How To Pick Your Successor From Multiple Candidates
2/1/2002

Abstract: Succession planning is hard enough for family business owners who have already chosen their replacement. After all, there are retirement and estate tax issues to sort out. But succession planning becomes even more complicated if family business owners must choose from among many persons. This article explores methods for picking a successor among multiple candidates.

Eenie, Meenie, Miney, Mo
How To Pick Your Successor From Multiple Candidates

Succession planning is hard enough even if you’ve already chosen your replacement. After all, you still have retirement and estate tax issues to sort out. But succession planning becomes even more complicated if you’re forced to choose from among many candidates.

Delaying this decision can damage your company’s well-being. Your best employees may leave rather than wait for your selection -- or if they lack confidence in your hastily named successor. Let’s look at some methods for picking a successor from among several candidates.

Know the Effects Of Deciding Early or Waiting
Robert and Lynn began grooming their daughter to take over shortly after founding their restaurant. Their decision was easy: The daughter was significantly older than the son -- who wanted to work outside the business anyway. Chances are, your decision will be more difficult. Consider the pros and cons of naming your successor early versus later:

Naming your successor early. Choosing a successor years before you retire reduces the chance that your family business will be left adrift if a disability leaves you unable to run the company. Another benefit: It doesn’t keep the other candidates in suspense, leaving them free to pursue other opportunities.

Use time to rotate your children throughout the company at all levels.

By choosing the next CEO early, however, you may eliminate talented family members from the candidate pool before their talents get the chance to shine. Robert and Lynn’s son was devastated later in life because he developed an interest in becoming CEO and was an excellent leader. But, he never had a chance at running the family business.

Delaying the succession decision. The flip side of choosing early is selecting by attrition -- putting off the decision until only one candidate remains. This option makes your decision easier, though it may not be the best one for your family or business. After all, your most qualified and innovative family members may have already quit, perhaps leaving you with a less-than-desirable successor.

Take Advantage of Time
You can use time advantageously without compromising your company’s well-being. How? By giving candidates a set interval period to compete for the top spot. This approach means you won’t hastily choose a successor; for their part, candidates will have time to prove they can handle -- and want -- the job. Plus, it gives key employees time to adjust. Updating top nonfamily employees helps maintain stability and morale.

Use the time to rotate your children throughout the company at all levels and consider allowing them to each serve a six-month stint as acting president. This gives them a well-rounded experience, letting them learn your family business from the ground up. It also gives you time to evaluate each candidate’s performance in the various jobs. Quantify their successes and failures whenever possible and compare their records against the profile of your ideal replacement. Setting standards will help you make your decision and even assist you in training the next boss.

Get Help With Your Decision
Succession becomes increasingly complex for family businesses that have numerous family members involved in ownership and daily operations. Turning the decision over to a team or trusted advisor may be the answer. Here’s how each works:

Creating a team. Generally, family businesses create a task force or team to choose their next boss and handle other related tasks, such as implementing the succession plan and setting the new boss’s compensation. Your committee should include family members, key executives and members of your board of directors, if you have one.

Be forewarned: A task force may choose to keep itself in place permanently or end in a stalemate. Worse yet, emotional rivalry and alliances may hurt the business. What can you do? Set a time limit for the task force’s existence and include outsiders to help keep the process objective.

Delegating responsibilities to a trusted advisor. Some family business owners prefer to leave the succession process to an individual outside the business -- such as their lawyer, accountant or consultant. It removes the burden from you and can add more objective insight.

But, there are risks. Outsiders may not fully grasp your company’s history, values and culture.

Don’t Dawdle
You can quickly decide on your successor, but making the best choice requires time and reflection. To ensure the next boss and family business are ready for the transition, begin the process at least a few years before you plan to step down. This gives you time to identify candidates, evaluate their skill sets and provide training. The sooner you start your transition, the better it will be for you, your successor and your family business.

3 More Key Succession Issues
When planning their succession, many family business owners mistakenly focus on just one area -- finding the next leader -- even though this process affects every area of the company. As you craft your succession plan, pay particular attention to these three areas:

1. Successor performance. Define performance objectives for your successor. Goals assure shareholders that the new CEO will be accountable for his or her performance. It also helps your successor define his or her priorities and stay on task.

2. Personnel. Consider how the management team and board of directors may change when your successor steps in. Don’t forget about family member employees: Will their careers change as a result of your retirement? You may want to help family members map out their long-term goals.

3. Shareholders. Select a family liaison: This is someone who updates shareholders about company business during the succession and transition processes as well as educates inactive shareholders about their responsibilities. Also, when a new CEO takes over, shareholders should review their estate plans and update buy-sell agreements.

RC Holsinger Associates, P.C.
1-800-570-4272
www.rchacpa.com

(The previous article was general in nature, and we recommend any reader consult with their tax advisor as to the specific application of this information to their particular facts and circumstances. This article is based authorities which are subject to change, and accordingly, should not be relied upon. Any tax advice included in this article was not intended or written to be used, and it cannot be used by the taxpayer, for the purpose of avoiding any penalties that may be imposed on the taxpayer by any governmental taxing authority or agency)


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