In 814, Charlemagne, king of the Franks and the man many scholars consider the first emperor of the Holy Roman Empire, died. He passed on his titles to his only living son, Louis.
It was a smooth transition, aided by the fact that Louis was his only heir. It was also one Louis was unable to replicate with his own sons, Lothair, Pepin and Louis II.
During the 830s, the empire was torn apart as Louis’ sons engaged in a civil war for future control of the empire.
Eventually, the empire was split into three pieces led by each of the sons. As they died, their three territories were split into even smaller pieces among their heirs. This messy transition broke a powerful empire into a complex association of weaker kingdoms that squabbled over competing claims. The tensions set back growth for more than 100 years.
In modern times, family businesses operate on a far smaller scale, but their leadership successions can be just as debilitating and destabilizing if not executed properly.[caption id="attachment_122284" align="alignright" width="150"] David Borst[/caption]
“We really don’t look upon inheritance and passing things along like we used to, but there are vestiges of it that still exist,” said David Borst, executive director and chief operating officer of the Family Business Legacy Institute. “I think there’s a natural inclination some people have to pass it along first to a male, and second to the oldest. So oftentimes, sadly enough, those who lose in these scenarios are the daughters, even if they’re the oldest child. Oftentimes the men are the ones who are entrusted with the organization, and that’s not fair. It isn’t right and it isn’t fair.”
Sitting around a table at the Wisconsin Club’s Country Club on Good Hope Road in May, Borst and fellow family business expert Jim Baka offered their insights into what does and does not work for transfers of power in family businesses.
Baka teaches a family business studies program for undergraduates at Concordia University. He’s also an adjunct professor at Mount Mary University, where he teaches global business policy and strategy for the MBA program. He has decades of experience working with family businesses in transition, and in two instances, served as an interim leader for local companies while the children of company owners aged and matured into their inherited roles.
Borst is the former dean of the School of Business at Concordia. He founded the Family Business Legacy Institute with Baka and two other partners, Lenny Khayat and Andy Locke, in 2015 and has worked with family businesses to establish succession plains and aid them in the process.
Baka and Borst said many families they work with do not have much conflict and transitions flow relatively smoothly. But certain red flags, such as sibling rivalries, disinterested children or parents who are unwilling to relinquish control of the business, can cause major problems down the road.
“The reality is, not every child is equally gifted and capable of taking over the family organization,” Borst said. “We have had some families that really struggle with that – ‘One child is capable, and the other really is not. What do I do?’”[caption id="attachment_141782" align="alignright" width="150"] Baka[/caption]
Baka said getting a succession plan in place early is essential, as is estate planning – figuring out who will inherit what in case the current owner and leader of the family business dies.
He also recommended allowing children of a certain age, say 18, to participate in certain meetings or discussions related to the business to get them up to speed and familiar with the company. He said this is beneficial for a few reasons.
First, it allows business owners to gauge their child’s interest in getting involved; second, it could give a parent an idea of how his or her child’s talents could be applied to the organization; and third, it gives the child a chance to become familiar with how the business operates and decide for himself or herself if it’s a good fit.
Ryan Domino, 30, Wisconsin sales and process product manager for Anderson Process in Brookfield, said getting involved early has been particularly helpful to him.
He has been involved with Anderson Process, his father’s company, in some way since he was 13. The family has already begun planning for the day he will take over.
Domino was working in sales for the company in his early 20s while getting his master’s degree in industrial distribution from Texas A&M University. By that time, he said he already knew running the family business was what he wanted to do with his life.
“It’s built in you,” Domino said. “Either you want to or you don’t … I have probably had a head start compared to a lot of people I know who are in a similar situation.”
He said every family is different and what works best for succession depends on the dynamic and the business – there are pros and cons to getting involved right out of college, and there are pros and cons to getting experience in an outside business he said.
If you start right away, “you can build those relationships (with clients and employees) and build that trust through the years, as opposed to just walking in to the family business,” Domino said. “But if you start right away, a lot of people don’t have the opportunity to learn about what happens everywhere else.”
The key for succession planning in his family has been communication – bringing him in to see aspects of the business a person in his position normally wouldn’t focus on, such as human resources-, finance- and insurance-related issues. And also, having tough conversations about estate planning.
“That’s the sad thing about it and the hard thing about it,” Domino said. “A lot of the topics that come up are not fun topics, but they’ve got to be talked about. Otherwise, you’re going to leave a lot of people and a lot of your employees scrambling.”
But even if a child has been thoroughly groomed to take over the family business when the time comes – they’ve been properly educated, received some outside experience and are interested in carrying on the legacy – there are still problems that can exist. One that both Borst and Baka have run into involves parents who are unwilling to relinquish their position of power, which can undermine the next-generation leader’s credibility.
“Oftentimes, the clients that an organization works with or serves, they look to the patriarch as the individual who has the knowledge base and they don’t go to junior, especially one that’s only been there a few years, as having that same chutzpah or knowledge,” Borst said. “As a result of that, the child suffers from a credibility gap that is very difficult to make up. And as long as the father is in the business, they’re not going to make it up.”
Baka and Borst said whether or not this particular problem can be overcome often comes down to how the parent-child relationship has matured over time, especially since stepping down from the helm of the business can be an emotionally troubling time for parents.
“The mentality, of, ‘Gosh, when do I give up? If I give up controlling the business do I give up controlling the family?’ That’s a big issue,” Baka said.
“I think it really speaks of a person’s mortality,” Borst said. “At the end of the day, none of us really want to face the fact that we’re not going to be here forever. And for an individual to wake up and say ‘Yeah, you know what, I’m ready to walk away from that which I built,’ it’s a huge ego blow.”
But if a son or daughter is looked upon not as a child, but as an equal in the family business, “then it’s a whole different ball game,” Borst said.