You’ve gone through the motions of succession planning—groomed your successor, established and executed all the attorney-advised documents—and now you’re prepared to hand off your business, right? Not necessarily.
Many family business executives actively or passively resist the transition process they once agreed to when it comes time to implement the plan. Even a well-crafted succession plan can fail if it lacks one key element: psychology. A focused review of the executive’s and member’s psychology should be the foundation of decision making for succession plan. Otherwise, overlooking the matter can torpedo years of planning and result in family and business tension. First, it is helpful to understand the ways psychology affects succession planning for all individuals involved.
Executives may struggle with facing their own mortality (subconsciously expecting to run the business until the end of time), or, and more frequently, they have a fear of losing power and control over the business they built. Many business owners tie their identity and self-worth to their work, so it’s understandable that there is a negative reaction when it is threatened. A leader once spoke about his upcoming retirement this way: “I am afraid about the next phase of my life…. I’m not sure what my life is or will be without my job, without my career. How will I spend my time? How will I face the fact that I am replaceable, that the world can and will go on without me? How will I derive a sense of identity, power, agency and meaning once I am retired?” (Link).
Individual family members’ emotional intelligence is also at play during succession. The protégé may feel guilty for wanting to take over the business, be impatient to succeed, worry for their predecessor after the transition, have a fear of taking the helm, be insecure in their readiness to be on their own, and coping with stress that comes with a change at work. And of course, there are all the other inter-family issues that can flare up when stakes regarding the business and members are high.
How should family owned businesses cope with these immense psychological issues when establishing and implementing a succession plan? Here are five tips for accounting for psychology in your plan:
- Don’t deny the inevitable—retirement will come. This may be the hardest and most time- consuming suggestion on the list. Begin early and recruit many family members and friends to facilitate this shift in mindset. A helpful tip is to begin reframing accomplishments to be about long-term legacy building, rather than short-term results or extending tenure.
- Bring in a third-party. An outsider can facilitate family business meetings regarding succession planning. This will inherently promote fairness and impartiality for the executive and successor. Also, during meetings, avoid buzzwords, double-talk, and bluster. This avoidance prevents action items being pushed off to “another meeting.”
- Have frank discussions, no matter how painful. Questions to existing leadership that should be asked and truthfully answered include: (1) How long do you see yourself in your role? (2) When will you be financially ready to leave? (3) What is your best-and worst-case scenario for exit? (4) What if your successor leaves? (5) What are the different ways you want to keep interacting with the company after you exit your role? (6) What is a comfortable timeline and parameter for the succession?; and (7) What are the contingent plans if, God forbid, someone dies early?
- Continue the discussions. An executive may “agree” to succession planning dates, but as it gets closer he or she might want to blow up the schedule for any number of reasons-- ego, money, or fear of free time. Continuously checking in on the matter can anticipate these feelings and provide early opportunities for fair adjustments or board intervention.
- Reward positive behavior. The board of directors of the family business may find it useful to set goals and parameters for the executive’s efforts in transitioning leadership, including bonuses over and above the usual for timely, successful and supportive transitions. If money is not a strong motivating factor, consider other ways of rewarding appropriate behavior.
Having a succession plan in place is in the exception, not the rule, based on a 2016 study that found that more than 8 out of 10 family businesses lack a plan. (Link). Don’t let all the years of work and preparation go to waste by not being realistic about the psychology of the business members. Being apprised of the above issues, and taking steps to accommodate and mitigate them, could spell the difference between a smooth transition of a family legacy or the painful crash of a cherished business.
Keith Baldwin is a business transactions and securities lawyer with a forty year history of serving clients’ legal needs. Keith focuses his practice on business relationships, including mergers and acquisitions, agreements among owner-entrepreneurs, and best practices for corporate governance. Keith can be reached via email at firstname.lastname@example.org or directly at 425.646.6133.