A central concern of family business leaders is assessing whether the next generation is ready to take over the business. This is very important. Research shows that 25% of failed migrations are caused by a lack of ready heirs. By taking the time to jointly design what preparation looks like, both sides can align and feel confident in their ability to step into leadership roles. Families should enhance next-generation participation by giving them autonomy, embedding trustworthy behaviors, and adhering to clear standards of readiness. Effective succession planning paves the way for future stability and facilitates the transition of the next generation of leaders. Involving the next generation in business transition planning promotes alignment, collaboration, and perhaps most importantly, mutual trust and a shared vision for the future.
In many family businesses, the tension between the eagerness of the next generation of leaders to take control and the willingness of the founding generation to relinquish control is the cause of the failure of many relationships and companies. I’m here. Founders don’t trust the next generation to take responsibility for the business, and the next generation doesn’t feel empowered to do so. As such, they find themselves in a costly impasse where their family harmony and business future are at stake. The lack of a jointly designed transition plan can wreak havoc on a family-owned business – included in the future growth of the business. Based on research of over 2,500 families and our collective experience as family business consultants, we’ve found the following strategies to help family businesses best manage their transition to the next generation.
Balance control and collaboration.
Like any organization, family businesses face conflicts over power and control. Family dynamics can make these issues even more troubling. In one instance, I observed that my son was wary of taking on a leadership role in the family business. He often felt that his father overruled his decisions and minimized his authority. Ultimately, his son quit his family business rather than risk further aggravating his relationship with his father. This collapse could have been avoided if fathers and sons had recognized that autonomy and cooperation were not mutually exclusive and adjusted their decision-making accordingly. A succession plan should include timelines for handing over responsibilities and criteria for who has decision-making authority. Clearly articulated desired outcomes for key business decisions can also create space for emerging leaders to exercise autonomy in pursuit of a common purpose. This helps strike a balance between the strategic goals of founders and the flexibility of emerging leaders to understand how their shared vision can be executed.
Embrace the perspective of the next generation.
One silver lining of the pandemic is that it has given families time to consider what values are important to them in terms of relationships, business and heritage. How families want to use their wealth for the greater good and how they adapt to new business and philanthropic opportunities are key questions we’ve heard at many recent family engagements. A conversation about shared values, including ideas for the next generation, can help start addressing these questions and bridging the generational gap. A recent PWC study found that family businesses with documented values are better prepared for inheritance and are more communicative and transparent. Research shows that 70% of businesses say family has distinct values, but only 44% of businesses write it down.
One family we worked with recently realized they shared core values such as adventurousness, collective problem-solving and caring for the community. This young mixed-race family who runs a billion-dollar family business worried about how their next generation would find their footing in their vast wealth. We invited them to share their perspectives on each other’s values, how they contribute to their family’s wealth, and how those values fuel philanthropic ideas. The image below represents the perspective and ideas of the collective family.
Involving the next generation early fosters a culture of collaboration, helps them understand how they can contribute to the family business, and also supports their personal and career aspirations. Trust, transparency, and coordination are fostered when families operate these conversations. Co-designing a common purpose based on shared values is a key component of building effective succession planning, especially across generations.
Strengthen solidarity between generations.
Academic research points to the important role exposure and emotional commitment play in the succession of the family business. Getting involved in the business at a young age and having ongoing discussions about entering the family business can help lay a strong foundation for a successful transition. In working with our families, successful people often talk to the next generation about growth opportunities, competition, company history, and family business ups and downs. They are actively finding ways for the next generation to explore how their priorities and desires align with the company’s goals and aspirations. Founders can also give their descendants the chance to overshadow the family leader. Others create “family banks” to fund pilot projects that foster entrepreneurship aligned with intergenerational interests. Modeling the pride and satisfaction of a family business also motivates the next generation to sign on to the business. A successful transition plan includes how to build intergenerational bonds and negotiate win-win scenarios for joining the family business.
Incorporate reliable behavior.
Trust is essential to a high-performing team and plays a strong role in family business transitions.Charles Feltman, author unreliable book, decomposes trust into four domains: honesty, reliability, competence, and care. Integrity is consistency in words and actions. Reliability is keeping promises made to others. Competence is a measure of having the skills, resources, and ability to do what you say you can do. Care is born when the best interests of the other party are in mind. You can trust someone on three domains, but you don’t necessarily have to trust her fourth domain. Someone might be competent, loyal, and trustworthy, but you think they only care about themselves. In this case, your chances of wanting to work with this person are limited.
In the families we observed, patriarchs believed their sons to be loyal, trustworthy, and caring. However, he did not believe he was competent enough to run his family’s East Coast real estate business from the West Coast. We agreed on criteria to enhance his capabilities, including expanding the brand. Both generations need to know that they can rely on each other to meet their obligations and grow their businesses. The best transition plans include tangible ways to build trust, competence, and credibility so both generations can confidently transfer power and authority.
Collaborative design criteria for readiness.
A central concern of family business leaders is assessing whether the next generation is ready to take over the business. This is very important. Because research shows that 25% of failed migrations are caused by unprepared heirs. By taking the time to jointly design what preparation looks like, both sides can align and feel confident in their ability to step into leadership roles.
In our interactions with many families, we have identified that definitions of preparedness can vary widely. For one founder, preparation meant he worked three years at a competitor’s business first. In another example, preparation meant he cleaned a construction site for a year, starting from the bottom. Completing an MBA signaled his readiness to lead another family leader’s business unit. Having in-depth discussions about the specific criteria that must be met in order to play a key role can help manage expectations and avoid misunderstandings. A business succession plan should include the desired skills, attributes, and work experience needed to transfer responsibilities in a timely manner between outgoing leaders and incoming leaders. Preparing new leaders to take on critical roles in a responsible manner requires early planning, timelines, and ongoing preparation from both generations.
Over the years, we’ve noticed that as founders look to succession, they tend to have more control over the family business. To balance control and flexibility, families need to strengthen next-generation participation by giving them autonomy, embedding trustworthy behaviors, and adhering to clear standards of readiness. I have. Effective succession planning paves the way for future stability and facilitates the transition of the next generation of leaders. Involving the next generation in business transition planning promotes alignment, collaboration, and perhaps most importantly, mutual trust and a shared vision for the future.
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