Insights: When to choose an outsider as CEO to run a family business

It can be a difficult moment when you decide it’s time for an outside CEO to run the family business. Sometimes, this comes about because the next generation isn’t interested in the business or lacks the necessary experience or readiness for leadership roles. Succession is a tricky thing – the word brings to mind not only the famous TV show but also the real-world challenges facing many of the world’s largest companies. It also applies to smaller organisations – although it seems not enough of these are planning. In fact, according to the Harvard Business Review, 34 per cent of family businesses lack a formal succession plan.

impacts not only the future success and stability of the business but also the family’s main asset. The task of finding the right leader is even more critical in a family business due to the intertwining of family and business interests.

The need for an external CEO often comes to the fore when a family business is undergoing significant strategic changes – moving into new markets, going through transformation, or facing a severe downturn. In these cases, an external CEO can bring fresh perspectives, strategic expertise and objective leadership to help drive growth and innovation while providing unbiased decision-making. Whatever the reason that brings a family business to the point of considering an external CEO, it’s all about planning. And I mean far ahead. Perhaps three years, but ideally five.

So, that’s what we’re going to cover here – how you should plan ahead, what challenges you are likely to face during the process, and a step-by-step plan to ensure a smooth transition.

Planning far ahead of time

In an ideal world, succession planning begins well in advance of the transition. A multi-year timeframe allows for thorough planning, discussions and mentoring between the outgoing and incoming leaders, as well as thinking about how this will impact each part of the business.

As a starting point, the family should clarify their objectives for the future – this will include the business and any other concerns, whether that’s real estate or other ventures they may have. It’s important to take stock of the full range of the family enterprise at this stage and involve the next generation to understand the various ways they might contribute. This groundwork ensures that when the new external CEO takes over, they can be given a clear picture of how the family will be involved.

When thinking about future planning, these are some of the key considerations:

• What skills/experience are you looking for in an external candidate?
• What roles will the next generation of the family want or be qualified to take?
• How will the two factors above blend?
• What is your timeline?

These are just high-level points to get you started – we will look at the process in more detail later in the article.

The challenges of an external CEO in a family business

Appointing a new CEO has its difficulties. It’s not a simple either/or task of promoting a family member or bringing in an external candidate. Make the wrong decision and bring in a poorly-suited CEO, someone who doesn’t have the right experience or is at odds with the family’s vision, and the company’s future can be in jeopardy.

So, the transition of executive leadership is a process that demands a lot of attention. It’s about using a strategic approach and ensuring collaboration between stakeholders at all stages. Each family business is indeed unique, but some things are universal, and a well-structured and transparent process is key to selecting the right CEO. Investing time and effort in this process ensures that the chosen leader is well-prepared to steer the company forward.

There will always be bumps in the road. One key challenge may be the outgoing CEO’s reluctance to fully relinquish control. It’s understandable – this is a family business, and there is a strong emotional attachment. The outgoing CEO, though, must understand that letting go is crucial so that the new CEO can establish their leadership and make necessary changes. The incoming CEO needs to have the freedom to make decisions while also having the opportunity to earn the respect of the executive team and family shareholders.

With this in mind, a clear plan must be in place to ensure incoming and outgoing CEOs feel their needs are being met. Let’s look at that now.

Take it step-by-step – a five-part plan

Bringing in a new external CEO can be broken down into a few key steps:

Step 1: This begins before the new CEO starts their tenure. It’s about preparing everything so the incoming CEO has all the necessary information – financial statements, organisational chart, operational procedures, key legal documents, contracts, IP, and so on. Throughout this step, the outgoing CEO must ensure the new CEO has access to necessary materials and that meetings have been set up with key stakeholders.

Step 2: The new CEO is now in the role but in a passive capacity. They should still hold weekly meetings with the outgoing CEO in the form of high-level overview-type discussions. These should not only be about information transfer but also about building relationships around the business. This is also the time when the new CEO can start to understand how they will interact with family shareholders and employees.

Step 3: The new CEO is now continuing with meetings and site visits, and is shifting from listening to actively participating. They will now be voicing their opinions and observations, though decisions remain with the outgoing CEO. This phase is crucial for building rapport and understanding the family dynamics that influence business decisions. The new CEO must be particularly diplomatic in critiquing the current state of affairs.

Step 4: The new CEO begins to take over daily management responsibilities, implementing their processes while the outgoing CEO reduces their involvement. Even as the new CEO assumes leadership, they should remain sensitive to the power dynamics in a family-controlled business, where the outgoing CEO might retain an influential role.

Step 5: The final step allows the new CEO to start pursuing the changes they want to make to prepare the business for the future. The outgoing CEO might still be available for consultation but should step back from active involvement.

Circling back

As we have seen, a family-owned business may want to bring in an external CEO when it faces operational challenges, difficulties achieving strategic growth, problems adapting to new market conditions, or overcoming management conflicts that require a fresh perspective. When done correctly, with the right candidate, it can be very effective.

However, selecting an outside CEO for a family business requires careful planning and foresight to ensure a successful transition. Anticipating potential challenges and understanding the unique dynamics of a family-run enterprise are crucial for a smooth handover. By addressing these considerations and following a structured step-by-step plan, it’s possible to integrate a new external leader who aligns with the business’s strategic goals and cultural values, setting the stage for long-term success.

The writer is the founder and managing partner of Trade License Zone.