Succession Can Make or Break a Family Business

By Prof. Enrique Soriano

 

Leading a family business can be a complex affair. “Family” and “business” are intertwined into a mix of business challenges, family values and generational differences – meaning that the issues faced by a family business are often more diverse and complicated than those faced by other companies. The hidden dragons that devour the best-laid plans of business succession are the relational issues (both past and present) that color individuals’ perceptions, feelings, and decision-making.

 

In family-owned businesses, it is important to pay attention to the informal nature and complexities of family issues that are intertwined with the business. The founder, their spouse, their children, and grandchildren will continue to be relatives after the transfer of the business. Add the strong emotional experiences family members have shared (both positive and negative), with the usual presence of grandchildren, and it quickly becomes apparent that in most families the relational issues outweigh financial or business factors.

 

Succession in family business is perhaps the most critical challenge among the many unique challenges of family businesses. Many marriages end in separation and divorce, and many divorced adults have children from their first marriage. Many of these parents will marry again, perhaps adding new children to the marriage, creating a blended family. A blended family can include half-siblings, step-siblings and children from the current marriage.

 

In this article, I will lay down some strategies on how to prepare for a successful  generational transition in the family business. Let’s start with my first book, “Kite Runner Columns,” where I mentioned that family businesses have both strengths and weaknesses.  Some of the weaknesses are the family’s  unwillingness to respond to change, conflict between growth and ownership, and failure to develop a succession plan. I quote, “The next-generation family-business leadership rests with a team.  Given the characteristic family desire for equal treatment of children, perhaps it is not surprising that team management receives a friendly reception in family business.  What’s new is the notion that installing a successor team can be an appropriate approach rather than an expedient way of avoiding conflict.”

  

Strategies and Steps to a Successful Handover

 

Here are some strategies on how to prepare for a successful generational transition:

A. Engage the family in discussions of the future. The first thing is for the family to clarify with its members the extent to which being actively involved with the business (as an owner or manager) is consistent with their personal dreams and goals.  Establishing a collectively held vision for the future takes time, but helps ascertain the necessary alignment and motivation to move forward.

B. Establish an agreed set of family goals for the firm.  There should be a clear statement of family policies regarding employment of family members, succession and ownership.

C. Set up clear ownership objectives.  Examine the emotional factors behind ownership goals.  The consequences of the dispersal of ownership should be fairly addressed and growth aspirations must be consistent with ownership objectives. Advice should be taken on the tax issues of passing ownership between generations.  There should be a mechanism in place to reconcile potential differences in outlook between family shareholders who work in the business and those who do not.

D. Set up a Family Council or Family Assembly.   Recognizing that family business is affected by family dynamics, create a platform – like a family assembly – where grievances can be aired and resolved.  A family council or family assembly complements rather than replaces the board of directors. The family council sets policy for the family and recommends policy that concerns the family to the board, such as around family employment in the business. The board of directors sets policy for the business and may also make recommendations to the family council in matters that concern the business. The family constitution articulates a family’s vision for itself and the business, its core values and the policies and guidelines that maintain family discipline.