Next in line: Why grooming a successor is critical to a family business
by Sarah Manning | October 3, 2016 10:28 am
By Danielle Walsh
Who will lead the family business once I am gone? What will happen to my retirement when the next generation takes over? How can I tell my daughter she just isn’t ready to lead?
These are just a few of the questions that can keep a family business owner up at night—and for very good reason. We often assume that since the next generation has been exposed to the family business and its owners from a young age, they will have absorbed—as if through osmosis—much of the skills required to manage or lead it. However, this is very rarely the case.
That’s why a formal grooming process is an integral component of a successful family business succession plan.
Raising the comfort level
Any successful family business succession process requires ensuring the current owners are comfortable with the skills, knowledge, management style (e.g. behaviour, leadership), work ethic, and commitment of the potential successor to effectively transition the operating controls and, eventually, ownership. This also helps to bring comfort with respect to the future of the current owners’ retirement. Further, it is equally important the next generation be comfortable with the succession plan and the expectations with respect to their role in it.
It should be noted the committed successor usually welcomes a grooming plan, as managing and owning the family business does come with a fair amount of pressure. I have seen far too many next-generation successors look 10 to 15 years older than they really are due to the stress of managing the business and the family. Doing so is no small task and often the next generation is unable to manage in the same way the older generation did, which can make the changes difficult on everyone, including employees and extended family. By implementing a grooming plan, stakeholders can see the next generation is acquiring the necessary skills to become a competent manager, leader, and/or owner.
Education is not enough to prepare a potential successor to lead the family business. Of course, requiring family members to hold a certain level of education to be employed or become part of management is a sound family business practice. However, it simply isn’t enough to develop competent and responsible next-generation leaders and owners. The following is an outline for developing an effective grooming plan.
Current position
The grooming plan starts by identifying the current position of the individual being groomed within the company or the position he or she will occupy when they begin the process. In other words, what is their current job description and where are they currently situated on the organizational chart. If you do not have job descriptions or an organizational chart, you should consider developing these as your benchmark for the grooming process.
Desired position
The grooming plan outlines the desired position at the end of the grooming period. In other words, what will the desired position/title and job description be at the end of the process? What will the new organizational chart look like when they take up that position? For example, over the next three to five years, XYZ will be groomed to become the CEO of the family business. By the end of the grooming period, he will have earned the privilege of becoming a responsible owner. Ideally, the grooming plan would include a job description for the desired role and a revised organizational chart outlining the new positions. The use of job descriptions and organizational charts is to provide clarity with respect to who reports to whom now and in the future.
Mentors
Each of the individuals being groomed should be assigned a ‘mentor(s)’ to guide them through the grooming period. If at all possible, this should not be a direct family member. Ideally, the mentor would be an existing owner or senior manager who is working in the area in which the successor is being groomed. If that is not feasible, a trusted and seasoned employee (whether active or retired) would make a good mentor. The mentor may need to change as the grooming plans unfold.
Performance reviews
The individuals being groomed should undergo a performance review based on their current positions in the company, including a self-assessment component at the start of the process as a benchmark for their grooming. This performance review would continue at three-month or six-month intervals for the duration of the grooming period. If the individual being groomed is new to the family business, the self-assessment would still be conducted. The initial and ongoing performance reviews for those already in the business would require input from not only their respective mentors, but from key employees, as well as all the owners. The performance reviews do not need to identify who is providing the feedback, since this could create some discomfort for those conducting the reviews. The results can be consolidated and shared with the potential successor.
Learning objectives
The grooming plan outlines the learning objectives along the way, as well as how they are to be achieved in a type of ‘time and event schedule.’ If you start with a skills assessment, it is easier to identify gaps and plan accordingly. For example:
- What skill does the successor need to acquire or improve upon and over what time frame?
- What internal training is required to achieve the desired outcome and how should it be implemented? Further, who is the appropriate person to provide it?
- What external training is required and how is it best achieved?
- What continuing education would the successor benefit from?
- What professional and business associations should they join?
Reporting
To whom does the successor report as he or she progresses along their respective grooming plans? This may change over the grooming period. Again, it is better to ensure the successor is not reporting to direct family members, as this can cause some issues with respect to accountability.
Compensation
How will the successor be compensated over the grooming period? Is the current compensation in line with fair market value (i.e. what you would pay a non-family member to do the same job)? Is compensation while being groomed in line with fair market value and what will the compensation package be at the end of the grooming period, assuming the successor successfully completes the process?
Flexibility
Grooming plans tend to be fluid and may need to change over time to accommodate business and individual grooming needs. All changes need to be approved in writing by the successor.
Assessment
At the end of the grooming period, the potential successor would be assessed by the owners with feedback from the mentor(s) and other key senior employees as to their readiness and effectiveness in assuming their new role and to become future owners.
Continuing education
The family business could commit to a process of continuing education for the potential successor, including courses and conferences related to the jewellery industry, and the field of family enterprise.
Accountability
Ideally, the person being groomed should develop the first draft of their grooming plan with an active family member once the desired future position is determined and the initial benchmark evaluation is done. The draft is then refined and approved by the owners and the mentor(s) and select members of senior management (if deemed appropriate). Once agreed by all, the parties should sign off. For a potential successor who is new to the family business, the grooming plan will need to be developed by the current ownership group, along with their senior management team. The family members being groomed are considered the ‘owners’ of their grooming plans and as such, it is up to them to make sure it gets executed to the best of their ability.
Communications
The existence of the grooming plans (not necessarily all the details) should be shared with the broader family when it holds its annual ‘family council meeting’ to talk about the overall succession plans.
Handing over the reins
Grooming plans are meant to help potential successors gain practical experience and knowledge, as well as confidence as managers and leaders. This process also helps the next generation earn the respect of employees and senior managers while they are working toward acquiring new skills. Another important aspect of the grooming plan is to get the next generation working with other non-family managers to slowly transfer allegiance to the successor. All of this should, in turn, help the current owners feel more comfortable and confident when it comes to relinquishing control.
Grooming plans should be used in conjunction with a set of family business rules outlining the employment, management, and ownership criteria for family members. Having clear requirements can help remove emotions from decision-making, which should allow for better business decisions, while reducing conflict amongst family members.
Danielle Walsh is founder of Walsh Family Business Advisory Services, a consulting company specializing in assisting family-owned and operated businesses navigate the rough waters of management and ownership succession. She is a certified public accountant (CPA), chartered accountant (CA), and holds certificates in Family Business Advising and in Family Wealth Advising from the Family Firm Institute (FFI). Walsh is also president of the Ottawa chapter of the Canadian Association for Family Enterprise (CAFE). She developed her philosophy and desire to help family businesses from her father, Grant Walsh, who has worked as a family business practitioner for the last 25 years. Walsh also currently teaches the first family business course offered at the undergraduate level at Carleton University in Ottawa. She can be reached via e-mail at danielle@walshfbas.com.
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