Preparing a nonfamily leader for emergencies

NowÕs the time to think about filling the vacuum if a key family leader suddenly dies or becomes ill.

By Robert A. Clarfeld

When Jack Miller, the owner and chief executive officer of a family owned market research company in Chicago, suddenly became ill and could no longer work, employees lost the leader they had relied on for 20 years. Even worse, with no other family member sufficiently experienced to step into the CEO position, the viability of Miller Research was questioned for the first time in its history. Clients began to examine other firms. Creditors demanded their cash.

Because Jack had anticipated staying on the job for another 10 years until younger family members could fully learn the business, his illness forced the family to rethink its succession plan. They had to evaluate the company’s management structure, its financial health, and its potential for growth. Unfortunately, there wasn’t time to give these important matters proper consideration. They had no choice but to sell the business or risk losing it. In the rush, they settled for an offer that was considerably less than the business’s full value. Just like that, the family company was gone.

A fictional example, but a very real problem. Every year, hundreds of family owned businesses find themselves abruptly facing a succession problem when an owner dies, becomes ill, or is unable or unwilling to run the business. If there are no children, or none suited to take over, the future of the company is in jeopardy. For the business to survive such a crisis in leadership, the family should have a contingency plan in place for choosing a nonfamily leader and helping him or her succeed. If the family has decided what type of person it would need, and has identified potential candidates to take over, it will be ready to respond should an unfortunate event take place.

In-house or out

In creating a contingency plan, families have two fundamental issues to sort out: whether to promote from within or hire an outsider, and whether the nonfamily leader will be expected to run the company for a limited time—assuming more of a caretaker role—or for a lengthier period, assuming greater responsibility for initiating long-term programs, products, and strategies.

It makes sense to begin the search for a successor within the company. Look not only at current managers’ talents and responsibilities, but also their history with the company and potential for assuming leadership. If there is a candidate who shares the family’s vision of the future, plan to provide this person with the best possible training and experience that is needed to run the company. This may include assigning the person to different line positions or increasing his or her contact with clients and suppliers.

If you determine there is no one on staff with the requisite commitment, personality, and potential to replace the owner, go outside the company. Take a close look at individuals who work for competitors and identify those who possess the attributes that are most valuable to your company.

As you look inward and out, consider whether the company needs a “caretaker” or a long-term leader. If the company will have to wait until younger family members are ready to take the reins, recruit someone who has substantial years of experience running a similar business and who plans to retire in a few years. If, however, you will need a long-term executive, consider someone younger who has a proven track record. A consultant or search firm can assist you in identifying a nonfamily successor without diverting you from running current operations. Such experts also can provide the outside viewpoint necessary to realistically evaluating a candidate’s capabilities.

Key issues to settle

No matter which direction the search takes, an advisory board of key managers and family members should be formed to discuss the business’s future management. It is also wise to complement the advisory group with a succession planning team comprising individuals who can present objective views on the company’s business needs and the type of person who can best steer the company toward growth and profitability. The succession team should include current or former senior managers, the company’s CPA and attorney, and other business advisors.

To guide themselves in formulating an emergency plan, the advisory board and succession team must answer some key questions.

How effective is the current management structure and does it need to be changed? For example, if ownership and management of the company resides with one individual, as it did at Miller Research, consider how the company would operate if the managerial functions were separated.

What impact will the promotion of an insider or recruitment of an outsider have on employee morale? For example, try to determine whether key employees will leave if an outsider is brought in.

What are the company’s strengths and what management skills are needed to ensure those strengths are applied to furthering business goals? If the company is technology oriented, say, new management should have current technical backgrounds to make sure the company does not fall behind competitors.

What are the company’s short- and long-term goals and how is the new successor expected to accomplish them? It is important to write down clear goals, a task that many family businesses do not undertake. Once this is done, then a system for measuring the new CEO’s performance against these goals should be created. This will give the family a guide to judging candidates, and will give potential candidates a realistic view of what would be expected of them.

Who will be responsible for mentoring younger family members while the interim successor leads the company? Another family member, even if high up in the company, may not be the best person to train the next generation. Consider whether to add a mentoring role to the responsibilities of the new CEO, or to assign this task to other senior executives, whether family or not.

Attracting the best

The advisory board and succession team must also design the right compensation package to attract and keep the best successor. In addition to salary, fundamental options include a performance bonus and equity in the business. Many executives, especially those coming from large public companies, may not be satisfied unless they receive some equity stake. Offering equity—particularly if you anticipate business growth—can be a valuable incentive, even if it takes the form of phantom stock. It will inspire greater commitment since the successor will have an opportunity to build his or her wealth. What’s more, an equity program can provide tax benefits to both the successor and the business.

In today’s competitive climate, no company can afford the risk of being without a leader, even for a short time. That’s why it’s vital that family business owners consider successors before one is needed. Preparation will ensure that the business remains in the family’s control, even if a nonfamily member will be running the operation.

Robert A. Clarfeld is president of Clarfeld & Co. P.C., a CPA and financial planning firm headquartered in New York City.