One of the major reasons many family-owned real estate companies don’t survive past the first or second generation is a lack of succession planning. In theory, it’s great to think about “grooming” an existing team member to take over the senior role someday. In reality, succession poses a serious challenge with far-reaching implications, especially for small and mid-sized companies. Few firms can afford to hire a deep bench of potential successors, and if a preferred person doesn’t work out, finding a replacement can be daunting.
The chances of a firm’s survival in many cases are grim. Once the reins pass to the next generational leader, odds are stacked against the company that it will survive to the next succession. Research by the Family Business Alliance indicates that just a bit more than 30 percent of family-owned businesses are able to make the transition into the second generation, and only 12 percent are still viable by the third generation. A mere 3 percent make it to a fourth generation or beyond.
Many factors contribute to these bleak figures, including mergers and acquisitions, rapidly evolving technology, and the ever-changing ebb and flow of the broader markets. Whereas most public REITs have solid succession plans, many private real estate companies are ill-prepared for the top executive’s eventual departure.
Baby boomers formed most of the small and mid-sized real estate companies in operation today, and many of those people are retiring or planning to. Yet an alarming number of them are also getting ready to leave without a concrete plan to ensure their business thrives and grows after they’re gone.
Recruiting outside versus inside
In our experience at RCLCO, most small and mid-sized real estate companies have no formal succession plan in place for key team members, and few companies have afforded themselves the time needed to groom a promising candidate—or to try to regroup if that effort has already failed.
Even when a company believes it has a viable internal successor, that person may grow impatient and depart suddenly if the process drags out too long—forcing a renewed search for another qualified candidate. An external search may be the best option for a company that has only a limited pool of internal candidates, especially if time is short.
Here are three important factors that should be considered to make the process most effective:
Culture—Any outside hire should be thoroughly vetted, not simply for experience, technical skills, and capabilities, but also to ensure compatibility with the company’s purpose, culture, and office dynamics. Many small and mid-sized companies have unique, deeply ingrained cultures based on working relationships, job roles, and skill sets that have evolved over many years. Even the sharpest outside candidate might not be a good fit for a particular firm.
Communication—Open lines of communication are critical, both with existing employees and potential new members, to combat the fear and inertia that often accompany a leadership succession. Team members should stay engaged and positive in their work as the process plays out. Transparency from the top down will be vital in helping to maintain an even keel during the transition.
Buy-in—Any potential new leader, especially one coming from outside, must win the support of owners, senior leaders, and the entire team. Not everyone will be pleased by the decision, particularly senior people who may feel passed over. So, it’s essential that the newcomer establish, firmly and clearly, what he or she brings to the company, and why that unique leadership is now necessary to ensure future growth and earnings. Without such buy-in, the risk that a firm’s best talent might head for the exit grows.
Implications of not planning
Proactive succession planning takes time and can be a struggle, but the consequences of not doing it can be devastating. Emergency or contingency succession plans are designed to deal with unexpected turnover, such as a sudden death, disability, or departure. Although many companies have legal prescriptions covering ownership or partnership stakes in those instances, the policies often fall short in defining a clear line of succession in the event of an unplanned vacancy. The result can easily lead to a power vacuum and disastrous mismanagement.
In the worst case, a third- or fourth-generation CEO might have no option other than to sell the family business—all because a structured plan for succession was not implemented in time.
Choosing a worthy successor is not an easy task, especially for someone trying to preserve the family real estate business for another generation. But with many people of baby boom–age range now retiring, a solid succession plan is more important than ever. It takes time, money, and a lot of hard work to find exactly the right person, but making that investment is necessary.
Finally, the emotional component of succession should not be ignored. It can be a trying time for everyone. Even when the desire to step down is genuine, following through with goodwill during the transition can be difficult on all sides. Time and again, we have witnessed outgoing leaders who are unwilling—or unable—to walk away from their day-to-day roles once a new successor is finally installed.
It can be a tricky environment to navigate, and the impact on the bottom line can be harsh if it’s botched. But dealing with it successfully, up front and with candor, helps ensure the incoming leader will be well primed to take over and continue building on the predecessor’s legacy.
