Big brother is watching your successors-to-be

The young should be introduced to key customers and suppliers gradually — and warned of the risks.

Many younger members of family businesses are greatly annoyed when they learn that people outside the company are watching them closely. Already under close scrutiny by employees, these potential successors tend to be resentful when they suspect that customers, suppliers, creditors, and government regulators are observing their behavior, too.

Owners of family businesses and their offspring have to expect that key outsiders will have a vital interest in potential successors. If they are larger, professionally managed companies, they are likely to have a file on the financial strength and stability of your business. And, they will closely track the development, motivation, and qualifications of successors who may one day be dealing with them.

The larger firm may ask its representatives to report on your succession plan periodically as part of their business planning. The reps may even be urged to work with the family to achieve certain objectives of the larger firm, such as the development of a timetable for succession. They watch, they try to help, they measure, and they recommend. This scrutiny is not unethical; it represents a legitimate interest in protecting their firm's investment.

Several years ago I was meeting with the chairman of a large, family owned wholesale distributor when he was interrupted by a phone call. The chairman had told me beforehand that he would have to take a call from the CEO of one of his biggest suppliers ("We handle their products in 16 states"). He asked me not to leave the office while they talked.

During the 10-minute conversation it became clear that the chairman was talking to this manufacturer about a family business matter at another company. After winding up his discussion, he told me: "I know you work with both family owned and public corporations like ours, so this may be interesting to you."

His supplier was worried about a dispute at a family firm that was one of the supplier's principal wholesalers. The family firm accounted for 80 percent of sales of this manufacturer's products in one state, at three big locations and several smaller local stores. 

Ownership of the firm was shared by two branches of a family which founded the firm about 70 years ago. "Apparently, there's some sort of impasse among the owners, which has delayed their decisions on some important investment choices and commitments," the chairman told me. "My supplier says there's some possibility they'll settle this by selling the business, and he wants me to consider being the buyer. Also, if this continues to drag on without being resolved, he may just cancel their franchise for failure to perform. But he needs continuity of supply. So he wants to know if we'd consider opening several branches there to take over those lines."

Your biggest business partners cannot afford to sit idly by when a family dispute threatens the future of your relationship. By the same token, they have a powerful interest in the competence of your successors and the long-term continuity of your business.

To deal with these concerns, leaders of family companies should develop a multi-year plan to introduce successors to important outside firms with which they do business. By adopting a visible, open approach to the succession process — and showing that you are paying consistent attention to the plan — owners assure their partners that their business relationships are not in jeopardy.

The rising members of the next generation should be prepared in stages for display and contact with major customers, suppliers, and lenders. Though the stages will vary from one company to another, a good program for preparing successors to deal with outsiders usually involves six critical elements: 1) sorting; 2) starting; 3) testing; 4) blending; 5) selecting, and 6) warranty.

When children are under 25 they are still deciding whether they want a career in the business, and parents are still sorting them out to identify the most capable future leaders. With rare exceptions, people under 25 should be kept away from major business partners unless the occasion is purely social and business won't be discussed. One reason is that while people this age don't think of themselves as immature, the young neophyte may remind some 50-year-old decisionmakers of qualities that irritate them in their own children.

Perhaps a more important reason is that the under-25 crowd is not yet fully aware of the sensitivity of certain business information. Even when they are coached to keep their lips sealed, they may innocently reveal certain things about the business or the family that can be exploited by others. I recall one casual comment made by such a young man to an important supplier. The supplier had commented on the father's convincing success in a recent negotiation. The young man replied, "Well, when your sisters own two-thirds of the voting shares, you become very good at that." Later the supplier said to me: "His father has seen to it for over 15 years that I didn't know that!"

Successors should not be green when they begin to meet your important business partners. When starting out in the business, they should be placed in jobs that involve smaller, low-risk contacts with outsiders. In lower-level sales and service jobs, for example, they can get experience dealing with customers and suppliers who are not the big decision-makers. 

The kids should be alerted to a number of risks involved in these first contacts. First, in lower-level jobs, they may well come in contact with government regulators concerned with zoning, taxes, environment, health, and safety. They should be fully briefed by company attorneys about regulations that affect the company and may bring fines and the like. 

 Second, they should be made aware that some people will attempt to pump them for information. For example, outsiders may ask them for information that goes beyond a sales transaction. What kinds of questions might come up that are inappropriate? The kids should be given some guidelines for responding to these situations. They should also be aware that customers and suppliers have been known to plant information with younger family members — or disinformation — that serves their purposes.

Third, people may play to their egos and try to persuade them to change the terms of a business arrangement or agree to things such as price changes or extra charges that are beyond the purview of the nonfamily salesperson or buyer. Flattered by the assumption that they have the authority to agree, young family members may be tempted to make promises the company cannot keep.

In almost all early contacts with various outsiders, young people should have observer or "assistant" status. Coaching and debriefing will take them to the point at which they can work on their own with an older or more experienced person. Occasions for "soloing" in their dealings with key partners should be chosen carefully, to give them the highest probability of success. Self-confidence grows from a series of small successes, not a high-risk leap.

The results should be tested whenever possible. Young people who start out in sales can be easily evaluated on the basis of how well they do in meeting quotas or bringing in new customers. In a construction company, for example, they can be assessed on the basis of their accuracy in estimating the costs of a job. If they are in charge of service, customer satisfaction surveys can provide useful clues to their skills in dealing with the public.

In larger companies with many employees, the family member's contacts with those outside the company will be in collaboration with nonfamily co-workers. A career employee can be very helpful in guiding the young successor-to-be in these situations, but the task of "blending" the two is complicated. 

A career employee who has had long-term responsibility for maintaining a relationship with a customer or supplier may regard the newcomer has a nuisance — or a threat. In the presence of the customer or supplier, they may, sometimes unknowingly, erode the credibility of the successor through subtle comments or body language. The treasurer of one company raised questions about the owner's son with the firm's bank. In so many words, he conveyed the message, "Dad's going to tell you that his kid's bright and capable, but he's really a donkey." It took us three years to figure out why the bank had doubts about the son.

In general, career employees should be told as early as possible if they cannot aspire to a higher position in the company because the job is likely to go to a rising family member. Many talented managers will leave in these situations. But those who remain will perhaps accept that they will have to be satisfied with other types of rewards — including financial — and, as a result, may have fewer conflicts with potential successors.

The best blend of career employees with young family members involves people over the age of 50 who are devoted to continuity in the business and have a mentoring instinct. They are not likely to view the successors as rivals and can thus take a genuine interest in their progress. A family firm with a small number of employees may have to find these coaches among long-standing outside advisors, including accountants, attorneys, and consultants. Another good source is friends in the same industry who are not competitors.

By the time some of the kids are ready for senior contacts, they will be well over age 30 and have a swelling résumé of accomplishments. During the next stage of preparation, they'll deal directly with top customers or suppliers, the main bank contact, the senior regulators, community groups, and, possibly, a labor union. The company should collect information on the effectiveness of the young family executive in these senior situations. When there is more than one successor on hand, this information will be valuable in determining which of them will be most responsible for dealing with those representatives outside the firm.

When you assign any employee to work with a customer or supplier, you offer an implied warranty that they are competent and committed. While outsiders may tolerate minor human failings in most young employees, they tend to hold younger family members to a higher standard. 

The warranty also implies that the company stands behind the word of the younger family member. Here's an example of what parents should absolutely avoid: Dad had carefully prepared Son for the job of operations vice-president. When Big Supplier X came in to talk about new systems for its distributors, Dad told them to work with Son, who was to handle this contact from then on. 

The Supplier Rep and Son worked up a three-year project that would provide great benefits to the company by changing systems, computers, and space use. When they presented the plan to Dad, he turned it down flat. Son's credibility was hurt a little, but Dad's came crashing down. Dad had prepared Son, but had not prepared himself to relinquish his authority and stand by his man.