Family-run businesses make up a significant portion of the American economy. According to the most recent census, more than 8 million independently owned businesses with fewer than 500 employees operate in the United States.
Unlike major corporations that often have extensive succession plans, small businesses must make choices as their owners near retirement. They must decide who will take the organization forward — another family member or an outsider.
Selecting the next CEO for a family business isn’t always straightforward. There are a lot of factors to consider, such as the capabilities of family members to oversee the company in the future. Some owners look outside their families for fresh insights that new leaders can provide.
The succession decision is one of the most difficult for a CEO. A wrong choice can adversely affect the organization’s operations, potentially resulting in future failure.
CEOs who built their companies from the ground up don’t want to see them deteriorate due to poor leadership. They want their organizations to stand the test of time so future generations can benefit from their hard work.
There are a few options that retiring CEOs of family businesses have for succession.
Often, a CEO turns to a trusted family member to take over the reins once they leave. Family members who spend their early careers learning the ropes of the organization have internal knowledge of the company’s operations that an outsider doesn’t.
They may regularly interact with major customers, forming strong relationships and bonds that are difficult to replicate.
Many times, a family insider grows up with the business. They may be the CEO’s child, younger sibling, niece, or nephew. They listen to the CEO’s struggles and achievements over time and learn the skills necessary to be an asset to the organization.
However, the family insider isn’t always a suitable successor for the CEO. Since most family insiders spend their early careers exclusively with the company, they never experience how other organizations operate. They don’t witness other leaders in action and may have difficulty adapting to new technologies or practices.
A CEO who plans to pass their role to a family insider is wise to encourage them to take on positions with other companies during their career. Spending a few years outside the family business can broaden their skill set and give them knowledge they can apply in their new role as the CEO of the family business.
Education is also crucial. Some family insiders transition from high school directly to the family organization. They don’t obtain advanced education that can benefit their future roles. Encouraging a family insider to pursue a bachelor’s or master’s degree is critical to their success.
Sometimes, there isn’t a family insider available to take over the CEO’s role in the organization. Close relatives may be too young to run the organization or lack interest. In these cases, a CEO can turn to a successful family member working elsewhere.
Sometimes, family outsiders prove quite beneficial. They allow the CEO to keep the business within the family while bringing fresh ideas and strategies to the organization. Ideally, a family outsider will have some knowledge of the company’s business practices but a wide breadth of experience outside the industry that can aid the organization.
Family outsiders are also helpful for training family insiders. For instance, if a child of the CEO is still in the early years of their career, a family outsider could take the leadership reins while mentoring the insider for the CEO role later on. In this situation, the original CEO can retire or move on to their next endeavor while facilitating a robust succession plan for the company.
A non-family insider is a person with extensive experience within the organization. However, they lack a family relationship with the CEO. They may be a long-time employee with extensive experience across various departments.
A non-family insider often counts the CEO as their mentor, and they’ll receive ongoing guidance from the CEO to prepare them for their new leadership role.
Non-family insiders are advantageous when no family member can take over the organization. If the CEO has children, they may be too young to run the company or they may have other interests. Similarly, siblings and extended family members may not have the skills or desire to take over the business.
Selecting a non-family insider to run an organization is rare. Often, CEOs of family businesses who turn the company over to a non-relative seek to sell their organization as part of their retirement plan.
A non-family insider who purchases the company from a CEO may need to obtain financing to support the change.
In some cases, the CEO will transition the business to the non-family insider in exchange for a percentage of their yearly earnings. They’ll continue the arrangement until the new CEO amasses enough money to buy out the founding leader.
Hiring a non-family outsider for the CEO role brings new skills and experience to the organization. A non-family outsider may have industry experience leading similar companies or be entirely new to the market. Their outside knowledge can be a breath of fresh air to a company stuck in conventional ways.
However, non-family outsiders probably won’t share the same values or strategies as a family insider. They may struggle to build strategic relationships with key customers and remaining longtime employees.
When a non-family outsider comes into a family business, they might make changes that other team members disagree with. These could include significant adjustments to the company’s business model, employees, and products or services.
Sometimes, their changes can optimize the company for the current operating environment, but in other cases, the business declines.
CEOs often overlook their succession plans in favor of managing the company’s current affairs. However, at some point, they’ll need to step down. CEOs must appoint the right person for the role to ensure the organization’s future survival. Selecting a successor may be the most critical decision they make for their company.
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