199: Are Your Kids Ready to Take Over The Business? (Revisited)
Why Rotating Them Through Departments Isn’t a Succession Plan
Moving your son or daughter through every department builds technical skill, but it doesn't necessarily prepare them to lead. Succession works when the company is ready too, with a clear vision and plan the next generation can step into and deliberate leadership development along the way.
There are some owners with an adult child in the business who aren't comfortable asking the question out loud: Can they run this?
The common plan is to move that son or daughter through department after department, a couple of years at a time, so they pick up technical expertise and build rapport with the team on the way up. Both of those hopes can come apart. Some people are going to resent the last name regardless of how much time your son or daughter spends working through the business, and credibility in the field doesn't necessarily translate to credibility in the office, where colleagues may have twenty, thirty, even forty years of leadership experience behind them.
In this revisited episode, Cameron and Joey lay the traditional approach next to the strategic one, where the question moves beyond whether the second generation is ready and asks whether the company is ready for the transition, too.
IN THIS EPISODE, YOU'LL LEARN
Why rotating your son or daughter through every department can build technical expertise without developing the leadership and managerial skills the company needs next
What the top two reasons people are promoted into management say about how most people end up as managers
Why a plan everybody is accountable to takes the question marks off one person, all the way from the owner to the janitor
Why an adult child will sometimes hear something from a trusted outsider that they can't hear from you
FREQUENTLY ASKED QUESTIONS
Is rotating my son or daughter through every department a good succession plan?
Not by itself. Working across departments builds technical knowledge and an understanding of how the business works. But as a company grows, technical expertise isn't enough. Leading the business requires leadership and management skills that aren't typically developed in the field.
How do I know if my adult child is ready to take over the family business?
Look at how they work beyond their own department. Give them experience on the leadership team and see whether they can help solve problems across the business. When you're running the company, there's no sales department or service department. There's the company, and you're responsible for all of it.
What’s the difference between a traditional and a strategic approach to succession?
A traditional approach focuses on whether the next generation is ready. A strategic approach also asks whether the company is ready. It puts a clear vision and plan in place so the next generation can step into leadership knowing where the company is headed.
Does the next generation need formal leadership training?
Yes, usually. If most of their experience has been inside your company, leadership and professional development need to be intentional. Other leaders may have developed those skills through education, experience at other companies, self-study, or professional development. The next generation needs that same intentional development.
Can I retire if my child takes over the business?
Only if the financial side works too. Many owners have put much of what they've earned back into the business, so they may need to sell or get the company to a point where they can step away from day-to-day responsibilities and live off the dividends. For more on stepping back, listen to How Owners Step Back Without Breaking the Business, Part 1 and Part 2.
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Episode 199 — Are Your Kids Ready to Take Over the Business? (109 Revisited)
Cameron Earhart with Joey Brannon, CEO and Founder, Axiom Strategic
This transcript has been lightly edited for readability.Cameron Earhart:
Hi, welcome to the Axiom podcast. This is Cameron Earhart, and today I have a very distinguished guest. Guys, get ready. Joey Brannon, CEO of Axiom Strategic, will be joining us.
Joey Brannon:
Well, thank you, thank you. It’s an honor and a privilege to be here.
Cameron Earhart:
We’re excited to have you. So today we are talking about, or the question that we’re going to try to answer for you is: are your kids ready to take over the business? So, Joey, I have a question for you to start. Is Annalise ready to take over Axiom?
Joey Brannon:
If you ask Annalise, she’s absolutely ready to take over the business. For those of you who don’t know, Annalise is my seven-year-old. She’s gotten a lot of CEO practice with two older brothers, telling the 17 and the 15 year old what to do. But one day maybe I’ll have to answer that question more seriously.
It’s a question that not a lot of people are comfortable asking out loud, but it is definitely rattling around in the head of a lot of first or second generation business owners who have a second or third generation also involved in the business, and potentially in what you might call a line of succession, to take the business over.
Cameron Earhart:
Well, before we jump into it, give a little bit of context, because you’ve been doing this for years and you’ve worked with a lot of businesses with multiple generations. We’re currently working with a lot of businesses with multiple generations. So lay that framework a little bit, and then I’ve got some questions I want to ask you.
Joey Brannon:
It’s kind of natural. It’s funny how we have a lot of businesses that have a second or third generation. It’s not necessarily because we hang out our shingle and advertise that we are family business specialists, but anybody who’s working with businesses in the space that we are, from a few million dollars up to $50, $60, $70 million, and they’re owned privately, meaning there’s not necessarily a share ownership group. It’s maybe one or two, maybe three owners. They’ve been working that business to get it to that point. They’ve been working it for a lot of years, right? So they’re older. They’re in their late 40s, 50s, 60s.
And most people have kids. So these business owners, like every other adult in their 40s, 50s and 60s, have kids who are adult age or approaching adult age, and it’s kind of natural for those kids to grow up around the business and then to maybe want to be a part of the business, or to be asked to be a part of the business. And so it’s something that we run into. We ran the statistics once and it was 70%. Now I think it’s probably 80%. It seems like when we add a business, it’s a very high likelihood there’s going to be a second or third generation involved in the business.
Cameron Earhart:
It’s got to be so exciting as that generation passing it down, to know, like, my legacy is going to continue with my child. My son or daughter is taking it. That’s just a cool thought.
Joey Brannon:
It is, and it’s something that I think a lot of parents want. But there’s a thought that usually precedes that, or comes along with it: am I going to be able to retire? I still need the money, but I really want you to take it.
The idea of a second generation stepping in is attractive from a legacy standpoint, but there’s still the financial reality that a lot of these businesses, they’ve not diversified. The business owners have not diversified for retirement. The money that they’ve made, they’ve usually plugged right back into the business. And so they either need to sell the business so that they can make up ground on that retirement front and have assets to live off of if they’re not going to be earning an income, or they have to get the business to a point where they can step away, not have as many day-to-day responsibilities, and live off of the dividends from the business.
And that’s ultimately the question a lot of them are asking. Maybe not overtly, but certainly in their head they’re thinking: if I step away, is the business going to continue? Is it going to do better? Is it going to be able to afford me? Is it going to be able to afford me and the kids? Those are all the questions that you get into. But there are a lot of other questions too, when it comes to the ability to lead a business that’s grown to that size.
Cameron Earhart:
All right, cool. Well, that’s good context. Let’s jump into it. First, let’s talk about traditional approaches versus strategic approaches. Tell me more about what you mean by that.
Joey Brannon:
There’s two ways that we see most commonly that people will handle succession. The first is what I’m calling the traditional approach, and that’s where we have that second generation, or that up-and-coming generation, basically rotate through all the departments we can. Maybe there’s a couple of very technical departments that they’re not necessarily qualified for. Accounting is one that you don’t really necessarily see. But it’s very common to say, well, we want them to be in the field in this department for a couple of years, and then in this department for a couple of years, and then we want them to be in sales for a couple of years, and then we want them to be in service for a couple of years.
And it could be a couple. We’ve got some second generation business owners and they’ve been there for 30 years. They’ve been there for a long time, probably because they started when a lot of these kids weren’t even legal. Like 12, 13, 14 years old, child labor laws, sweeping the floor. But they’ve literally been in the business for that long, and at 16, 17 started to get a paycheck and have responsibilities and a supervisor that wasn’t mom or dad. And so 30 years later, now they’re 45, 46, 47, and mom and dad are 67, 70, somewhere in that neighborhood, but still very active in the business.
So this idea of I’m going to have them work through the business. And I’d say the 30 years is probably rare. It’s usually more like I’ve got a 23 or 24 year old son or daughter who’s coming out of college, and they come to work in the business. And now I’m on a 10 or a 12 or a 13 year clock in my head of: can I get them enough experience in maybe two or three years per department over the course of four or five departments? I feel like that’s going to give them that kind of experience.
And what they’re hoping is that, one, they’ll develop some technical expertise. Certainly they have this idea that if they’re going to supervise people, they need to know how to do the job so that people can’t blow smoke and fool them when the job’s not getting done. But they also are looking, in my experience, they’re wanting that second generation to build rapport with everybody else in the company.
Cameron Earhart:
Yep.
Joey Brannon:
And there’s this idea that if they’re out there in the trenches with them, everybody’s going to learn to love them and look up to them, and it’ll just be this natural progression from being a buddy in the field working shoulder to shoulder to now I’m the boss signing your paycheck. And when I say that to them, they kind of see the error of that thinking. There’s a big gap between shoulder to shoulder in the field and now I’m the person calling all the shots in the company. But we don’t always think these things through. We just kind of go one day at a time and hope that we’re going to get to where we want to go.
Cameron Earhart:
Yeah, it sounds like they want to make sure that when their child takes over, they’re respected, and it’s not viewed as, the only reason they’re the CEO now is because of their last name. So it’s like, well, let’s just bounce them around and have them work with everybody, and hopefully they earn everybody’s respect naturally.
Joey Brannon:
It’s true. It’s unrealistic to expect they’re going to build that rapport, because some, possibly even many, people are going to resent the fact that they do have that last name. They kind of know: oh, you’re just here to earn your stripes, and then you’re going to move on. My career is going to be here. I’m going to be here until I leave this place, and you’re just here for a little while. So don’t pretend that we’re buddy buddy. You’re down here slumming it with us guys in the field, but pretty soon you’re going to be up there in the office. So I don’t think it’s realistic to expect that that rapport is going to happen.
The other issue with this idea of having them work through departments is that they are going to build technical expertise, but a lot of times the reason that approach is popular is because that’s the path mom or dad took. They were driving the truck for a number of years before they were able to hire some more people and then move into a supervisory role, and that seems like a natural progression for them. And it would be, if we were starting all over from scratch again. But the fact is, we’re starting at 20 or 30 or $40 million, and technical expertise is not going to be the thing that gets us to the next level. What’s really going to get us to the next level is a higher degree of leadership and managerial skill sets, which you’re not typically going to develop in the field.
So there’s a few problems with it. Another one is just that the credibility in the field doesn’t translate to credibility in the office. When you’re a small business owner who’s growing a business, and your kids are small, and you need help, you’re going out and identifying people who have that leadership and managerial skill set. They’ve proven it, and you’re luring them away, or you’re giving them an opportunity to step into a role their previous employer didn’t. And those people, some of them have worked 20, 30, even 40 years. And you’re saying, oh, my son has worked in every department for three years, and now it’s time to bring him onto the leadership team. And they’re like, what does this guy know about leadership? So that credibility that you’re looking for by putting them in the field oftentimes doesn’t translate at all when you bring them into the office, because there’s a whole group of skills that they don’t have that their colleagues do have.
Cameron Earhart:
Wait, so you’re saying technical ability does not translate directly into leadership skills?
Joey Brannon:
I would say most of the time it doesn’t. We look at people who are successful in that leadership and managerial role, and they came out of the field, and we say, oh, that’s how you do it. But that’s selection bias, because if you look at everybody who’s ever started in the field, you’ll find that a very small percentage make the transition into being managers instead of the people who are charged with getting the work done. So you have to be careful where your assumptions come from.
Cameron Earhart:
A study by Gallup across hundreds, I think it was thousands, of organizations, thousands of managers. The top two reasons why people were promoted to managerial positions: number one was because they excelled at their non-managerial job and in the technical abilities, and number two was that they had a lot of experience and tenure. So you’re speaking to this. Stick around long enough and you get promoted.
All right, so let’s talk about the strategic way.
Joey Brannon:
Well, not surprisingly, we’re going to talk about strategic planning, because it’s a more deliberate way to tackle this problem of succession. If we focus on whether or not the second generation is ready, it really ignores whether the company’s ready for that transition. In that traditional approach, you’re looking out there and you’re saying at some point there’s just going to be this light bulb that goes off. And it’s an entirely subjective assessment that says, okay, they’re ready. And then you’re going to install that person with the expectation that the organization is going to be ready for the same change.
It assumes that that next generation is going to simply step into the parent’s shoes and replace them as the charismatic leader. The same vision, the same unspoken cultural values, the same unarticulated purpose. And I’m saying unspoken cultural values very deliberately, because in those situations it has been the charisma of the founder. I’m not saying it’s all cheerleading and rah rah. They’ve got some good systems and they’ve got some good processes. But when it comes down to it, the leadership really revolves around that central individual.
So our approach would be to help the business build a roadmap around the succession that also took into account all the other things that they want to do to accomplish the vision of the business. So we have to get to this idea of a vision. Is there a vision for the business going forward? And have you built a plan around that, that the second generation can step into? Otherwise you’re just handing them this huge grab bag of systems and processes and people and saying, hey, make sure that I don’t go bankrupt when you start running this company. And that’s not a great way to do it.
So we want to build a system where they get experience on the leadership team and they can receive this mandate to drive the culture forward. When we talk about culture, we’re talking about the vision of the organization, the values, the strategies that are going to be pursued for the next couple, three years, the goals for the year. And if all that stuff is there, and that second generation has been a part, or can become a part, of the team that is leading that direction, then they can learn to focus their efforts across departments. That’s a really key skill set.
So we have somebody who comes into the organization, or into the leadership team, and maybe they have worked in all these different departments. And I think that would be a great thing. Don’t hear what I’m not saying. I’m not saying it wouldn’t be great for somebody who’s going to be the leader of the company to have all this experience across the departments, because I do think there’s tremendous value in understanding how the work gets done.
Cameron Earhart:
Including accounting.
Joey Brannon:
Including accounting. Yeah, absolutely. At the very least, a crash course in how to read financial statements from the controller.
But when they get in, one of the things that we want to have them practice is, when issues come to the leadership team, can they get out of whatever operational silo they’re in in their regular responsibilities and help the sales department solve a sales problem? Or understand, if there’s a primary strategy that the organization is pursuing in the strategic plan around retention. Let’s say that we want to make sure that we retain way more customers than the industry average, so that we can continue building new sales and growing and not have customers leaving out the back door. And we want to focus on retention. And let’s say that leader is in sales at the time, the second generation. Being able to come onto the leadership team and understand what is sales’ role in driving retention, rather than just say, oh, retention, that’s a customer service issue. That doesn’t have anything to do with me. So you guys work on that, I’m going to work on this.
When there’s a strategic plan to drive the organization forward and there’s a second generation, now we begin to gauge how is that second generation able to work across departments. And they’re shoulder to shoulder a lot of times with these folks, or maybe they’re even brought in as a junior leader to the leadership team. I’ve seen that sometimes. But are they willing to contribute to things that aren’t directly their responsibility? Because when they aspire to ownership, there are no more boundaries. When you’re sitting at the head of the table, then there’s no sales department, there is no service department, there is no operations division. There is the company, which you’re responsible for. And you can’t get locked into this kind of thinking.
Cameron Earhart:
Yeah. So the thing I like the most about viewing it this way, the strategic way versus the traditional way, is that the traditional way is all about the person, and the strategic way is more about the company as a whole. And so I could see, as an employee, when it’s the traditional way, they get a little resentful, they get a little bitter, they have those question marks around, is this even the right person to take over the company? But the strategic way, it’s more of, no, there’s a plan in place. I know where we’re going as a company, and this person is stepping into that role to help lead us there. So it makes sense. I love this shifting of how we’re viewing succession.
Joey Brannon:
Yeah, it’s very well put. You’re taking away a lot of the question marks that exist under that traditional approach, when all they’ve done is spend time in different departments and all of a sudden they’re given more responsibility. And I’m not saying they’re promoted into leadership just out of the blue. It’s like, okay, now John has been taking a tour of these departments, and we’re going to promote him to assistant sales manager, and then sales manager, and then maybe we’re going to move him over to assistant customer service manager, and then customer service manager. Usually that stuff will happen as vacancies open up. You’re not displacing longtime veterans, but you are taking advantage of opportunities when they present themselves to move this person around into different leadership positions.
But absent a bigger plan that everybody’s accountable to, there’s always these question marks of, well, how are they going to lead? What are their plans going to be? What division do they think is going to be most important? Where do they think the company should be going in the next five or six years? I’m eight years from retirement. I really don’t want to have to go out and start over again.
And when there’s a plan in place, all those question marks disappear, because everybody’s accountable to that plan. The owner’s accountable to that plan. The janitor’s accountable to that plan. And the people on the leadership team kind of breathe this sigh of relief, because, oh, we’re just plugging another individual into the plan. And yes, this individual is going to be a leader, but they’re leading under the mandate and scope of the plan.
Cameron Earhart:
Yeah, that’s good. And when we talk about leadership, we always go back to servant leadership. We talk a lot about how your success as a leader is contingent upon the success of those you lead. In other words, if your reports are all failing, you are failing as a leader. It’s not that they’re failing, you’re failing.
So let’s talk about leadership and management skills for a second, because that’s obviously a huge aspect of the second generation stepping into the CEO role. How can we make sure that that second generation or third generation is filling that needed space?
Joey Brannon:
Well, we kind of alluded to this before. If you were to look around the table, say we have assembled a leadership team at a client. Let’s say they’re building a strategic plan. We’ve identified who the key leaders are in the organization and we’ve assembled them all at this virtual conference table. If you look around this table, you’re going to see that people have developed their managerial and their leadership skill sets in all kinds of different ways.
Some people went to school, and maybe they got a bachelor’s degree in some kind of technical area, and then they got a master’s degree in management. Some other people, maybe they had their own company. They came up through the ranks, started their own company, sold it. They’re still 20 years from retirement. They’re like, I’ll take a leadership position with a much larger company and finish out my time here. Some other people may have been there for 20-some years, and they’ve taken it upon themselves to go to night school and read tons and tons of books and up their personal education and professional development game.
What does the second generation look like who’s coming in, especially if you’re talking about somebody who’s fairly young? This is the opportunity of a lifetime, to come in as a young person and have the full faith and confidence of the company owner, who’s your parent, to say, I believe you can do this, and I want you to do this, and you want to do it. But what is your background? What is your life’s experience, or your formal educational experience, or your OJT experience that has built that leadership and managerial resume? A lot of times it’s non-existent.
And the other thing is that if we looked around that table, a lot of the people around the table are going to have multiple experiences in multiple companies where they’ve learned to compare and contrast the good and the bad from different companies. They haven’t had to learn everything by trial and error. They’ve learned a lot of their habits and practices and disciplines by looking at which companies did things well that they worked at versus the companies that did poorly, and then emulating the leaders they saw at the good companies. And when you have a second generation or a third generation coming up, and their primary experience has been within your organization, you really need to take it upon yourself to engage in some formal leadership and professional development.
Cameron Earhart:
Yep.
Joey Brannon:
And there’s a lot of soft skills that come along with that. And you said it well, that we can’t just focus on, am I hitting my number, because if the people that you’re supposed to be leading are not hitting their numbers, you’re not being a very good leader. There’s an emotional intelligence portion to that realization that has to be called out and taught and drawn attention to.
My experience is that that’s rarely self-evident to most people, especially most young people. It’s more as you mature and you get your teeth kicked in and you experience enough bad leaders and you say, I don’t want to ever be like that person, that you become a good leader. And if we want to accelerate that process, you really need to be much more intentional about the training that that second generation gets, specifically in leadership and professional development.
Cameron Earhart:
Yeah, that’s good. So in the traditional approach, it’s so much about the person that it’s easy for that person to get an inflated view of themselves. It’s easy for them to be prideful, to lead out of an authoritative position. But in the strategic approach, when it’s more about the success of the company and everybody within it, then it’s so much easier to facilitate this attitude of servant leadership. It’s not about me, it’s about the success of the company. And how much more are the fellow employees, the team members, going to be cheering on that second and third generation when they know that that person believes they’re there to serve, and not just for the title of CEO to take a big paycheck home every day.
Joey Brannon:
Yeah, and they learn that best, I think, when they can witness mom and dad running the organization accountable to something bigger than themselves. Kids who grow up in businesses that just always provide bigger and better toys for the family to enjoy tend to look at the business as the toy provider.
Situations where they’ve grown up where mom and dad have admitted that maybe they’re not the best people for certain roles and responsibilities in the organization, especially as an organization grows and grows quickly and can outgrow their skill sets, they tend to bring in people who are better at a job than they are. Hey, I know I don’t need to be the smartest person in the room. And by the way, I know that if we want to continue growing this and giving more opportunities for more people to come here and do it with us, then we can’t pull every single penny out of the business. We have to reinvest back into the business. And they develop some financial disciplines around that.
Those kids learn growing up as teenagers talking about the business and hearing what we can and can’t do, and it teaches that we are part of something bigger. The business is not accountable to us; we are accountable to the business. And I don’t want to say business as much as I want to say organization, because what we’re really talking about is the impact that that organization’s having on the world at large through the employees that work there, and being able to provide an environment for those people to thrive and do their best work in the best way for the people around them, the customers and the vendors they work with. A kid who grows up having witnessed that is really set up for success.
But we know that that’s not the experience of most small business owners. Most small business owners are figuring this out as they go along, and they may be early, or maybe haven’t even started their strategic planning and execution discipline yet. And so if somebody were listening to this and they haven’t done that, I would say do that for the organization first. It’s going to pay tremendous benefits for the second generation, for your family that you want to set up for success. But a part of this always has to be about something bigger, and I’m going to advocate that it’s for everybody on the team. It’s not just for you and your family to make this work.
Cameron Earhart:
Yeah, that’s good. I like it. Anything else you’d add before we close it up?
Joey Brannon:
Maybe just one word of exhortation or encouragement for the parents. Your heart can be in the right place, but we all learn as parents, as our kids get older and become adults or closer to adulthood, that we can have the right answers, and we can be saying all the right things, and we can even be saying the right things in the right way, and still not be heard, because we’re the parents.
So this is one of those areas where I would encourage you to leverage other people that your kids will respect, that have credibility with them. It could be people who are already in your organization who’ve watched these kids grow up and have been maybe a great aunt or great uncle to them and are good role models. Maybe they can come alongside and start to teach some of these professional development skill sets, as well as mentor them in the operational role that they’re filling as they’re coming up through the ranks and being added to the leadership team.
But also, you’d be surprised at the progress somebody can make with an adult child who’s outside the organization. I’m not just tooting our own horn here, but we can be heard in ways that the parents can’t. Other trusted advisors, friends of the family, people that you know and would trust with your children, pouring into them, can make great strides with your kids. And don’t be frustrated by that. Be encouraged by it. Don’t bang your head against the wall. You’re not going to be able to teach them everything.
Cameron Earhart:
That’s wise. So what I’m hearing is, hire Axiom.
Joey Brannon:
A little self-serving. No, no sales pitch.
Cameron Earhart:
All right, well, awesome. This was extremely valuable. Appreciate you taking the time to be on our podcast.
Joey Brannon:
Least I could do.
Cameron Earhart:
All right. Thank you, everyone. We’ll see you next week.
