Business Succession Planning: What if the next generation isn't ready?

Part six in a series...

For families contemplating a transfer to the next generation, planning is more complicated when the next generation is young, untested, disinterested, or incapable. Typically, families focus on management succession, but ownership succession deserves consideration as well.

Family business owners often envision a graceful handoff from senior management to the next generation – a bit like the performance of the winning team in an Olympic relay race. But what happens if the next generation isn’t ready? One option is to appoint interim management. When I - young lawyer without manufacturing experience - took over as president of our family business, we hired as VP of Manufacturing a retired executive well known in our industry. Roy worked with me for a number of years, offering wise counsel on manufacturing-related issues. Similarly, a trusted non-family executive may be appointed to serve as President and CEO while the next generation earns its stripes. What’s important in these situations is that the family clearly lays out the non-family executive’s role - placeholder, mentor – and that he is well compensated. Few situations can deteriorate faster than a company run by an aspiring non-family executive who is suddenly and without warning or explanation replaced by a family member. Furthermore, the next generation family executive needs to understand that the path to the top job is not necessarily preordained, and that his success will depend in large part on his absorbing as much knowledge and wisdom as possible during the non-family executive’s tenure.

In some cases, a non-family executive has successfully run a family-owned business for many years, even generations, without any family members on the management team. In these situations, there may have been no next generation family member who was interested in or capable of running the company, or the company may have grown to such a size and complexity that it was unrealistic that a family member would have the world-class skill-set required to handle the job. Whenever a family business is run by non-family executives, it is critical that the family exercise its oversight responsibilities – whether as directors or shareholders – with focus and commitment, to ensure that the family’s values and vision continue to guide business planning, and that strategic planning and budgeting reflect the family’s need for distributions and liquidity.

What if no one in the next generation is capable of serving as a director or even a responsible shareholder, whether because of age, incapacity or lack of interest? For some families, it may be time to consider selling the business, particularly if the interests and focus of G2 and G3 are on other worthwhile ventures or activities. For other families, a transfer in trust can provide for ongoing stewardship of business assets for the benefit of the family. The essential element for a trust that will own an operating business is selecting a trustee with the right skill-set. On the business side, the trustee needs to have at least basic business knowledge: a working understanding of business operations, strategy and governance, the ability to read financial statements and reports. On the personal side, the trustee should understand the grantor’s intent, have strong interpersonal skills and have sufficient contact with the beneficiaries to understand their needs. The best trustee will bring useful perspective and experience to the family and the business, and, leading by example, will serve as a mentor and model for the next generation.