HME Modern Family Part 1: Succession Planning - Determining Who’s Next in Line

Posted on in Growth Strategies

Written By: Richard Davis, HirePowerHR

Do you work within a family-owned business? Our new series, HME Modern Family, is just for you! For the next four weeks, CONNECT authors will cover topics on how VGM members can navigate through and overcome the complexities of operating a family-owned HME business.     

Several years ago I was with a client in Houston and the business owner was asked “what is your exit strategy?” With complete sincerity, he began to describe the fire evacuation plan. After explaining that the exit strategy is his plan when he is either no longer able to manage the business, wants to sell, or wants to retire, he commented “I have no idea”.

It is funny that most of us would never begin a trip without at least having a pretty good idea of what route we were going to take and certainly our destination. This is also true for the question of “Who is going to take over my business when I voluntarily, or God forbid, involuntarily leave the business?” This question and subsequent answers are crucial in order to maintain and sustain a successful organization.

What is Succession Planning?

Wikipedia offers a pretty good definition of succession planning. It is a process for identifying and developing internal people with the potential to fill key business leadership positions in the company. Succession planning increases the availability of experienced and capable employees that are prepared to assume these roles as they become available.

Although every business should have a succession plan, creating one for a family-managed and operated business creates even more complexity.

It is estimated that family businesses, including Fortune 500 companies, account for over 60% of the country’s employment and over 70% of new job creation. In a study conducted by the Family Business Alliance, just over 30% of all family-owned businesses survive into the second generation. Twelve percent will still be viable into the third generation, with 3% of all family businesses operating at the fourth-generation level and beyond. One might conclude that lack of proper planning is a major reason why family businesses either don’t survive or do not remain in the family.

The Importance of Succession Planning for Family Businesses

Creating a viable succession plan for a family business is crucial for continued growth and long term sustainability. Family businesses have intimate history which may make it difficult for someone from the outside to fully understand and appreciate.

Several issues affect family managed businesses more than others. The dynamic of the family itself creates unique challenges. How many members of the family are involved and which family members expect more responsibility and interest in the business as original family members retire? Which family members have been more involved than others and expect a larger chunk? What family members have the capacity and capability to manage the business? Interfamily disputes are the primary reasons that impact the future of a family business and also the primary reason the succession plan is necessary for a smooth transition.

Succession Planning Phase 1 – Develop Shared Vision, Goals, Objectives

The first step in developing an effective succession plan is to create a collective vision, specific goals and the shared objectives for the business.

This should include all family members who hold key leadership positions in the business. The plan should include a determination of the importance of family member involvement in the leadership and ownership of the business, in the present and the future. Are there family members capable of sustaining and growing the business? If so, what family members will succeed current leadership? It may be determined at this step that no family members are capable and the succession planning could determine the best course of action is to bring in a professional from outside the family to manage the business for future generations.

Succession Planning Phase 2 – Establish Governance Structure

The next crucial step is to instill a corporate governance, a system of rules, practices and processes by which the company is directed and controlled. It could be a board of directors or a group of trusted advisors that assist with this process. It is recommended that the decisions about any limitations to be imposed on family members be completed at this stage.

Establishing a structured corporate governance is a great method for dispute resolution, which can help to avoid significant conflict down the road as older family members depart the business and new members become involved. The most difficult succession planning issue in a family business is what family members have the ability to lead and which ones do not. This can get very emotional, especially as additional generations of family members become involved in the business.    

Setting goals and a vision; assessing the talents and skills of family members; and establishing a method to make tough decisions will make a succession plan more effective.

About the Author

Richard Davis is human resources consultant with HirePowerHR, which he founded in 1992 to focus on talent management and human resource consulting, and management training and development. He has more than 30 years of health care experience in executive management and consulting.