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The Psychology Of Succession Planning For Family Luxury Jewelry BusinessesBy The Gordon Company |  August 21, 2013 (0 comments)

Ft. Lauderdale, FL—While it’s quite common to see third- and fourth-generation prestige jewelry stores, when it comes to family businesses overall, only 30% of family businesses survive to the second generation. The numbers diminish with each successive generation: only 12% survive to the third generation and only 4% make it to the fourth generation.  

It's not the taxman's fault. Most jewelers blame tax and legal issues as the primary reasons why businesses fail to survive into the second generation, but in fact the number-one reason why they don’t has nothing to do with taxes and everything to do with the lack of a well-developed and mutually agreed-upon succession plan. Tax and legal problems have relatively straightforward solutions, but what’s less straightforward is understanding and addressing the psychological aspects of succession, and developing a dynamic plan that meets the needs of the individuals concerned.

Effective succession planning is about the willingness of family members (and other parties necessary to the business) to work together to make it successful. Unless all the parties understand and deal with the emotional and psychological factors unique to the current owners, operators, future shareholders, and non-family investors in the business, even the best plan will fail.

For example, consider a case where a family member put their third generation business into receivership, instead of voting for a reorganization plan that long-term would have likely been beneficial to the whole family. The failure of this business to survive was not due to estate taxes, litigation, or the marketplace, but rather disregard for others’ feelings about fairness and equity.

Psychological Barriers. There are many psychological barriers to succession planning that founders have to overcome both individually and as a family group. These include reluctance to change, life-stage adjustments, and family forces. Founders and owners may fear losing personal identity and self-efficacy because of the loss of power and control over their company. Owners may also resist facing the reality of life-stage adjustments, choosing instead to wait until retirement age before addressing the need for a business transition.

Family dynamics also can make planning difficult. It requires an honest, open discussion of subjects many people don’t like to discuss: money, legalities, interpersonal relationships, mortality, and exit strategies. But succession planning is only meaningful if interpersonal relationships are properly addressed at the start of the planning process. Otherwise, fighting over financial and managerial interests could harm an otherwise viable business while failure to agree on an effective transition can also be a painful and costly mistake, because a family-owned business is not only a source of income, but also an important family legacy.

Relationships are key. Many would assume the most important relationship is between the founder of the business and his or her chosen successor, but that would be a mistake.  Likewise, traditional wisdom suggests succession plans should result in a seamless transition that begins early in the businesses’ development with an underlying goal of matching the founder/owners’ attitudes and beliefs with the eventual successor. However, that view may be naïve also.

Today, the basis of succession planning is developing and managing many relationships, which is seldom either a seamless or a straightforward process. What is most important is fostering a positive relationship between and among all family members to gain consensus on two key elements in all succession plans, namely ownership and operating management. These include agreement on control, involvement, compensation, and value.

Table 1: Key Elements for Successful Succession Planning

Key Elements	Description
Control	Who has the power to direct and control the business after the succession plan is implemented?
Business Involvement	How active will the founder, successor, and other family shareholders be in setting strategy and day-to-day business operations?
Value and Compensation	How will controlling management and non-operating family members be compensated?

Building a Succession Plan. While there are a wide variety of ways these elements can be configured into a workable succession plan, what is important is to find that combination of the elements that satisfies the collective needs of all family members at the beginning of the process, rather than waiting until later years to resolve deep-seated differences and emotional needs.  Then, the only resolution may be confrontation, litigation, and all too often dissolution of the business through a sale or outright liquidation.

But it’s often difficult for everyone to voice their feelings about perceived unfairness and inequity of succession plans. For one thing, succession decisions are often done ad hoc and too early.  While it is important for owners to guide their children's future role in the business to make future transitions easier, succession plans are not really about children per se, but all about grown up children’s families, including spouses and grandchildren. For instance, consider a situation where a managing family member wanted to take the business private, only to find that other family shareholders felt—but never said—the business had been poorly managed and the wealth unfairly distributed. 

As a result, the business was sold to a larger rival. In retrospect, had management addressed other family members’ deep discontent sooner, a mutually beneficial solution could have been found that would have kept the business under family control and satisfied everyone’s emotional and financial needs. This is just one example of how difficult it is for family members to talk openly about emotional and financial threats on an individual or collective level; much less thrash out how to overcome such feelings and emotions.

Find a neutral mediator. For these reasons, it is often beneficial for owners to consider the use of outside facilitators, like organizational development (OD) specialists, to manage the succession planning process. This professionally managed and transparent course of action promotes an atmosphere of fairness and impartiality, while helping family members voice their concerns, reservations, feelings, and emotional needs—not just the rational view. Additionally, professional advisers can assist owners and family members in working together to systematically focus on understanding and resolving conflicting succession planning issues. While specific conflicts will vary according to family and business circumstances, areas of concern and discontent typically include (a) current leader’s economic needs; (b) family related differences; (c) strategy disputes; (d) post succession conflicts; and (e) ownership structure controversy. Table 2 summarizes some of the issues and questions family members need to think through and answer in order to develop a successful succession plan.

Table 2: Succession Planning Issues

Areas of Conflict	Description
Current Leader’s Emotional and Economic Needs	1. Will the founder/leader have the ability to give up power, control, and prestige of running the business? 2. Is the founder/leader’s vision of retirement realistic in the context of a workable succession plan? 3. What steps will the family take to address unrealistic expectations? 4. What income does the founder/leader expect from the business after retirement?
Family Related Differences	1. How will the roles and relationships change after the succession? 2. What are the family’s feelings about the new relationships and power structure? 3. What is necessary to gain a consensus?
Strategy Disputes	1. To what extent will the business plan change when Generation Two takes over? 2. How will the business change to remain competitive? 3. Will historical core values have to change to respond to competitive threats?
Post-Succession Conflicts	1. How will the family manage the inevitable conflict arising from a succession plan, without jeopardizing the business? 2. Will management consist solely of family members or will the organizational structure also involve selected key employees, investors…etc., who is not family, post succession? 3. How will key employees be retained when the founder/owner retires? 4. Do other employees have sufficient job knowledge and experience to maintain business continuity? 5. Will sibling conflict likely inhibit a smooth transition? 6. What is the risk of key employees aligning with other family members?
Ownership Structure Controversy	1. Who will own the business? 2. How will the ownership be divided? 3. What will be the ownership structure? Common stock? Preferred stock? Voting shares? Non-voting shares?

The Gordon Company is pioneering new diverse sales growth strategies in keeping with its 110-year-old tradition of providing timely business-sustaining services for many of the nation’s oldest and most esteemed fine jewelers. Whatever the business objective, The Gordon Company has helped fine jewelry retailers achieve their goals in this stringent and unyielding retail environment in a variety of ways. These include such services as brand-specific diverse growth strategies; targeted inventory reduction sales; brand building; store reduction and consolidation sales; transitional ownership, business continuity, and succession enabling events; market share dominance events; cash flow maximization, and store closing sales. For more information or for specific examples of actual case studies, call (954) 763-9800 or e-mail info@gordonco.com.

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