Keys to a Successful Succession Plan

Many family-business owners haven't planned out what will happen when they are ready to retire. Some assume their son or daughter will take over; others figure they'll shutter the business. By not creating a specific plan early, they drastically reduce the company's value. And having such a plan can make the company valuable, indeed.

That was what the Schirber family found when son Loren decided to join his father, Marty, in his Minneapolis-based company Castle Building and Remodeling Inc. "Having a plan in place totally changes the mentality of the business," Loren says. He had worked in the family business earlier and decided to rejoin while completing his MBA."My father's plan was to close the business when he retired, and as he got older, he was using the profits as his retirement plan. [That build up] would stop when he quit. Now, there's a long-term strategic future, and the ongoing company can provide a secondary retirement plan."

Understand the Process
The key reason contractors don't create succession plans for their family members is because the process is incredibly misunderstood, says T. Ray Phillips IV, president of Indianapolis-based The Family Business Legacy Co. LLC. "The owner's mindset usually is that a plan means it's their time to go, and that creates a defensive posture. But that's not the case," he says.

The focus of such a plan should be to create a successor-development format, outlining what the owner's talents and responsibilities are, and who will succeed him in those areas when he begins to cut back. The Schirbers' plan involved Loren taking over sales while Marty remained in charge of production. "Typically, it would be the other way around, as the customers like to see the owner," Loren says. "But Marty is so good with the details, and my strength is in sales."

Plan Ahead
The critical factor is in determining what the next generation's talents are and where their contributions will come. "The assumption that family members will take over is a key misunderstanding," Phillips says. "That doesn't have to happen." He suggests creating a family-succession plan that lays out how family members can acquire ownership, how they become employees and how they become managers. "That way it's not punitive or derogatory toward any individual," he says. "It sets up the rules ahead of time so expectations are clear."

In some cases, remodelers bring in a nonfamily CEO without an ownership role to run the business. Family members agree to it because their stock value grows as the company succeeds.

As the new generation gains more authority, the owner must relinquish it, which can be difficult. "The key to delegation is to lower your expectations," Loren says. "At first, things will go wrong as the person learns, and he'll do them differently. But things will quickly get better, because [the child has] a talent for that activity, and will have more time to devote to it than the father did."

Working out issues of different personalities can be difficult in a family situation. "Arguing business with family members couldn't be more painful," Marty says. It combines the two things the owner loves the most. "You have to learn that you don't have to get into each other's faces to resolve an issue. You can understand that there are different approaches and that neither is necessarily better."

The most important point is for the owner to determine his exit strategy, Loren says. "Does he want to grow the business larger, sell it, close it and retire on the money he's made? There has to be an alignment between father and the next generation on the final goal," he says. "Even if you're not in final agreement all the time, you have to understand their perspective and goals. It will affect how you do business."