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Transfers of a Family Business: Choosing The Next CEO

When one child has been active in a family business, and he or she wants to take over the business when the founder retires, deciding the second generation CEO obviously, involves a relatively simple analysis. Nevertheless, leadership transitions in a family business are always susceptible to complications — some of which can be anticipated and some of which cannot.

This article provides a summary of many factors that can impact the choice of a next generation CEO.

  • Skill Sets. Should a child be the CEO if she is an excellent salesperson but is lacking in operational skills? What about the child who has tremendous technical skills but is awful at dealing with people? No one can be great at every skill required of a CEO but major deficiencies should give the founder pause before his or her successor is appointed.
  • Multiple Children in the Business. The decision of who will become the next CEO becomes more complex if more than one child is active in the business. A competition among siblings for the top spot can damage family harmony. Clearly, things are easier if the siblings can cooperate, share responsibilities, and have complementary skills.
  • Control. Regardless of how many children have management roles, the founder and the company have to decide who will have ultimate decision making authority. The ability for all family members to reach unanimous decisions is desirable, but highly unlikely in practice. Usually control is devolved onto a limited number of people, if not limited to the CEO. This too, however, can lead to tension in the family.
  • Leading vs. Managing. A child can be a very successful manager of a product line or company division but not be right for the CEO role. Managing is fundamentally different from leading. A leader needs to have a strategic vision be able to anticipate trends and future developments, to inspire, and to problem solve on a much higher level than a manger.
  • Non-active Children. There is a clear potential for discord where some children with an ownership interest in the business are not involved in the business. The next CEO has to have the ability to balance competing interests between the company’s needs and the desires of the non-active family owners. The classic example is a company that needs to purchase new machinery but certain family members want the money distributed out as dividends.

Ultimately, the founder has to decide what is more important: family harmony or the survival of the business. Some families are lucky in that the members are candid, not jealous but supportive, want the business to succeed, and are willing to subordinate their own desires to that end. Other families cannot reach consensus on who the next leader should be or the amount of power given to the CEO. In these cases, in the end, the business is likely to be sold or outside managers will be put in place. It is apparent that emotion plays a large role in the transition process.

If you have any questions about choosing your next generation CEO, please feel free to contact your Davis & Kuelthau corporate attorney.