What is this thing called 9Stucks?
9Stucks is a dynamic business diagnostic tool. It identifies nine distinct yet interrelated business challenges that cause a company to underperform.

5 Pesky Plights Hurt a Family Business (Part 3): The Handoff

HandoffI ran outdoor track both in college and high school. Since I was a fast runner (back in the day) I always ran one of the legs of the 4×100 and 4×200 relay teams. Our relay teams practiced daily on perfecting the handoff – passing the baton. We had the relay leg transitions down pat. Unfortunately family owned businesses may not plan for a leadership transition and may bungle, delay or simply avoid the handoff to the next generation of family leaders or to non-family executives.

This is the mid-point in my multi-part series that explains how 5 particularly disabling conditions unique to a family business can exacerbate business underperformance.

This post is about companies with non-existent succession/transition plans. When owners can’t or won’t let go, four of the 9Stucks (Ditch, Moment, Slow Lane, and Another World) get really amped up and push the stuck company into a deeper hole.

Family company leaders often stay in their roles too long.  But staying too long is not the problem; being in a zone of leadership indecision creates troublesome ripples throughout the entire company.

FamilyCo was one of my stuck manufacturing clients. I was hired by the company/family to do a ‘fresh eyes’ assessment of their business. The company wasn’t in trouble but it had hit a wall and was stagnating. It didn’t take me long to figure out there were issues with the senior team, the company’s competitive position and a number of important operational functions.

Some facts:

  • Jack (second generation) was the CEO and the son of the founder; at age 70 he worked full time at FamilyCo
  • Jack’s 2 children (son and daughter) both worked for the company. The son (Bill, age 42) ran operations (manufacturing and engineering). The daughter (Susan, age 40) was head of marketing. Bill and Susan worked well together.
  • Sales was led by a non-family member and he reported directly to Jack. In the last few years, the sales team had experienced significant turnover.
  • The CFO was also a non-family member and had worked for Jack for many years. He was nearing retirement. His duties included many administrative functions and human resources.
  • There was no Board of Directors/Advisors

The children told me: “Dad was the driving force to get the company to where it is today, but now we think he has blinders on; he doesn’t acknowledge all the changes in the industry, the shifting customer demands or the need to upgrade our facilities, systems and equipment. He is living in the past. You (me) need to talk to him about letting us run the company.”

Okay…now what?

In my experience, there are a myriad of reasons why owners resist an orderly transition and block out the next generation. They include:

  • work is all they have known; they don’t want to stop for fear of the unknown ahead
  • entrepreneurial spirit/ownership of ideas
  • desire to continue to achieve
  • fear of losing control and authority
  • they like the money
  • no heirs suitable to run the company
  • competent team does not exist to take their place
  • all of their assets are tied up in the business

In contrast to the above, the next generation may be thinking their elders:

  • are really stubborn
  • have lost their focus
  • are tired, stale, bored
  • don’t trust our abilities
  • are control freaks
  • may experience potential illness or health issues
  • are risk averse

I did have that talk with Jack, and talks with the children, and with Jack, his children and his wife, and with the entire team. We covered a lot of ground. Our conversations and thinking encompassed these following areas and resulted in a collection of action steps:

Jack

Jack didn’t want to stay on forever, but his reluctance in leaving was rooted in the issues below. He was:

  • a bit overwhelmed by the changing industry
  • worried about money (cash to him and to his wife)
  • lacking the energy to lead new internal initiatives

I convinced him that indecision was worse than no decisions. He finally agreed that he and his team had to embark on a change program to unstick the company. We were past hurdle #1.

Fixing the Business

1. Change and Innovation

Most often, I find that many ‘people/team/family/shareholder issues’ can be resolved or toned down by simply agreeing on needed changes and developing reasonable solutions to fix the problems. Frayed emotions can dissipate pretty quickly once action plans are set in motion.

ACTIONS: We created an operational plan with key initiatives, ownership, milestones and measurements. Key initiatives covered upgrades to the plant, equipment, the web, customer processes and people.

2. Leadership & Organizational Structure

Transitions can be quick or lengthy. FamilyCo’s approach was orderly but not drawn out.

ACTIONS (Briefly):

  1. Bill became COO and added sales and marketing to his responsibilities (Susan was ok with this).
  2. The company started a search for a new CFO; the incumbent was fine with this since it finally gave him a clear path to retirement and allowed an orderly transition for the business. The new CFO also reported to Bill.
  3. The medium term plan was for Jack to become Chairman and Bill to become CEO in one year. That did occur.
  4. All of these changes gave comfort to the other employees and prevented a potential talent exodus.

3. Equity/Ownership and Cash

ACTION: The family created a long term equity plan for transferring ownership from Jack to Bill and Susan. This plan provided Jack and his wife financial security in the form of a lump sum partial payment and ongoing payments over five years.

4. Governance

‘All in the family’ wasn’t working. Bill and Susan both wanted an independent fiduciary Board.

ACTION: They settled on a seven person structure – 3 family members and 4 outsiders. Jack took one of the family seats along with Bill and Susan and they collectively recruited the 4 outsiders.

This is the third post in a series about the 5 missteps of leadership that can exacerbate the 9Stucks in a family owned company. Part 1 of the series described what happens when the family needs and the business needs are out of balance. Part 2 of the series examined why the process of making the basic strategic choice of innovate and grow vs. maintain the status quo can be an exciting journey forward, or a source of conflict.