847.849.2800
Contact
There’s bad news and good news when it comes to family business transition to the next generation.
First, the bad news: Only about one-third of businesses survive that transition. Here’s how the Harvard Business Review put it in a 2022 article: “In many family businesses, the tension between the eagerness of the next generation’s leaders to take control, and the founding generation’s willingness to relinquish control, is the source of many failed relationships and companies.”
InterimExecs CEO Robert Jordan takes a look at the challenges of family conflict in this lively 7-minute video:
Now, the good news: It doesn’t have to be that way. With a lot of planning, honest conversation, and realistic expectations, family businesses can survive and thrive for generations to come.
Here, we dive into the challenges of transitioning a family business to second-generation leadership and how to navigate those challenges successfully.
Bridging the Generations
This needs to start early. Family business succession is most successful in families where the family business owners work closely with the younger generation throughout the family enterprise.
That means the older generation maintains control to ensure business goals are met, but is willing to listen to new ideas. The next-gen leaders will bring their own passions and ideas to the company. Discussing and valuing those ideas and options along the way builds the shared vision and expertise that will be needed to lead the organization into the future.
A successful transition most often is one in which the older generation relinquishes control gradually. This avoids a jarring transition and it allows the older generation to watch how younger family members grow into jobs with ever more responsibility.
Managing Family Dynamics
Maintaining family harmony can be the most important thing for family business leaders. Here are some ways to do that:
- Set clear boundaries between business and family: This means not discussing business matters at home, and not bringing family drama into the workplace.
- Have regular family meetings: Setting up a family council that meets regularly can help to keep everyone on the same page and resolve any issues that may arise.
- Create a family constitution: This is a document that outlines the values, goals, and expectations for the family business. The process of creating a family constitution can lead to deep discussions about what is most important to everyone in the family.
- Hire non-family members: Hiring non-family members can help to create a more objective and professional environment. Start by contracting with an interim leader with experience running family firms. It is an easy way to see how outside professional management changes the dynamic of the family firm. And, because an interim is not a full-time hire, you can change your mind with no expensive buy-out.
Keeping Lines of Communication Open
Communication is key to any successful relationship; it is especially important in a family business. That means communicating openly and honestly about business matters as well as personal matters.
This isn’t always easy, especially if there is a history of mistrust. If that’s the case, consider bringing in an outsider, such as a business coach, to help.
Giving Up Control
The transition plan should clearly define the conditions of the senior generation’s exit, including when they will relinquish control and whether they will continue working as advisers or in a job with specific duties.
This is probably the biggest complaint we hear from second and third-generation leaders-in-waiting: There’s a transition plan in place, but the family managers keep moving the timeline.
This is why it is so important to develop a business succession plan and stick to it. Yes, you should revisit the plan annually. But that is to ensure the plan takes into account the current and future business expectations — not solely as a way to move the transition further down the line.
In addition to laying out the timeline, family business succession planning should lay out who has the authority for decision-making in each area of the business. While discussions and input are always welcome, once the person with decision-making responsibility makes the decision, it must be respected across the enterprise. Anything else erodes trust and undermines authority.
We take a deeper dive into succession planning in Part 2 of our series.
Training Next Gen Leaders
The generation taking over must receive the training required to take control. Yes, that means understanding each part of business operations — finance, production, marketing, etc. But it also means understanding how to manage the most important asset of the business: its human resources.
If the heir-apparent needs additional training in any area of the business, identifying that early in the transition planning gives you the time you’ll need to get them the training they need.
Keeping Non-Family Members Happy
Most successful family-owned businesses have key employees who are not members of the family. They are important stakeholders; keeping them happy can be critical to the future success of the business.
That requires keeping them in the loop on the transition planning, answering their questions honestly, and allaying any fears they have about the future stability of the organization.
Securing Your Financial Future
Yes, taking care of you is a very important part of the family business transition process. A critical part of the transition plan should include your wealth management and estate planning needs. Will you take a cash-out distribution? Will you continue in some new role as a business advisor or consultant with ongoing payments?
______
Do you need help with this critical transition of the business you have built? Contact InterimExecs for a confidential consultation about your plans for the future and what the company you have built needs to smoothly transition to new leadership. InterimExecs RED Team of top executives work with owners to develop and execute a strategic plan for exiting your business. That means providing operational expertise to increase the value of your business and putting structure in place so you can successfully change roles or transition out.
Read Our Full Series:
Part 1: Choosing the Exit Strategy that is Right for You
Part 2: The Critical Importance of Business Succession Planning
Part 3: Identifying the Right Successor
Part 4: Family Business Transition to the Next Generation