COMMENTARY | COLUMNISTS | PEGGY EDDY

When to bring in an outsider

In general, when a family retains an outsider to come into their business it is usually because things just aren’t working. From my experience, there are three more definitive motivating reasons to hire a non-related individual for a family in business.

The first reason is that entrepreneurial companies that have been extremely successful eventually outgrow the skill set of the founder. Most founders of family-owned entities spent little time working for large public companies before striking out on their own.

Therefore, it is unrealistic to expect that they had at the outset, or could develop, the talents and the range of expertise to handle growth and the changing demands of the companies they started decades ago.

Rather than face a decline in profits due to lack of talent, family business shareholders often will hire professional leaders who are charged with improving the profitability of the family enterprise. Many times, this will foster the formation of a formal outside board of directors.

Frequently, the founder becomes chairman of the board, stepping down from daily operations. In some cases, bringing in a professional manager becomes a necessity if the family wants to prepare the company for an eventual sale.

In summary, many founders are just that — a founder, not a manager who is enthralled with the daily details of a growing business. One woman who started an extremely profitable and now nationwide property management firm in her early 30s once told me “I am convinced that most entrepreneurs have ADHD. We are great at starting businesses but not so great at actually running them!”

The second main reason professional leaders are hired from the outside is that there are no family members interested in taking over the reins from the founder. In spite of this, the founder may still want to continue ownership of the enterprise.

This may be motivated by the founder wanting to provide continuing employment for loyal employees of long standing, to remain committed to the business’ mission and to receive continuing cash flow from the business in the form of dividends or distributions, even though they are officially “retired.”

The third motivation for bringing in an outside leadership team is that the founder is ready to retire, but family members in successive generations are not yet ready to take over the leadership of, and decision making for, the family business.

Henry Ford II wasn’t ready to lead the automaker when his grandfather died, so an outsider was hired as an interim CEO until the younger Ford was ready. Termed “bridge managers” by some, finding these individuals is challenging, as some candidates aren’t interested in an executive position with a finite time period.

Others may be hesitant to work in a family business where they would be responsible for mentoring the very person who will take over their position! On the other hand, some experienced outsiders relish this type of temporary assignment in that they welcome the challenge, or look at the temporary situation as a late-stage career move.

Planning for management succession is always a challenge for the private or public entity. There is the cost, time and effort involved to recruit and retain the perfect candidate. The management continuity process is one that involves personal financial, tax and estate planning, corporate and family governance, strategic planning and open discussion among family stakeholders.

Tough questions need answers. Does the company need one executive or an executive team? What can the company afford? Who are the company’s major competitors? What is needed for the company to stay competitive?

In addition to designing the professional experience and hiring criteria for outside candidates, it is also important to keep the stakeholders involved and briefed. One of the major considerations is what type of communication skills do candidates need to work well with family members.

Another consideration is whether or not the founder and the family members are open to taking advice from outside professionals. Having a professional board of directors composed of family stakeholders and talented outsiders will appeal to highly experienced professionals.

As the family business moves through growth stages, it is critical to have the right leadership team at the helm. Moving to professional managers can be a valuable strategic option as an alternative to an unwanted or untimely sale of the family business.

Keep in mind, however, that outsiders aren’t always a panacea. If a family in business was dysfunctional before the professional manager is hired, it will not change people’s behavior. It will become even more embarrassing!

The success of bringing in outsiders largely depends on how family members, particularly the family CEO or founder, treat and view those outsiders. Look at your family business closely. Is it time for your family business to hire professional outsiders?

Eddy, CFP, is president of San Diego-based Creative Capital Management Inc. and co-founder of the Family Business Forum at USD. She can be reached at peggy.eddy@sddt.com. Comments may be published as Letters to the Editor.

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