Tag Archives: Succession

Journey to the Future: What is Your Collective Vision for Leadership Transition?

Kelly LeCouvie
Kelly LeCouvie

For the next 19 years, 10,000 American baby boomers will turn 65 every day. Many of them are family business leaders who are thinking about transitioning leadership to the next generation.

While it is great to start considering the transition to the next generation – sometimes we find ‘action-oriented’ entrepreneurs jump to make changes before they have fully thought through the big picture.  We are not advocating delay – just planning and communication.

Too often forward-looking leaders jump into action by developing next generation leaders, creating new reporting structures, revisiting estate plans, and establishing new governance structures. All of which are important. However, sometimes leaders find themselves in active pursuit of a destination that is not only unclear to them, but is interpreted differently by multiple stakeholders in the process.

So before you put the car in drive, be sure to communicate with your passengers and gain alignment on some important questions: What is our ultimate destination? Which roads will get us there while meeting our objectives along the way? If we need to take a detour, what are the best alternatives? What is our arrival date? How will we know we’re there?

A desired outcome, or vision for what future leadership looks like helps ensure alignment and creates the collective energy you need for a very important journey.


Successor Legitimacy

by John L. Ward 

A Financial Times article[*] about the sustainability of China’s leadership offers some ideas for family business successors.  The article outlines several forms of legitimacy that are more or less sustainable. 

First is procedural legitimacy.  The people accept how the successor was chosen. Democracy is believed to be the most legitimate – “people chosen by the people.”  That, of course, is not common in family businesses, nor China. 

Then what other forms of legitimacy are there? 

  • Performance legitimacy – success provides better welfare for the people. Beware: this cannot always be assured; research suggests that 55-65% of company’s financial performance is industry, not leader dependent.
  • Political meritocracy – it is clear that the leader is qualified. In China the Communist Party is setting ever higher standards of education for party leaders; honest competition for the best to be the successors also supports sustainability.
  • Ideological legitimacy – the people accept the leader as virtuous and the best steward of the company’s future. In Confucianism, the important values are benevolence and harmony.

As procedure, performance and meritocracy can be unsure in family firms, then ideological legitimacy is the essence – how virtue and stewardship are assessed may depend on the local culture.


[*] “Real Meaning of the Rot at the Top of China,” Daniel Bell, Financial Times, April 23, 2012


Succession during recession?

by Albert Jan Thomassen

Albert Jan Thomassen

Recently a family business owner asked me if he should step down now. “Why do you ask me this”, I replied.  He told me he had planned his succession very carefully and was supposed to hand over the CEO seat to his successor. But he has since developed serious doubts because the recession is hurting the company rather badly.

There are pros and cons to handing over the reins in recession time.

Reasons to step down during a recession:

  • A young successor has new ideas and a lot of energy which can boost innovative thinking and change
  • The drive and energy of the incumbent might not be enough to take the company through yet another recession
  • It may be too difficult to make some of the ‘hard choices’ after many years of building up the company – there may be a lot of baggage.
  • There is no better learning opportunity for a successor than taking over in bad times

 Reasons to stay during a recession:

  • To leverage the experience with previous recessions to help navigate this one
  • Staying on demonstrates commitment and strengthens loyalty of key people in the company
  • To be able to leave the company in stronger shape for the successor
  • To protect the successor from an unrealistic and unachievable task

What is wise to do depends on the specific situation. As I have seen families in business so often do, the owner in this particular case came up with an original solution. He decided to stay but realized that he wanted to control too much. He was worried that instead of giving his management, including his two children, more responsibility and freedom to take the measures they think are right he would become a real control freak. To counter this, he created a task force with the powers to decide and himself as an advisor to the task force.

We would enjoy hearing from others about how they have managed the challenge or opportunity that is a succession during this ‘great recession’…



Bernie Kliska

For most family business senior CEOs, the prospect of relinquishing control is a troubling one. It presents many fears—the fear of mortality, the fear of not having sufficient funds and the fear that one’s adult children won’t get along. These business leaders have put their hearts and souls into the business for all their adult lives; yet, as most seniors recognize, they must let go if the business is to make a successful transition to the next generation. In fact, they need to be thinking about giving up both the CEO role and voting control.

The process of letting go should begin long before the CEO’s retirement takes place, even before actual succession plans are drawn up. Ideally it should be the function of the board of directors to determine the appropriate time for the CEO to retire.  While clearly the CEO needs to have a voice in this process, if they are the sole decision-maker on when they should let go, they may well be tempted to stay on longer than they should —past the time when they still are an effective leader.

In order to prepare for the challenging transition away from the leadership role, CEOs need to develop security and confidence in a number of realms.  First, they need to ensure the company is sound enough to sustain itself without the senior CEO at the helm.  In addition, they need to take steps to achieve personal financial security – so they are not financially reliant on the business going forward.  Third, ensure the children really grow up by giving them the opportunity to succeed or fail without their parents’ protection.  And finally, often overlooked is the importance of developing meaningful other interests that you believe will keep you engaged and excited to face every new day.  The CEOs who are able to let go are those who know that even without the business, they still have value as human beings.

Entrepreneurs who truly retire and turn over authority can find joy in knowing that they have built a business that not only will outlast themselves but that also have been preserved for the next generation of their families. If you are interested in learning more about this subject matter I would like to suggest you read ” Letting Go; Preparing Yourself to Relinquish Control of the Family Business” by Dr. Craig E. Aronoff.


Warren Buffet’s Successor: A Soybean Farmer!

Kelly LeCouvie
Kelly LeCouvie

Howard Buffet is Warren Buffet’s 56 year old son, and works as a corn and soybean farmer in Nebraska. Warren Buffet has recommended to the board that Howard succeed him as Chair after his retirement.

You might question this choice. Berkshire is a large enterprise that requires rigorous oversight of its operations, and a Chair who will ensure that strong governance is perpetuated after Warren Buffet retires. We might envision an industry expert, or at least someone who has work experience in multi-business enterprises.

Yet Howard Buffet’s background doesn’t fit that profile. He understands agriculture, and through the Howard G. Buffett Foundation works to improve the standard of living and quality of life in developing nations, particularly Africa. In addition to teaching farmers how to grow successful crops, he encourages them to learn accounting. Howard Buffett would not be considered an industry expert. But Warren Buffett is more concerned with engaging a Chair at Berkshire who understands the importance of perpetuating the values and culture that have helped create Berkshire’s competitive advantages. And he has pointed out the importance of this in family-owned businesses: “Family-owned businesses share our long-term orientation, belief in hard work and a no-nonsense approach and respect for a strong corporate culture,” said Buffet during a talk in Switzerland.

Howard Buffett may not seem like an obvious pick, yet based on what we know about continuity through generations in family businesses, he might just be the very best strategic choice for leadership at Berkshire Hathaway!


What it takes to be the company’s next leader – Part 2 of 3

Drew Mendoza

Ascending to the CEO role of a family enterprise is not usually a walk in the park.  However, leadership has its benefits and, I have yet to meet a successful second or later generation leader of any family enterprise who, after totaling up all the battle wounds and joys of the job, didn’t look back on it as having been a worthwhile career decision.  Of course the key word here is successful.

These successful leaders tend to have had a common experience:  their rise to the CEO role was well thought out, well executed and a planned event.  In addition, these successful successors tend to be passionate about wanting to lead, and conduct themselves in honorable ways that built trust among the other family shareholders and company stakeholders.

And these future leaders benefited from the presence of an appropriate governance body that played a critical role overseeing full transition of executive responsibility from one generation’s CEO to the next.

The ‘alternate reality’ we see in cases where there is no appropriate governance body is that the transfer of responsibility and authority seems to often stall, stumble or worse.  Stresses from these mishaps ooze out into the family and, well, things can become pretty messy.

What have you seen?  How often does the big-dog gracefully relinquish the CEO role without placing oversight of the process in the hands of an appropriate board of directors?


Should family members not working in the business ever be owners?

Chris Eckrich
Chris Eckrich

Recently at a seminar a well-respected advisor proclaimed that any succession plan that allows stock to pass to those not working in the business is a bad succession plan.  For anyone who has experienced family dissension or destruction over conflict between those in and outside of the business, this certainly will sound like sage advice.  But, while this may seem sound advice for a smaller business where there is little chance for significant reward beyond that which can support a single owner or that owner’s family, the issue is a bit more complex where larger assets are involved. 

If the business is successful over time and grows large enough, there is an opportunity for building an enduring enterprise that creates both career paths for those working in the business, and returns (in the form of investment appreciation and dividends) for those who are not working in the business.  Furthermore, an aligned ownership group can support growth models with the patient capital approach that is a competitive advantage for family firms.  When combined with a liquidity policy that allows for the voluntary buyback of a small percentage of shares on an annual basis, the shareholder tree can be slowly pruned over time, increasing the likelihood of a unified shareholder group.

If we think of a family business in terms of a snapshot in time, it does seem logical to keep the family business in the hands of only those employed in the enterprise.  But if we take a longer-term perspective, this decision may exclude the possibility of a family enterprise that ends up being governed by owners with independent directors serving along non family executives in building the business.  Or, we may open ourselves up to the possibility that a next generation leader will come from one of the branches that might otherwise been prevented from ever owning the business.

One size does not fit all when it comes to family businesses.  Each family must decide what path to pursue in terms of who can own the business, and all options should be considered in the decision-making process.


What They Think in Brazil (Part 2)

by Stephanie Brun de Pontet &
John L. Ward

We continue to share the results of a survey of 100 significant family firms in Brazil which were part of a program hosted by HSM, a program we were very privileged to lead.

Shirt Sleeves to Shirt Sleeves…

What do they think are the greatest challenge to family business continuity?

  1. Senior generation “Letting Go” (29%)
  2. “Sibling Rivalry” (17%)
  3. Business challenges (16%)
  4. Cousin differences and indifference (16%)
  5. Nepotism (12%)
  6. Attracting non-family talent (8%)

Family Education

The most common education initiatives at their family meetings were:

  1. Family history and values (38%)
  2. Understanding the business and industry (31%)
  3. Improving family interpersonal skills (24%)
  4. Financial literacy (7%)

Most surprisingly, 49% had more than one family meeting per year!

Problematic Paradoxes?

We asked what was their most perplexing paradox as a family business:

  1. Change and tradition (27%)
  2. Selective and inclusive (25%)
  3. Fair and equal (18%)
  4. Freedom and loyalty (16%)

With special thanks to HSM, Brazil for encouraging the survey and for their dedication to family business education.


Family Business Practices in Brazil (Part 1)

by Stephanie Brun de Pontet &
John L. Ward

We had the special pleasure of conducting a two-day workshop for HSM for 250 people from more than 100 significant Brazilian family firms. In this and subsequent web posts, we share the results of a survey of the participants. What has been their experience?

In terms of ‘who’ was in our audience answering these questions: 36% are in the founding generation, 37% in the second generation, 16% in the third generation, and 11% in the fourth or later generations.  As the generation of the family will have a bearing on many of these questions, we have broken up the answers by these demographic groups as appropriate.


  • “Letting Go” of control by the senor generation was seen by all generations as the most significant challenge to successful continuity – non-family advisors and directors felt so, even more strongly.
  • Siblings in business together thought that differences in managerial style between them was their next greatest challenge (40%), followed by sibling rivalry (25%).
  • “Co-CEOs” have been part of 21% of all family firms, with 33% finding that a good practice.


  • Just as with our global research, half of families who have initiated a Family Constitution are pleased with results and half are not! Pleasantly surprising, 57% have tried.
  • Also quite similar to our global research, about 1/3 of all family firms have three or more Independent outside directors. 63% of those with outside directors find them extremely valuable.


  • About half feel it is likely that they will consider a private equity investor for their family company.
  • 51% say an IPO is not imaginable.
  • 24% already have experienced a ‘family shareholder’ redemption; yet, unfortunately, 45% have no policy to guide such an almost inevitable event.

What was our most surprising finding? Fully 65% of all participants have official family meetings, and most include some family business education as part of their meetings.

With thanks to HSM for encouraging the survey and for their dedication to family business education.


Succession Webinar Questions Answered

Tools of the Trade: Two Experts Talk About Family Business Succession

Q. How important are buy-sell agreements and clearly established valuation methods for family shareholders? What are typical valuation methods?

A. A buy sell agreement is a succession planning tool that; (i) protects existing shareholders against transfers of ownership to nonfamily members or parties they do not want as “partners;” (ii) provides for a well thought out method of transferring management and ownership of the business to the next generation; (iii) addresses when and how an existing owner may be able to sell their ownership interest; (iv) provides a means of valuing the business in the event of an ownership transfer; and (v) determines how payments will be made to a transferring owner in order to protect the ongoing viability of the business.

Common valuation methods are; (i) annual determination of value by the owners; (ii) a formula approach; or (iii) determination of fair market value by independent appraisal.  Additional information on business valuations can be found at www.MandAlawyer.com by clicking on the tab on the left side of the home page titled “Business Valuations.”

Q. What are your recommendations for pre/post nuptial agreements for family members working in the business who do not have ownership but may be having ownership in the future?

A. Many families use pre and/or post nuptial agreements to protect assets that were acquired before marriage and to keep shares within the family.  The effectiveness of such agreements is dependent upon state laws so discuss this with an attorney before making such a requirement.  If you do want to require agreements of this type before someone is allowed to become an owner make it should be discussed and planned well in advance of engagements.

Q. Do you advise to sell to a family at a discount price?

A. Generally, minority owners are the ones that face a possible discount on the sale of their stock.  Whether or not there is a discount applied may depend on whether the event triggering the sale is voluntary or mandatory.  If the minority owner just “wants” to get out versus a buyout due to death or disability, it is more likely that there would be a discount.  Discounts tend to give majority owners an unfair valuation advantage and are generally avoided in buy sell agreements.

Q. What range of discounts do you typically see for minority interest and lack of control? 

A. Discounts are generally due to lack of marketability and lack of control.  These discounts also overlap.  Lack of marketability discounts range from 20% to 45% for privately held ownership interests and minority ownership discounts also range from 20% to 45%.  Different appraisers apply these discounts in different ways and in different combinations, but rarely would the total discount exceed 40%.

Q. Where are good places to find advisers to help with providing ideas for liquidity for the outgoing generations? We have found that local banks don’t provide the level of experience or expertise required.

A. For information on selecting advisors see www.MandAlawyer.com and click on “M and A Professionals” on the left side of the home page.  The right professional “team” is the key with the right leadership.

Q. What’s your experience with what family members are involved? Spouses and partners are the people I struggle with – how involved should they be?   

A. It is important to clearly define family for the purposes of ownership.  If spouses are allowed to own some provision may need to be made for the business to purchase their shares in the event of a divorce.  Life-partners are treated much the same as spouses in most states and therefore, would need to be considered the same as spouses.  There is no simple answer but there needs to be open discussion within the family and good documentation of decisions for future reference.  Since spouses and in some cases life-partners are influential in raising children who will be the next generation their cooperation and participation in the family business continuity plan is often critical.

Q. Can you review the valuation process you described with the two owners and two envelopes bids?

A. The simplest form of the “shoot out” is when two partners (A and B)  provide bids for the company in sealed envelopes. The envelopes are opened at a meeting of the parties and the highest bidder has the right to buy out the other owner.  If the A is the highest bidder and does not buy out B’s interest, then the B, the lower bidder, has the right to purchase A’s ownership interest at the price bid by B.  In a multiparty shoot out the rights would go from the highest bidder, in order, down to the lowest bidder.

Q. How is stock valuation different than an appraisal?

A. They are the same.  Stock values should be set based upon an appraised value.  Share prices increase when valuations increase.

Q. What are the unique concerns for succession of a C corp? My retirement fund is currently 90% company stock.

 A. The fact that a “C” corporation is not a pass through tax entity (C corporations are taxed at the corporate level and the shareholders are also taxed on dividends from the C corporation) requires additional tax planning to make sure the buy sell agreement, current ownership structure and future business operations are all structured in a manner that minimizes the double tax.

Q.  Is there any published stuff out there on typical valuation methods for private companies for those with minority interest?

A. Google “discounts on minority interests” and you will find volumes of material.  One of the leading writers on this issue is Lance Hall with FMV Opinions.  Applicable information can be referenced through FMV’s web site at www.fmv.com.

Q. What are the steps to help a family transition to a family business office if they have not considered it before?

A. Generally, a family office is useful when a family reaches a size and net worth that can support central functions such as investment planning, tax planning, philanthropy and even clerical services.  If the separate needs of the family are placing an inappropriate burden upon the staff of the business it might be wise to consider a family office.

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