Having successfully navigated C-suite roles with two noteworthy families as a non-family executive, I’ve had a front-row seat on what works and, perhaps more importantly, what doesn’t with the transition of the family business to the next generation. What I love about family businesses is they’re personal, with a family culture and deep sense of legacy. What gets challenging is when the personal nature gets clouded by emotion and affects decision making, the family culture breeds favoritism and entitlement, or the sense of legacy and long-term view result in complacency and acceptance of mediocrity as the status quo.
PwC recently came out with their 2019 Family Business Survey report. I was fascinated to learn that 62% of founding business owners today plan to transition their business to the next generation of family members, but only an estimated 33% will succeed.
Baby boomers are retiring, and their kids are taking over. But is everyone ready? Doubtful, according to a landmark study by Roy Williams and Vic Preisser, which found an alarmingly high failure rate with family business transitions. They identified four primary causes:
• Breakdown of communication and trust within the family (60% of failures)
• Insufficient preparation of next-generation members (25% of failures)
• Absence of a clear vision to align family members (12% of failures)
• Failure by professional advisors to correctly interpret taxation, governance and wealth preservation issues (less than 3% of failures).
How do you avoid failure and instead successfully transition the business from one generation to the next? Here are six sure-fire steps you can take to ensure you and your business are well positioned for future generations.
1. Start now. It’s never too early to be thinking about succession. Begin by establishing a rationale or philosophy for your ideal scenario. Answers to questions like “What does your model transition look like? What’s the time horizon? At what stage and size is the business?” will begin to inform your pathway. This will most assuredly evolve over time, depending on where you are in the transition spectrum. As you get closer (within three to five years), develop a written plan with clear goals and a timetable to guide your decisions and actions.
2. Establish employment guidelines. This will save you from yourself and provide important boundaries for both family members and non-family employees. Bringing the next generation into the business can be fraught with misaligned expectations. You risk making emotional decisions rather than objective ones. Your children may not think the rules apply to them. Likewise, non-family employees aren’t quite sure how to work with or supervise someone with your last name who might be running the company one day. The best way to avoid the pitfalls of family employment is to establish written guidelines outlining clear expectations, standards for employment and prospective ascent through the ranks. This should be shared, understood and observed by all family and non-family employees.
3. Prepare the next generation. Don’t assume that family members will develop and learn the business over the natural course of time. Their growth in the business requires focused attention. You’ve worked tirelessly on your business. Do you really want to leave its future success up to chance? Create a development road map for next-generation members that starts with an honest assessment of their preparedness and then purposefully takes them from role-player to manager to leader. Development plans should be customized for the individual and aligned with their interests and talents.
4. Articulate a clear vision. You probably know where the business is going and what future success looks like, but do others? Probably not, which can result in misunderstandings, disagreements and resentment. Articulating a clear vision and ensuring that all family stakeholders thoroughly understand and support it is critical to family alignment and legacy.
5. Practice transparent conflict and communication. This is the number one reason why family business succession fails. Family members either avoid conflict (to keep family peace) or allow it to fester and erupt. Constructive communication breaks down, ultimately risking an insurmountable rift. When handled openly, communication and conflict can be productive and fuel better decision-making and innovation for the business. Regular family meetings and establishing standards for conflict resolution are two effective best practices.
6. Enlist trusted advisors. Surrounding yourself with impartial experts who have no emotional capital invested in the business is absolutely critical. When family and business are intertwined, judgment can be skewed by emotion, rather than objectivity. Trusted advisors are unbiased and equitable, which will ensure that decisions are made and actions are taken that are in the best interests of the business.
As a business owner, your legacy and oftentimes that of your family is 100% dependent on the ability of the next generation to follow in your footsteps, build on the foundation your hard work has produced and learn to lead in their own right. These six steps will help to ensure the sustainability of your business for future generations. Are you ready to get started … today?