The succession conversation in the privately held mid-market business is rarely about succession. It is about identity, about family, about the half-articulated promises a founder made to himself thirty years earlier about the shape of his life and the meaning of his work. The mistake the consulting industry makes — and the family business often makes alongside it — is to treat the succession question as a problem in organizational design. It is, in our experience, almost always a problem in personal reckoning that arrives wearing the clothes of organizational design.
I have worked on a meaningful number of these engagements over the last decade, both inside the firm and before. The pattern that distinguishes the successions that go well from the ones that go poorly is not, principally, a pattern in the technical work. The technical work — the leadership development, the role design, the equity arrangements, the legal and tax structures — is well understood and reliably available from competent advisors. The pattern that matters is whether the founder has, by the time the technical work begins, made the personal reckoning that the technical work requires of him.
What founders avoid, and why
Most founders of successful privately held businesses are people of unusual ability and unusual constitution. They have spent decades operating with a degree of personal authority that no executive of a comparably sized public company would be permitted to exercise. They have, very often, built the business around an implicit promise to themselves: that the work would be theirs to direct, that the shape of the company would reflect their judgment, and that the relationships with customers, with suppliers, and with the most senior of their employees would remain personal.
These are not vain commitments. They are the conditions under which most successful privately held businesses are built. They are also, with rare exceptions, incompatible with a successful succession. The founder who succeeds at his succession is, almost always, the founder who has confronted the obsolescence of these commitments before he has confronted the technical work of replacing them. The founders who fail at their successions are, almost always, the ones who attempt the technical work without the prior reckoning. The technical work then fails in the middle, often at considerable cost to the family and to the business.
The five-year horizon
The single observation I would press most strongly on a founder considering succession is that the work begins five years before it is required, and that the founders who begin it earlier consistently arrive at outcomes that are better — for the business, for the family, and for themselves. Five years is enough time to identify and develop the leaders who will replace the founder, to migrate the most personal of the customer relationships, to design and test the operating cadence of the post-founder business, and to make the personal reckoning that the technical work demands. Three years is, in our experience, often not enough. Eighteen months is reliably too short, and the eighteen-month succession most often produces either an interim arrangement that lasts a decade or a transaction conducted under conditions that do not flatter the founder's negotiating position.
The objection most often raised against the five-year horizon is that the founder cannot know, five years out, whether he will want to step back. The answer is that he is not committing to step back. He is committing to make the business succession-ready, which is a different commitment, and one whose costs are far lower than the costs of arriving at the succession unprepared. The succession-ready business has more options than the business that is not, including the option of remaining founder-led.
The technical work, briefly
The technical work of succession is not the subject of this article, and is in any case well-treated elsewhere. I will note only that it requires, at a minimum, attention to four areas: the leadership team that will run the post-founder business, the operating model and decision cadence that will replace the founder's personal involvement, the ownership structure and the financial arrangements that will support the family across generations, and the question of what happens if the answer is a sale rather than a succession — which is, increasingly often, the answer that the family arrives at.
Each of these areas is straightforward when conducted on a five-year horizon by a founder who has done the personal work the technical work requires. Each is treacherous when conducted on a shorter horizon by a founder who has not.
The role of the outside advisor
The right outside advisor in a succession is rarely the consultant who positions himself as a succession specialist. The succession specialist often arrives with a methodology, a deliverable framework, and an interest in extending the engagement. The right advisor is, in our experience, an advisor of broader competence and longer relationship who can move comfortably between the personal, the strategic, and the technical, and who has the standing to tell the founder things he does not wish to hear. The right advisor's first useful contribution is often a conversation about whether the succession should be conducted at all, or whether the family should accept that the answer is a transaction. That conversation is rarely had with the right candor by an advisor whose engagement depends on the succession proceeding.
Halverson Reed's work in family-business succession has been part of the firm since its founding. We do not specialize in it, in the way that the term has come to be used in the consulting industry, and we do not market it as a service line. We are, however, retained for it regularly, by founders who have concluded that the conversation requires the kind of advisor whose interest is in the right answer rather than in the duration of the engagement.