Outsiders can help family firm survive
Passing the leadership baton can be risky for a family-owned business, especially when the successor is an outsider.
The long-term survival of the business and the fortunes of the family may be at stake. Yet few family business leaders are prepared to make the tough decisions necessary for a successful transition.
Often it can take an outside advisor experienced in family business dynamics to manage the handoff.
“A pending transition is a time of high emotion,” said Barry Graff, a family-business consultant based in San Diego.
Families may turn to an outside successor if the next generation is not old enough, competent enough or interested enough to take over.
In such cases, an outsider can serve as the permanent or temporary successor needed to protect and expand the family business, experts said.
That happened at Fairmont Private Schools, which offers preschool through 12th grade on six campuses in Orange County. Leadership was passed to a nonfamily chief executive a couple of years ago.
Second-generation owner David R. Jackson, 62, was ready to consider stepping aside after 27 years at the helm but believed that his young adult sons were not ready to take over.
Jackson followed “best practices” advice for family-owned companies when he turned to outside counsel to find a successor. The result: He found his dream CEO to run the business founded in 1953 by his stepfather. And he said his worst fears -- being unable to let go of control or hiring the wrong person -- never materialized.
“For me the decision was driven by my tremendous goal to see my love, Fairmont Schools, become an even better school,” said Jackson in an e-mail interview.
An elder in the Mormon Church, he is now on a two-year mission in Russia with his wife. The trip sparked his need for a successor in the same way an earlier overseas mission taken by his parents opened the door for him to take over as director of the private business in 1979. He and his wife bought it in 1999.
They still own the business but have plans to transition their stake to their five children actively involved in the school. They expect one of their three sons to take over when the outside CEO decides to retire or leave.
At Blois Construction Inc. in Oxnard, Jim Blois, 47, runs the underground utility construction business started in 1965 by his dad.
He doesn’t plan to step aside anytime soon, but he has considered the possibility of an outside successor as part of the “what if” strategic planning he does to stay ahead of a constantly changing business landscape.
That successor “could be compensated highly without ownership and be a place holder for the future,” said Blois, whose oldest child is 15.
Finding the right outside successor takes time and effort, but it can increase the value of a family business, experts said. An outsider can offer fresh insight or needed expertise.
Choosing an outside successor can reassure key employees that the business will continue without the founder or another family leader. And it can assure family members, whether involved in the business or not, that the assets the founder worked to accumulate will be in the hands of a professional manager.
For those family-business owners who want or need to sell the company when they are ready to leave it, an outside successor can be attractive to a buyer, said Kevin Roach, senior partner at PricewaterhouseCoopers in Los Angeles.
Private equity buyers, who typically buy a business to sell it later at a higher price, may believe that an outside successor will accept changes more readily than a family leader, experts said.
That’s an important consideration for family businesses, which have been prime targets during this decade’s private equity boom.
“A lot of family businesses are being inundated with offers at prices that they never thought imaginable,” Roach said.
Although succession planning makes sense on paper, many entrepreneurial founders have trouble taking the steps needed for a successful transition, experts said.
Even as they approach or pass retirement age, most family-business founders or even second-generation leaders are not eager to confront the fact of their own mortality, to give up power or to make the decision to pass over some or all of their children as successor candidates, even temporarily.
“They intellectually recognize these issues, but they don’t necessarily act on them until they become a problem,” said Rich Folts, a partner in the Chicago office of international executive search firm Battalia Winston.
Once the decision has been reached to turn to an outside successor, finding one who is a good fit is another challenge.
It is essential to get all family members and key employees in the organization involved in the process, or the outside candidate will not be a success, said Patricia Romboletti, whose Sage Executive Search firm in Los Angeles helped Fairmont Private Schools find its first outside CEO.
“The founder is the father of the family and the father of the company, essentially, right?” she said. “So it’s like bringing in a surrogate parent all of a sudden.”
At Fairmont Private Schools, two of Jackson’s sons were “somewhat to very skeptical” of the decision to hire an outside CEO, their father recalled. “I believe they now see the wisdom. I feel very fortunate.”
Daniel, 33, currently works as vice president of operations at Strayer Education Inc., an education services company in Arlington, Va., continuing to prepare himself to take over at some point, his father said. Sons Chad, 31, and David Jr., 34, work at Fairmont. Chad is assistant director of education. David Jr. is director of media production.
Jackson said it was important first to find a top chief executive.
To help guide the selection process and oversee the business while he was gone, he set up a seven-person board of directors that included his son Daniel; his stepfather, the founder of the business; and several outside members.
Jackson said he struck an agreement with the new CEO, Rob Chandler, that gives the executive the benefits of ownership as far as profit and bonuses are concerned without actual ownership of stock.
Hiring an outside family-business advisor, well-known consultant Ernie Doud of Doud Hausner & Associates in Glendale, was also an important step, Jackson said.
Outside advisors, including board members, have helped Blois for more than a decade, the contractor said. Their expertise helped his company grow so rapidly that he hired an outside chief operating officer a few years ago to serve as a personal mentor.
“I’m relatively young and I’m still having fun,” Blois said. “But you have to have the organization in place to be able to adapt to whatever the situation is.”
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