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Succession planning 101

May 1st, 2020 / By: / Feature

A seamless transfer of leadership in a family business requires hard conversations and a detailed road map to avoid the worst potholes and ensure a successful journey.

By Jeff Moravec

A family business can offer great rewards—personally and professionally—for its founders and their descendants. But a family business also presents unique challenges and requires careful planning and management, especially when it comes time for one generation to step aside and another to take over. The irony is that even for excellent communicators, succession planning is something family businesses often shy away from.

“It’s one of those topics family businesses often avoid like the plague,” says Stephen P. Miller, president of GenSpan Inc., an Asheville, N.C., family business planning firm, and co-founder of the Family Enterprise Center at the University of North Carolina at Chapel Hill. “It can be uncomfortable. But if the family business wants to continue, it’s critical.”

Work goes on at SugarHouse Industries these days under third-generation ownership, and while the ownership structure was set when Mike Peterson began running the company, there were some cultural issues that needed to be addressed. Photo: SugarHouse Industries.

The difficulty comes not just when a founder is involved, says Miller; it can be just as tricky if the second or third generations were the ones that really built the company. “There’s a lot of personal identity tied up in the business,” he explains. 

Succession planning requires the current ownership, no matter which generation it is, to “think about stepping back, and about their own mortality,” says Miller. “And because the next generation may have a lot of questions, it’s easy for them to feel that if they bring them up to Mom and Dad, they may be perceived as pushing them out or putting their nose in the business where it doesn’t belong.”

But the hard conversations need to happen.

Continue or not

The first part of any discussion, says Miller, should be about whether the family really wants to continue the business when the time comes for a change in leadership. 

“Many founders started their business as a way to make a good living, and it doesn’t necessarily have to go to the next generation to be a success,” he explains. “The family needs to have a good reason for wanting to be in business together. Next-generation family members may feel obligated or entitled to join the family firm, but they haven’t thought or talked about why they might want to be in business with a sister, brother or cousin.

“Then you need to work really hard to create a shared vision, to get clear about where you want to take the business,” Miller adds. “Family businesses often fail to succeed from one generation to the next because there is no shared vision for the future of the firm.”

Mike Peterson, president of SugarHouse Industries, didn’t always plan on joining the family business. But after getting the chance to work with his father and other family members, he says, “it became a really easy decision to want to stay there.” Photos: SugarHouse Industries.

Jennifer Rodriguez has been through that process at Marianne’s Rentals, Oklahoma City, Okla., the largest special events rental company in the state. She’s the general manager at the company, which was founded by her mother, Marianne Long, who is still president.

“I told my mom we needed a plan done while she is still alive, so her wishes could be honored,” says Rodriguez. “If something happened to her, it would have been a nightmare. I didn’t really care what her specific wishes were; we just needed them on paper.” They created an ownership pool and the understanding that Rodriguez would eventually take over the firm.

And it wasn’t all just about Long’s family either, adds Rodriguez, although her husband, children and other relatives work there. “There are 65 other families here who depend on this place for their paycheck,” she says.

Respect the work

A successful transition requires that “the next generation respect the work that has already been done,” says Rodriguez. “They must show humility and gratitude in their role as the company transitions. Otherwise, it can be detrimental to the process or cause the owners to sell instead of passing it down.

“The balance is delicate,” she adds. “But the next generation must understand they will have their time to change things to be the vision of what they want.”

Mike Peterson, president of SugarHouse Industries, which manufactures marine canvas products, awnings, signs and banners in Salt Lake City, Utah, worked as a teenager at the company his grandfather founded in 1941. But after college, he was interested in psychology—not fabrication—as a career. 

“I was going to work for just a little bit at SugarHouse and then go to graduate school,” says Peterson. “But I started doing things at SugarHouse I really enjoyed. It was a chance to grow myself and to help the business grow. I got a chance to work with my father and other family members. It became a really easy decision to want to stay there.”

From the time his father took over the business, Peterson says, the ownership of SugarHouse was well-defined. 

Why? His grandfather saw what can happen when it isn’t. “My grandfather’s uncle owned a local furniture store, and he watched firsthand as both the company and the family were destroyed by disagreements among the second generation of owners. There were different priorities and interests, and a lot of butting heads. My grandfather put a lot of effort and thought and prayer in trying to design an ownership structure that would work for both the company and the family. He took it very seriously.”

Ownership for employees

When the company was passed on to Peterson’s father and uncle, a structure was set up that prohibited family members from owning part of the business unless they were employed there. While some family businesses do it differently, in this case, Peterson says, “It was really an attempt to unify priorities among shareholders. There were no silent partners showing up looking for dividends or payouts.”

While the ownership structure was set when Peterson began running the company, there were some cultural issues that still needed to be addressed.

“Sometimes family members were put into management positions they were not well-suited for,” he says. “The thought was an owner can’t report to someone else—he has to be the top guy. But that’s not good if someone is struggling, isn’t happy and may not really be cut out for management. It’s not good for the company or the employee.”

Recently, Peterson explains, the company has brought in some experienced managers from the outside. “We don’t have to rely only on the experience and abilities of family members for strategic decisions and big-picture things,” he says. “It’s worked out really well. Their outside perspectives help us look at things a little differently.”

Roles for family members

According to Miller, the consultant, it is often a good idea for next-generation family members to get some outside experience before they go to work at the family firm. 

“It can help them have some of their own success someplace where their last name doesn’t matter,” he explains. “They can get more accurate feedback on their performance and build some self-confidence.”

That’s what happened with the second generation at Northern Marine Canvas Products (NOMAR®) in Homer, Alaska. Kate Mitchell founded the business with her husband in the early 1970s.

Mitchell’s two children both worked at jobs outside the company. “Our son had experience in commercial fields and was mechanically inclined, and our daughter worked in retail,” she says. “He’s in charge of production now, and she’s the CFO. I encouraged them to go see what the world’s about before coming back.”

Still, she adds, leadership positions were not just handed out to the kids. “They started at the bottom rung,” says Mitchell. “Along the line, they worked their way up; they put in the time.”

Today, the children are shareholders in the business and a plan is in place that will eventually give them controlling shares.

“Something you started from absolute scratch is hard to give up, but the transition is in place,” says Mitchell. 

Sewing skills have been on display at Northern Marine Canvas Products (NOMAR) ever since Kate Mitchell founded the company in the early 1970s. Now her two children have leadership positions, but they worked their way up the ladder, Mitchell says. Photo: NOMAR.Sewing skills have been on display at Northern Marine Canvas Products (NOMAR) ever since Kate Mitchell founded the company in the early 1970s. Now her two children have leadership positions, but they worked their way up the ladder, Mitchell says. Photo: NOMAR.

Consider the next phase

From the time he was 12, Donny Vasquez was required to help on weekends taking down tents for events produced by his parents’ tent rental company, Made in the Shade Tent Rentals, then in Vacaville, Calif., now in Sacramento. It was the last thing he wanted to do. “I threw the biggest fits,” he says with a laugh.

But after graduating from college, Vasquez joined up in outside sales. “I saw there was business out there we could tap into,” he says. “I wanted to stay.”

The company incorporated in 2001, at which time the three sons were given an ownership stake. But it wasn’t until 2015, when Vasquez’s parents started thinking about retirement, that the family started to look at what the next phase of the company might look like.

It’s been a slow process, Vasquez says: “We look at it when we have a free moment, and sometimes there isn’t a free moment.” But they are now working with a consultant, Vasquez’s parents are taking an advisory role, and he and one brother are leading the company (the other brother is no longer involved in the day-to-day operation).

“It’s been a process moving from a mom-and-pop shop to one with processes and procedures in place,” says Vasquez. “One thing I’ve learned is that you can’t just have the company handed to you. You have to visualize how you’re going to advance the business; you have to learn how to deal with people, with the equipment, and understand how to maintain customers.

“We’re a very close family,” he adds. “My parents have given us the tools to succeed but never forced us to do anything. It’s played out very well in what we do. We rely on each other, and we always listen to what the others have to say.” 

Jeff Moravec is a freelance writer from Minneapolis, Minn.

SIDEBAR: Succession Roadmap

In a family business, three interdependent systems—family, business and ownership—overlap and interact, making succession decisions more complicated, but also potentially more rewarding, says Stephen P. Miller, president of GenSpan Inc., in Asheville, N.C., and co-founder of the Family Enterprise Center at the University of North Carolina at Chapel Hill. Miller outlines some of the key topics and responsibilities associated with creating a family business succession road map:

Family System Tasks

  • Articulate why the family is in business together.
  • Determine if there is a desire to continue family ownership of the business by future generations.
  • Create a shared vision for the business.
  • Establish values that guide the family’s actions and influence business culture.
  • Define the family’s goals for the business.
  • Define financial goals and non-financial goals.
  • Determine incumbent and future leaders of the business.
  • Clarify which family members are not involved in the operation of the business.
  • Establish a regular schedule for family meetings to discuss business and ownership issues.
  • Consider developing a family council if the family is larger than just one nuclear family.
  • Establish policies on key issues like family employment, conduct, decision-making, conflict resolution, conflict of interest and policy enforcement.

Ownership System Tasks

  • Work with legal and accounting professionals to address financial issues.
  • Create an estate tax plan.
  • Develop a plan for transfer of ownership.
  • Create a shareholder agreement.
  • Establish a governance system for the business.

Business System Tasks

  • Create, review and/or revise a detailed strategic plan to achieve family owner goals.
  • Evaluate market dynamics for opportunities and threats, and develop strategic responses.
  • Evaluate the company’s strengths and weaknesses, and create plans to build on the strengths and reduce or compensate for the weaknesses.
  • Identify and develop leaders needed to execute the company’s strategy.
  • Identify family members with the necessary skills and interest to join the family firm. 
  • Determine the education and training required for company leaders, mentoring, outside work experience with real responsibility and accountability.
  • Establish defined roles for family and nonfamily employees within firm.
  • Identify nonfamily leaders key to the future success of the business.
  • Create development, compensation and career plans for each nonfamily leader.
  • Clearly communicate succession plans and define individual roles in that plan.
  • Develop an exit plan for the incumbent leader(s).
  • Determine desired succession role for incumbent leader during the succession process and once leadership transition is complete.
  • Create a management task force to develop, execute and evaluate progress on the succession plan.
  • Identify who makes decisions on succession: incumbent leader, board of directors, advisors?
  • Establish a process for making succession decisions.
  • Establish a timeline for succession plan.
  • Create a communication plan to foster open, transparent communication at appropriate times with key stakeholders, including shareholders, family members, employees, customers, bankers, advisors and vendors.