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Sep 18, 2018

Why Family Businesses Should Hire Outside Leaders

Do you own a family business and is its leadership team composed solely of family members?

If it is, is this advisable?

Many experts say it is not. “Appointing an outsider (to a family business) can pave the way for business success and still leave open the possibility of future family leadership,” wrote Amy Renkert-Thomas in Wealthmanagement.com. “Outside management can bring the business to a new level of offering new skills and experience.” In some cases, outsiders can take care of unpleasant tasks related to family leadership that other members of the family would want to avoid: such as letting go of non-performers who are relatives.

Succession planning is often one of the big worries of family businesses. Few anticipate the kind of problems choosing the right leader can present. Many find that succession planning in a family firm is wrought with divided loyalties among family members. Clear thinking does not prevail because emotions run high.

Because of this emotional component, experts agree bringing in an outsider can help steady the ship.

Here are some of the ways that bringing in an outsider can help your family business:

  • You don’t want to have just a family member in a senior position in possession of essential business details and trade secrets. Sometimes it could become hard to replace this relative and loyalties interfere with sound business planning. If you have to replace a top executive, it will be easier if that person is an outsider.
  • An outsider can offer a different perspective from the family viewpoint.
  • An outside leader may possess certain executive skills and strengths not possessed by a family member, such as communication skills.
  • Balance, says the Young Entrepreneur Council in Management, is a vital component to your leadership team. An executive who can offer an attitude of neutrality during times of family conflict can be a significant advantage to the firm’s operations.

Succession Planning in a Family Business

Frequently family businesses make the mistake of speeding up their succession planning when the longtime CEO, and perhaps the firm’s founder, is ready to retire. However, this may not be the time that the next generation is ready to lead. That is not the way to plan for succession in a family business. Your firm should initiate succession when the next generation is prepared and ready to lead, not before.

According to Bill Black with Familybusinessplans.com, it is crucial for the owner to ask himself or herself:

  • When do I want to work less, or part-time? When do I want to disengage fully? When the owner answers these questions, he should share the information with top leadership, so they can assess if the heirs are ready to take the reins.
  • When the owner resolves a timeline for his retirement, then the next question is, to whom will he pass on the business? To family or non-family? If the next generation is not ready to lead the company, it could be that an outside leader is hired on a two-to-three-year contract, and one of the responsibilities of the outsider will be to groom the coming generation.
  • When the owner makes plans for retirement, what are the company’s financial expectations? Does the business expect to perform at the same level? What mechanisms are in place to ensure this? Is the company’s board composed of old friends of the founder? Upon his retirement, the time may be right for new blood to join the board. Take a fresh look at how management has run the business, and evaluate where changes can be made. Often, an outside executive can accomplish this more easily than a family member.
  • Whoever is chosen to lead the family business, he or she needs to have a healthy relationship with the departing CEO and owner. She needs to listen to the CEO with respect, and follow his advice. If he has run the business successfully for 30 or 40 years, he must know something!

Plan not only for succession but plan strategy for the structure

Experts also advise family business owners to consider essential facts such as ensuring that the organizational structure is in place to support the next leader. If the firm is developing software and is upgrading it on a regular basis, are all the company’s engineers and data scientists up to speed with industry developments? Does your manufacturing facility keep up with demand? Are there some new sales outlets that need to be developed?

It’s vital for your firm to have a careful plan with limits and methods of accountability that can help align the goals and expectations of the outside leader and the firm.

As your company goes through the transition of acquiring a new leader, it’s a time to get feedback from all employees about how they believe their department is functioning, and what changes might benefit the firm. Use this transition period to listen to employees’ views and to make plans for any needed changes. Be open to suggestions and respect differences of opinions.

Are there other younger family members who need to be trained to manage various aspects of the business? Get them on board and give them the necessary experience they need.

Remember that the bigger your business, the more talented people you will need to lead it. This is the belief of Dr. Joshua Baron, co-founder, and partner of Banyan Family Business Advisors, a Boston-based company that coaches family businesses.

As with any new hire, the company needs to be clear about the skills and capabilities required of the new CEO. When you know what your firm’s areas of weaknesses are, you can look for individuals with expertise in those areas: for example, marketing, or international sales.

Entrepreneurs’ Organization wrote in Inc.com: “With an honest assessment of the company's pain points, the individual hired to improve these areas will understand the important contribution he or she must make, and current family employees may more readily value the newcomer. When choosing between a highly-productive professional or a family member with average knowledge or skill, the overwhelming preference should be an outsider.”

Just look around you, and you will see examples of family- run businesses that brought in outsiders to lead them upon the founder’s retirement: Ralph Lauren hired Swedish retail executive Stefan Larsson to succeed him at his namesake fashion empire. Levi Strauss & Co. had been run by different generations of the Haas family, who were related to the company’s founder, until 1999– when they chose Philip Marineau from Pepsi Co. to succeed Robert D. Haas as CEO. Haas is the great-great-grandnephew of company founder Levi Strauss. It was the second time in the company’s 146-year history (at that time) that the company went outside its gene pool for its leader.

Conclusion

A family business is in many ways no different from that of any enterprise. While it wants to perpetuate a multi-generational family legacy, it also wants to make money and to move forward in the future with excellence and growth. While family members may bring positive forces such as passion to the leadership of a firm they inherit, a poorly thought out leadership structure full of family members with different responsibilities can stand in the way of the clear, objective business thinking that leads to top results. 

If your family business can benefit from an outside leader, keep the best interests of the firm in mind. Jump at the chance, and make the hire!

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