ISSUE 3 MARCH 2008

Business owners usually pass their business to the next generation only once in their lifetimes. After 20 years or so of leading the business, memories fade as to how succession should be done. That’s why family businesses often look to outside tools to help them pass the business to the next generation.

One such tool is a ‘scorecard’ for succession. The idea is to score how well you are doing against a few key success factors. If you get a high score then you can be confident that you are well prepared. But if you get a low score you know that you are in trouble. Jozef Lievens, Chapter Director of FBN (FBNet Belgium) has developed the ‘Succession Scorecard’.

His Scorecard identifies 10 success factors:

1. The current leader finds a new role.
2. A capable and motivated successor becomes the leader.
3. The relationship between the current leader and the successor is good.
4. There are constructive relationships in the family.
5. There is governance of the business and family.
6. The successor forms a team with non-family members.
7. All alternatives are carefully examined.
8. The family business is run in a professional way.
9. There is a correct arrangement about ownership.
10. The succession is skilfully planned.

With any scorecard, people can ask: ‘why are we looking at these success factors rather then any others?’ After all, there are many factors that influence succession. In 2004 a Canadian study identified at least 70 of them.

But it’s hard to score and control 70 factors. It’s much easier to focus on the few that are most important. There is good research to back up Jozef Lievens’ choice of the top 10 success factors, notably a 1995 study by Barach and Ganitsky called ‘Successful Succession in Family Business’. Looking at the 10 success factors in more detail:

1. Can the current leader find a new role?
Research shows that it can be very hard to step back from leading a business. The idea of succession is linked to the idea of death. It is usual to respond by going through denial, anger, depression and finally acceptance. But some business leaders never get beyond denial and so never even look for a new role.

2. Is there a new leader who is capable and motivated?
Succession works best when the successor is passionate about taking on the challenge and really wants to lead the family business. This usually means that they have had a free choice about whether or not to join the business.

3. Is there a good relationship between the current leader and successor?
One study suggests that succession is likely to be most successful if the current leader is between 60-65 years old and the successor is between 30-35 years old. The relationship needs to be strong enough to survive the inevitable conflict when the successor starts to take the family business in a new direction.

The higher your score, the greater your chance of success.

4. Are there constructive relationships in the family?
Some studies suggest that a family’s emotional intelligence is the most important success factor. Strong leaders may have strong personalities and can find it difficult to listen and communicate. Constructive relationships consist of trust, respect and optimism. Skills such as communication, acceptance of difference and conflict resolution are also important.

5. Are there governance structures for the business and family?
It helps if the business has a Board of Directors that can continue to lead the business even if the owner suddenly withdraws or dies before the succession is complete. It also helps if the family has structures for agreeing goals and dealing with conflicts. Some write down a ‘family charter’ or ‘family constitution’. Without such pre-work, it becomes much more difficult for families to deal with problems when they do happen.

6. To what extent is the successor forming a team with non-family members?
It’s important that the new leader does not ignore the hopes and ambitions of non-family managers. These people are looking for roles and rewards that match their abilities. They may not want to see all the power going to the family. To keep them involved, it may sometimes be useful to limit the number of family members who can join the top management team.

7. Are all alternatives being looked at?
There are more alternatives than just passing a business to the next generation. One alternative is to sell the business. This may be worth thinking about if, for example, the long term prospects of the business are limited or if there are no competent successors. Another is to keep family ownership but to appoint a non-family manager. This could be on a permanent basis or just for a short time while a family member learns more about the business.

8. Is the business being run in a professional way?
Some successful entrepreneurs pay little attention to operational and management systems that just ‘get in the way’. But a lack of such systems will make life much harder for the next generation. A business that is professionally run is easier to pass on to the next generation.

9. Is there an arrangement about ownership?
It can be just as difficult and emotional to transfer ownership as to transfer leadership. Sometimes the current leader wants to give an equal share to all children but at the same time understands that the successor needs to have overall control (and therefore an unequal share or a legal structure granting power to the successor). The questions that need to be answered include: Will all shares have the same voting rights? How will shares be valued? What are the arrangements for children to sell their shares to the family?

10. Is the succession being skilfully planned?
Planning needs to cover five areas: the business, the family, the current leader, the new leader, and ownership. Research shows that skilful planning is needed in all these areas. More information about the 10 success factors is at www.scorecardsuccession.com.The website is in English and the ‘What is your score?’ section allows you to score yourself against the Scorecard. There is also a French version at www.scorecardtransmission.be and a Dutch version at www.scorecardopvolging.be

In this issue

Family Offices
Options for preserving wealth

Why join the family business?
Three views on the reason for joining the family business

First Steps to a Family Council
See the benefits of having a family council

Desire for Dynasty
The story of the House of Morgan

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