One day either you will decide, or have it decided for you, that you will no longer lead your closely held business. Have you given any thought as to who the next leader will be? Will it be a key employee who is not an owner? Will it be a family member who is not associated with the business? Will it be a family member who is associated with the business? Will it be an outsider?
Not everyone is capable of running a business. Mere birthrights do not often “work.” Merely being the oldest child in the family should not be the only reason to be the leader of the business. Choosing the “wrong” person to lead the business could be disastrous.
John founded the John’s Family Restaurants with his wife Mary in the early 1960s. Their first location was in Chicago, Illinois. Since then, the business has grown to thirty locations throughout the Midwest. John and Mary have worked together in the business since it was founded. They made great business partners and contributed equally to the success of the business. When they started the business, they did “everything”, even filling in for the waitresses and busboys who called in sick. Recently, Mary has “retired” from the business and no longer works in it, although she remains on the board of directors. John is still the CEO and is very active in running the business. While he solicits and accepts input from his management team, he has the final decision in all major decisions, such as financing, new locations, marketing and hiring of all employees at the manager level and above. The business has a regional manager for each of its four regions and has a Chief Operating Officer, Dan, who is not a member of the family. Dan joined the business 20 years ago after he earned his MBA. Each location has a manager. John and Mary have four adult children: Tom who has been working in the business for 15 years and is currently a regional manager; Anne who has worked in the business for 10 years and is currently a manager at one of the restaurants; Kim, who has been in the business for 8 years and is currently in charge of marketing and sales; and Tony, who owns his own successful business. Tom’s region is profitable, but not as profitable as two of the other regions. Anne’s restaurant is the most profitable store in the chain. Since Kim has joined the business, sales have increased each year by at least 10%. Now that Mary has retired, John is starting to believe he needs to prepare for his eventual retirement. He and Mary have been discussing who they believe should be the next CEO of the business.
John and Mary have a few major issues to resolve. One issue regards choosing the right person to lead the business after John “steps down”. If this were ancient England, it would be clear – Tom, as the first born male, would be the next CEO.
John and Mary should consider various factors:
– Do we have to pick a family member?
– Does the manager have to be an owner of the business?
– How far in advance do we need to choose the successor?
– Are there current employees or family members who are qualified to be a CEO or do we need to go outside the business for a successor CEO?
– What if we do not select someone who is currently in the business, such as our COO?
– What do we do if the apparent successor CEO is not apparent or not ready?
– How do we ensure that the business keeps our values after we relinquish control?
– What role should we have after a successor is designated?
– What role should our children play?
– Do we want the business to “remain in the family?” If so, how can we ensure that happens?
In future issues of the LawGram, we will discuss each of these issues, as well as others that face owners of closely held businesses who are planning for the continuity of their businesses.