As Robert Pasin considers who will eventually take over his family business, Radio Flyer Inc., he is trying to avoid the pitfalls faced by previous generations of his family.
When Pasin’s father — the only son in his family — became CEO, he was what Pasin calls “an ambivalent successor.”
“From the moment my dad was born, he was told, ‘You’re going to take over the business.’ It was kind of forced on my dad and not fair to his sisters. As a result, my dad became the successor, but it wasn’t something he was really passionate about,” Pasin says.
His father took a very different approach with his own children, putting no pressure on them to join the business.
“From a very early age, I really fell in love with the business and the products we made,” says Pasin, whose title is chief wagon officer, the equivalent of CEO. He ran the business with his brother until his brother’s retirement a decade ago.
Now it’s time for Pasin to start thinking about the next generational transition.
“I saw my dad for many years sort of trudging off to work. I love what I do, and I know how much it’s enriched my life, and I want that for my kids,” says Pasin, whose four children are in their teens and 20s. He has sought out advisers to help navigate this next stage.
“We’re still figuring it out,” Pasin says. “We know that we want it to continue to be a privately held company that our family owns. But I don’t feel that one of my kids has to be the CEO or that any of my kids necessarily have to work in the business.”
Succession planning advisers say this type of intentional yet flexible process is a good strategy — but it will look different for each family. Broadly speaking, succession planning should encompass three steps: values alignment, planning and ongoing evaluation.
Step 1: Ensure the Family’s Values Are Aligned
Before any detailed succession planning can take place, the family must agree on the goal.
“The fundamental question is, ‘Do we want to continue to own this business together, and do we want to continue to own it even if we don’t continue to manage and operate it?’ ” says Joshua Nacht, Ph.D., principal consultant with the Family Business Consulting Group. “Some families are aligned and clear on their goals, and some are not. Maybe they haven’t even spoken about it as a family because the subject is taboo.”
If the family wants to continue as owners, “make sure there’s a clear ‘why,’ “ Nacht says.
Step 2: Formulate a Plan
“Always have a plan, or a plan is made for you,” says Christina R. Wing, a lecturer at Harvard Business School and founder of family business consultancy Wingspan Legacy Partners.
Sometimes the business’s governance structure can help ensure succession planning happens. Veronica Maldonado is board chair for her family business, GEMIS Family Companies. The board consists of four family members and three external members — and they are all serving terms with defined end dates.
“We need to talk about who is going to take over from us — a family member or someone external,” Maldonado says.
And if a position needed to be filled before the end of a term?
“If I were to quit tomorrow, one of my cousins who is on the board would step in,” Maldonado says. “That’s one of the reasons we have more than one family member on the board — we’ve created that kind of backup.”
Whether the succession involves the CEO or board members, it’s important to make a strategic plan for succession that involves both the current and the rising generation of family members, as well as independent board members. Depending on the specific situation and the family’s goals, the family should consider a number of issues when making the plan:
• Continuity planning. Nacht advises families to think beyond just succession planning. “Succession can be focused on who is going to lead the business, and it’s obviously important to consider business leadership,” Nacht says. “Continuity looks at the entire system — the business and the family — and says, ‘How do we create a strategic plan for the long-term success of the business and the family?’ ”
• Transparency. If the family does not agree on who should take over or if several family members are competing for leadership, that can set up a difficult scenario. “It makes for good television, but in reality it can cause some real rifts when you have family members jockeying for position or favor,” Nacht says. “It’s best when this is a collaborative process with the family and board and everybody saying, ‘What’s best for the business as a whole?’ instead of a black box decision where Dad is going to appoint the successor.”
• Looking beyond the family. A successful business may grow beyond the ability of the family to effectively manage it. “It’s somewhat rare for families to be able to produce in every generation someone capable of leading an increasingly large and complex business,” Nacht says. In that case, the family should consider how to transition to a non-family CEO. They must determine the qualities they are seeking in the new leader as well as the governance skills the family will need to be effective stewards.
• Succession for secondary roles. “Consider what comes after the leadership transition,” Nacht says. A succession plan that fills key leadership roles from inside the company will leave holes, so the plan should include how to develop leaders for these secondary roles as well.
• Phased transfer. The succession need not take place all at once. The current leader may decide, for example, that he or she wants to be out of an operating position in five years. The plan would then specify which roles and responsibilities to give up, and when, as well as who will take them over.
• Institutional knowledge. How well can the business function without the current leader? This can be a particular concern with businesses whose founder is still the leader, and it’s especially important if selling the business is under consideration. Even if the family plans to continue as owners, it’s crucial to ensure the business doesn’t rely too much on one person’s knowledge or connections — and to create a transition plan if it does.
• Talent development. Whether members of the rising generation have been chosen as the next leaders or are being considered for leadership roles, it’s important to create a plan for developing their talent. They need to be given increasingly responsible roles in the business and the right educational opportunities.
• Emergency succession plan. The long-term strategic plan should be complemented by emergency succession plans for key roles in case these positions need to be filled earlier than planned. If the succession is the result of a crisis that affects the family, it may be difficult for family members to make decisions. In such cases, external board members can be a key part of the strategy.
Step 3: Maintain Flexibility
“These plans are going to evolve and change,” Nacht says. “I’ve seen families create plans and then nothing goes according to plan. What we’re aiming for is a framework that guides us and allows for the inevitable changes to the plan.”
Regular reviews should take place at least annually, though some families conduct them quarterly. If the plan includes interim goals — for developing the next generation of leaders, for example — the review should assess whether the goals are being met.
At Radio Flyer, Pasin is working to create a flexible plan. He has developed guidelines — not necessarily hard-and-fast rules — for his children. One such guideline is the recommendation that they work elsewhere until they are about 30, then decide whether they want to join the business.
“I’d rather develop good processes and resiliency practices so that we can figure it out as we go,” Pasin says.
Overcoming Emotional Obstacles
Although there are technical and logistical challenges to succession planning, many of the real barriers are emotional. Current leaders — especially if they are founders — may find it difficult to discuss succession. The lack of discussion can create challenges for the next generation.
“The founder’s life’s work is tied into this business, and it’s such an emotional topic that they don’t see it from the perspective of young people who may feel uneasy working for years, not knowing if they will have an ownership stake,” says Izabela Szymanska, founder of Business Transition Services. “In considering business succession, the next generation may wear their ‘business hats’ more frequently than their predecessors, who may view the process more emotionally. This can lead to miscommunication.”
It can help to change the mindset around succession planning.
“A lot of times people don’t want to talk about succession because they feel like it’s giving up control, but if they don’t make a succession plan and they die suddenly, they have no input on the future of the business,” Wing says.
Just as creating a prenuptial agreement does not mean a couple will divorce, creating a succession plan will not hasten a founder’s death or retirement. And unlike divorce, generational transitions will definitely happen at some point — with or without careful planning.
“The No. 1 pitfall for succession of family businesses is not having a plan,” Wing says.