members another major issue with which family businesses struggle. “The solution to that challenge is communication,” Hollar said. This means distinguishing the roles family members have in an enterprise. “Understand the difference between what it means to be a family member, what it means to be an owner and what it means for the business to be run in an effective manner,” Vago said. “What role is a person playing when they are talking to each other? Is a father criticizing a son, or is a boss giving a negative evaluation to an employee?” One way to make roles clear from the outset is to make sure that each family member applies for a position within the company. Even better would be if each family member was actually qualified to perform whatever duties their job title dictates. Related to this is the role of shareholders in a business. “People confuse the rights of ownership with management,” Vago declared. “A family member who owns shares in a business they think that gives them the right to butt into the business [operations], even though they’re not running the business.” It’s also important to determine what role in-laws will play in the business. Larry Hollar said that his son-in-law, a co-owner of Hollar Seeds, will stay on in that capacity even if he divorces his daughter. “A lot of families are very conflicted around that,” Vago said. “Some families discourage in-laws from working in the business just in case there is a divorce. The culture of the family has the most to do with whether this is a good idea or not. Some families will find it completely unacceptable. I suspect if it (divorce) were to happen it would work if the family has a mutually respectful relationship.” Balance in one’s life, in the family and in the business, alike, is key, according to Russell. “If you keep yourself in balance, and you have the right approach to family business, that is, treating your family as family, but also keeping some of those business issues at arm’s length, you have a better chance of being successful,” he said. “Treat people with respect both inside and outside the family. Planning and treating people with respect doesn’t guarantee success but it improves the chance of it.” Russell also believes that it’s important not just to write down a succession plan but one’s long-term vision of a business. “Memorialize many of the things that you want your family business to pursue, and, if you’re unavoidably detained or hospitalized, or, if you pass way, there will be a much better chance that the business will succeed in your absence,” he said.

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