Family business: How to pass the baton

July 9, 2012: 10:07 AM ET

Retail CEO Jack Mitchell outlines how his family's business has been able to successfully pull off succession from one generation to the next.

By Jack Mitchell

FORTUNE -- Fifty-four years ago -- with three suits, a coffee pot, and a dream -- my parents, Ed and Norma Mitchell, founded a men's clothing store in Westport, Conn., in a little 800-square-foot building.

In the mid-1960s, my brother Bill and I joined the family business, and in 1974 our parents passed the torch to us. By the mid-1980s, Bill and I had built the business into a dominant clothing store in Westport. In the 1990s, our seven sons came aboard, along with my wife Linda, and the business has grown into the largest family-owned upscale clothing store in the United States, with sales exceeding $100 million.

Can you imagine spending half of your working life in a family business, beside your mother, father, and brother, and all getting along? And then spending the next half of your work life with your brother, your spouse, your four sons and three nephews, and still all getting along?  I pinch myself. We have been able to create an environment of mutual respect and trust, one where we can function as a team that shares the emotional and intellectual challenges of business along with its financial rewards.

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The succession from the second to the third generation has been a joyful journey, so much so that we have already begun to plan for the transition to the fourth generation. When I think back over our half century, I can identify seven things that made it all go smoothly.

1. Passion to pass the torch

You have to want to do it. You have to want to pass the equity and the responsibility to the next generation. My mother and father had this passion, and my brother and I embraced it.

2. Asking for help

My father gave us a wonderful phrase that my brother and I adopted: "I need your help." To shape a successful succession plan, we needed help.  We didn't know everything about family businesses and so we agreed to study successful ones. In 1979, we joined the Forum, a networking group of a dozen or so similar family businesses. At a 1985 meeting, David Bork, a family business consultant, gave a talk that resonated with us. The next day, we hired him. Bill and I worked with him for several years on our plan. We also set up an outside advisory board to assist with this and other strategic issues.

David shared with us from the beginning that we should think of our family business as a business first. In other words, run it as a business, and most of the time what is good for the business is great for the family.

We were blessed with seven bright sons who went to excellent colleges and did well. We wanted them to make their own decisions about their careers. If they wanted to enter the family business, our arms were open, provided that they satisfied two rules we established in the late 1980s. I intensely dislike rules, but David and Bill convinced me that we needed to have a couple of firm ones.

3. The five-year rule

Our sons had to work five years elsewhere after finishing college. This rule was not popular with our father, who was still very much with us. He worried that we were sending his grandsons "out to pasture" and that we might lose some of the great talent and passion for the business that his grandsons had already demonstrated.

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While Bill and I recognized that risk, we felt they had to gain experience, self-confidence and an understanding of what a real job is about in the real world. They needed to know what it meant to be hired, transferred to a different city, promoted, pushed, and pulled by someone other than their father or uncle. If they decided on becoming an astronaut or a podiatrist instead, we would support it wholeheartedly.

The five-year rule not only gives the next generation work experience, it also gives them wisdom they can bring into the family business. When our sons join the business, they made positive recommendations, and my brother and I respected them even more because they had these outside experiences.

Russell worked at IBM, Bob at Sports Illustrated, Andrew at Footlocker and Godiva Chocolatier; Todd at Apple (AAPL); Scott at Eddie Bauer, Abercrombie and Fitch (ANF), and Ann Taylor; Chris at NBC Sports and Neiman Marcus; Tyler at Henry Bucks in Australia, Brioni, and Harry Rosen in Canada; and Linda worked at her own family business.

4. No guarantees

The second rule was that a family member was not entitled to a job simply because their name was Mitchell. They needed to be qualified, possessing both the skills and the passion to grow within their area of responsibility. Our sons ended up choosing different areas: one picked finance and administration, another sales and merchandising, another marketing, and several managing newly acquired stores. Our outside advisory board and our consultant David Bork supported this policy.

And now, after 20 years, our sons and nephews hold leadership positions within our company. Two of them are co-presidents and will soon become co-CEOs.

5. Pass the equity early

When our oldest sons, Russ and Bob, were 29 and 27, and Tyler, Bill's youngest son, was only 13, my brother and I gave them a large percentage of the equity of the business.  Sixteen years later, the remaining stake was transferred. We trusted them with our business early, and they became much more responsible and accountable because they were owners. They stuck by the guiding principles and values that had served us well, building relationships with each and every associate, customer, and vendor by treating them as friends, and measuring every facet of our business.

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6. Provide financial security to the senior generation

A solid succession process requires a financial plan that allows the older generation to retire with enough assets outside the business to ensure that "money" is not the reason to remain in control forever. Often, when all of their assets are in the business, the owners not only tend to stay active too long and block the next generation from leading, but they also become too conservative, unwilling to take bold risks out of fear that they might cripple the entire business.

7. Communication:  candid and transparent

Of course, our family has had its share of challenges. We are not perfect. And over the years, all of the family and senior non-family executives have agreed that a lack of transparent communication would be the only thing that could pull us apart. So we have many different, yet important, meetings.

Faithfully, we have scheduled weekly Tuesday morning family meetings. We discuss in a confidential way, in a safe haven of sorts, any issues that are on the active working family members' minds.

We have had a Family Council since the mid 1990s, which consists of all members of the Mitchell family descended from Ed and Norma, our parents, who are 14 years old and above, including spouses.

8. Have fun

We work hard and we play hard. Of course, things are not always perfect, yet we clearly all enjoy our family fun.

Jack Mitchell is the chairman and CEO of Mitchells Family of Stores and the author of Hug Your Customers and Hug Your People.

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