Key Choices To Be Made Before Planning Starts

By Peter Davis

A succession strategy articulates how the process will be carried out and the values guiding it.

Succession planning has three objectives: to efficiently and fairly distribute assets from older to younger generations; to pass control of the business in a way that will ensure effective business leadership; and to maintain and promote family harmony.

It is quite remarkable how the effort to meet these three simple objectives results in the agony, confusion, and paralysis that characterizes so much succession planning. Yet the reasons are obvious.

First, the key concepts are ambiguous and emotionally charged. What does fair mean? What does control by the next generation imply for those who are no longer in control? Second, one objective may be in conflict with another. The older generation can pass control but unfairly, and that can destroy family unity. Conversely, if the parents refuse to grant any sibling more power than the others—giving priority to family harmony—that could stalemate the business.

The possibilities of meeting all three objectives successfully are greatly enhanced if the business owner develops a clear strategy for succession planning and communicates it early. A succession strategy articulates how the process will be carried out as well as the purpose and values guiding the choices that have to be made. Some strategies may be defined as idealistic, others as pragmatic.

Parents who espouse the idealistic strategy believe that members of the next generation can successfully share power, that equality promotes teamwork and distinctions in power and authority lead to conflict. Other parents, who can be described as pragmatic, believe that when there are multiple successors, family conflict is inevitable unless one is given ultimate authority.

Succession strategies can also be defined by the time horizons they establish for control. Sam Walton chose and executed brilliantly the family-legacy strategy, the primary purpose of which is to keep the business intact through many generations. In his book Sam Walton: Made in America, published just before his death last year, he wrote of the family partnership in which he and his wife and children kept control of 38 percent of the Wal-Mart stock (see Family Business, Autumn 1992). Walton sent a powerful signal to his heirs that they were to regard themselves as stewards of a family legacy. “Some families sell their stock off a little at a time to live high and then—boom—somebody takes them over, and it all goes down the drain,” Walton wrote.

The goal of the family-legacy strategy is to lock up assets in perpetuity. There are, of course, legal limits on how long an individual donor can control the assets of future generations. However, the use of trusts and restrictive sale agreements can considerably reduce the discretionary powers for at least two generations (and also greatly reduce estate taxes).

In contrast, generational-empowerment strategies are based on the belief that conditions change and it is impossible to predict what will be right for the business and family 20 years from now.

Controls and restrictions imposed from the grave make little sense in a rapidly changing world. Could Tom Watson Sr. have predicted the future of IBM at the time of his death in the late 1950s? Would he have wanted to restrict his grandchildren's disposition of IBM stock? The best approach to succession, many parents feel, is to communicate good values to the next generation, to support them in becoming adults, and then to empower them to make their own decisions. These strategies therefore emphasize direct transfers of ownership and responsibility.

Hold-and-see strategies offer an intermediate set of options. Usually this approach is taken when the next generation will not be ready for some time to assume responsibility. Or there may be family conflicts that can perhaps be healed with time. Hold-and-see strategies lock up control through, for example, the use of voting trusts for lengthy periods of time (up to 10 years). Procedures are developed to provide for the distribution of power and assets at the end of the hold period.

One of the biggest questions that must be resolved in succession planning is whether stock will be restricted to those working in the business. The benefits of having the owners run the business are significant. Much of the success of family businesses is, in fact, based on owner-operator strategies, which take two basic forms. In the family-first version, all family members who work in the business operate as partners and share equally. If a partner quits or dies, his or her stock is bought in equal amounts by the remaining partners. In the Calvinistic version, a larger share of ownership goes to those children who work the hardest, are the most interested, and the most effective. Ownership control in the next generation goes to the individual who stands out as a leader.

The value some families place on treating siblings alike doesn't count for much here. In the Calvinistic strategy, the “baby” in the family may have as much chance of being selected as the first-born. Even in-laws, who in many families do not qualify for leadership or primary ownership, might be considered.

Finally, a succession strategy must address the issue of individualism versus collectivism. Collectivist strategies are designed to keep the family working together as owners or as managers or both. Strongly collectivist strategies bind the family and the business together. Individualistic strategies create some space between the two and support children in whatever career path they choose to follow. The approach here may focus on helping the children build their own businesses. Existing businesses may be split among siblings, or business units may be spun off, so that each sibling can be the head of a company. Parents and children may enter into joint ventures. In some cases the primary business is even sold and the assets divided among the children, allowing them to make their own investments.

The right succession strategy for a family depends on many factors. Family values are, of course, important. The way the children were raised makes a difference. If siblings have been in conflict for the first 30 years of their lives, the choice of a strategy based on family consensus may be overly idealistic.

The size and success of the business are important considerations, too. Some businesses by their very nature should be owner-operated. It makes no sense, for example, to have passive owners in many high-risk, entrepreneurial businesses, especially those that depend on owner collateral for financing.

As the strategic choices are made, a model for organization of the succession process starts to emerge. The leaders can test the extent to which the three basic objectives are met and, if the family feels vulnerable in certain areas, they can take remedial steps. Strategic thinking thus illuminates the key choices that must be made and increases the chances of success.


Peter Davis runs the Executive Education in Family Business program at the Wharton School. He was the founder of Wharton's Division of Family Business Studies.

Article categories: 
Print / Download
Summer 1993

Other Related Articles

  • HBO's 'Succession' isn't just great TV

    Scene: In a gilded townhome several floors above New York’s Fifth Avenue, a family toasts its patriarch’s 80th birthday. Rather than bask in the warmth of his family’s love and respect, the patr...

  • Succession planning is the key to family enterprise resilience

    When a family business fails, most people suspect that estate taxes or incompetent advisers led to its demise, but that’s rarely the case. Even before the estate tax exemption increased at the end o...

  • A son's push for planning

    In many family businesses, it’s the younger generation that’s eager to charge ahead and the elders who rein them in. At Summer Classics, a Pelham, Ala.-based manufacturer and retailer of luxury ou...

  • Overcoming emotions and conflicts to plan for leadership succession

    The influential founder and chair of a multibillion-dollar family company suddenly fell ill. The founder and chair had worked closely with a non-family CEO on a day-to-day basis. Financial performance...