Many founders of family businesses dream of creating a multigenerational legacy—an enterprise whose leadership will pass from generation to generation for years to come. But succession isn’t an event. It’s an evolution.
The succession process is time consuming, complex and particular to each family and business. It may not go as planned, particularly when illness, accidents, technological advancements, regulatory changes or financial meltdowns get in the way of the best laid plans. But succession also can be rewarding, as the next generation comes to understand the business and blazes a new path for the enterprise.
No two family businesses follow the same route, but those that enjoy active participation by their emerging leaders follow some common strategies:
Start educating the next generation before they take over. Many founding owner-managers have hired skilled estate planners to tax-efficiently transfer ownership to the next generation. But being among the beneficiaries of a business-owning trust is different from being an owner-manager. Young family members who are stepping into leadership roles need to know the lingo and mechanics of estate planning. They need to understand ownership and control structures, why they were put in place and how they function. For example, do the family’s future leaders understand GRATs? Do they know what happens to stock held in GRATs once the annuity is paid in full? Some families may keep this information from their children, either out of fear of loss of privacy or desire to protect them from complexity. But the business has a greater chance for long-term success if they are educated early.
Along the same lines, it’s worth remembering that the nuances of the business are transparent to a founding owner-manager, who typically is deeply involved in developing his or her company’s products and services, choosing the markets in which it operates, making strategic choices about deploying capital and overseeing the management team. All this may be opaque to young family members, even if they’ve regularly sat at the dinner table with business owners—and even if they have an economics or MBA degree. Business owners with an eye toward the future explain the business to their children and encourage questions. They also introduce the next generation’s prospective leaders to board members and senior management.
Introduce the next generation to business leadership gradually. Founding owners are usually management-centric. For them, being part of the business means running it and having a hand in everything—marketing, paying bills and watching cash. But as the business matures and ownership expands, meaningful non-management roles also emerge. To succeed over the long term, the business requires informed, educated and interested board members and shareholders. Family trusts need effective trustees. Preparing future generations for multiple roles can increase the pool of talent available to the business—and give young family members meaningful involvement without them having to make a 100% commitment to the business. Board and committee roles can strengthen the relationship between the company and next generation owners who don’t serve in management roles.
Also, don’t rush the children. Sixteen-year-olds hardly know what kind of vegetable they like, so don’t expect them to know whether they want to run their family’s business. Asking children to make important decisions at such a young age will just create pressure. Most kids don’t know whether they want to get involved until their late 20s or 30s at the earliest.
Appoint an objective, fiduciary board of directors. Founding owner-managers often fear that a fiduciary board of directors will tell them what to do and interfere with their running of the business. But owners need a fiduciary board as an insurance policy. If the owner dies unexpectedly or becomes incapacitated, the next generation will need to make tough decisions about the future of the business and their role in it. The board will have the legal power and responsibility to name a successor or interim CEO and to oversee strategy, acting for the benefit of the shareholders. If the board knows the family and its vision, and has an effective working relationship with the next generation, the emergency succession will go more smoothly. Moreover, if a young family member joins the senior management team, the board will serve as a bridge between generations, overseeing the transition process and providing guidance and perspective. Sometimes, young family members will follow a board’s advice more than they would that of a relative.
Encourage children to work outside the family business. It’s considered a best practice for kids to gain outside working experience before joining a family business. There is enormous benefit to working for someone else. Young employees learn job skills and gain perspective from someone they don’t call “dad” or “mom.” There’s another benefit: Working for a non-family member can help a child who might previously have sworn never to go home to the family business to recognize what a great opportunity going home might be. It is like valuing a graduate degree: The quickest way to learn the value of an advanced degree is for a young person to work someplace where he or she is the only person who doesn’t have one.
Avoid becoming too entrenched in the business. Working lives are getting longer, with many owners capable of running a business well into their 70s and even 80s. But think carefully about how this impacts the future of the business. Staying in the big office too long can thwart the ambitions of talented young family members. They will pursue their careers elsewhere if that happens. Where talented, capable members of the next generation are interested and prepared to step up into senior roles, founding owner-managers may need to step aside and create new identities for themselves.
Practice joint decision-making. It’s best if young leaders can practice running the business while the founder owner-manager is still around. That lessens the chance that their mistakes will have serious consequences. The owner also needs to recognize that decision-making becomes more complex as the business grows, as the family expands and as the number of stakeholders increase. Just assuming that the next generation will “figure it out when the time comes” sets a bad example for future leaders and also almost ensures chaos during the transition period. All parties will benefit from working together to articulate policies and procedures for governance and decision-making before the succession plan kicks into action.
Amelia Renkert-Thomas is joint managing director at Withers Consulting Group, a New Haven, Conn.-based family business consultant with offices in the U.S., Europe and Asia.