In addition to being economic engines, family businesses are sources of pride, identity, hopes and dreams.
But less than 12% of family businesses survive to the third generation.1 There are many reasons why, from market forces to business-specific roadblocks. One of the most common is that the next generation is either not interested in or prepared to lead. By building a systematic process, however, it is possible to both inspire the rising generation to get involved in the business and prepare them to contribute to its success. Below, we discuss five approaches to begin this process.
Tell the Family and Business Stories
One of the most effective tools for instilling a sense of pride in the next generation is storytelling. By telling the story of the business creation, the founder’s vision, and the values demonstrated in sustaining the business, families can form connective tissue between generations and emphasize that the business has a heritage worth preserving.
Families may even want to consider putting pen to paper and recording the family business history. In addition to preserving the history for future generations, this document can be a valuable source of information for analyzing the business’ strengths and weaknesses across time and, potentially, identifying leadership factors to help make succession planning decisions. After all, like any company, family businesses rarely enjoy a straight line to success. Honest narratives contextualize the business cycle, provide a strong message that perfection is not possible and illustrate how the business has evolved to overcome challenges.
Expose the Rising Generation to the Business
It is difficult to feel engaged by something you know little about. It is, therefore, critical to create ongoing opportunities for the rising generation to learn about the family business. Touring facilities, shadowing executives, mentorship programs, summer jobs and internship opportunities are all learning experiences that can help determine which members of the rising generation are most interested in the business and may choose to one day join the company. This can help create a pipeline of future leaders – even for those family members who ultimately decide not to enter the business – and facilitate a greater appreciation of the benefits and responsibilities that come with being a business-owning family.
Define Roles and Educate Family Members about Their Roles
Not every family member will serve in the family business, nor should they. Yet each family member has a role to play. Harvard University professors Renato Tagiuri and John Davis famously created the Three-Circle Model of the Family Business system in the late ’70s.2
These separate, sometimes competing, priorities can create conflict. But clarifying the roles and responsibilities of family members who are part of the model can help alleviate such tension.
Family members must determine and advance their shared values and vision and be aware of how they are reflected in the family business.
They should understand the importance of communication, know how to positively resolve conflict and create a framework for decision-making – or family governance.
Underlying much of the family role is an emphasis on sound and collaborative decision-making: Effective decisions will have to be made to successfully navigate both the family and business across generations.
Business roles and responsibilities need to be clearly defined, from management responsibilities to job descriptions to employment policies.
A wide array of questions – some potentially difficult to discuss – must be asked and resolved. For instance, what kind of reporting does management provide to owners and family members? Who will act as a liaison between management and the family?
In order to create a culture of trust, transparency is critical.
It is essential that owners recognize their rights and responsibilities.
Responsibilities likely include attending shareholder/owner meetings; reading financial statements; understanding the challenges of business management; and familiarizing oneself with the duties of management.
Aside from being best practices for good stewardship of a business, the above are also crucial for constructive family relationships. If a family member’s only interest as an owner is economic benefit, issues around compensation can create division between those family members working in the business and those who do not work in the business.
The bottom line is that role clarity, transparency, communication and education are key ingredients for transition success.
Create a Family Employment Policy
Not every family member who has an interest in the family business is qualified to work in it. Nor does every family business have the right employment opportunity for the skillset of every family applicant. Early on, families need to determine if every family member is entitled to a place in the family business or if the business will only consider hiring family members when it has a position that requires filling. Is this a family-first business, a business-first business or something in-between?
Most families with whom we have worked do not make employment decisions solely on the basis of the family name. Instead, they make it clear that the business will hire based on its needs. Additionally, they often clarify family employment expectations by creating a family employment policy, which can help make it clear that there are objective criteria for applicants to meet. Creating a family employment policy can also mitigate some of the intense emotions surrounding situations where family members might have unrealistic assessments of their progeny’s competence.
Teach Financial and Business Fundamentals
Understanding basic financial and business concepts is critical for business-owning families’ decision-making. Family members need this knowledge to understand the business’s financial history, health, and growth potential. Failure to educate family members on such fundamentals can lead to misunderstandings about dividend distributions, compensation, operating reserves, valuations and more. Further, a knowledgeable shareholder/owner is far less likely to disrupt a family business with unrealistic expectations about the economic benefits associated with ownership.
Educating the next generation about business concepts does not have to consist of dry informational sessions. On the contrary, developing money-managing skills can begin early with piggybanks that have dividers for spending, saving and sharing. Providing financial education opportunities to learn experientially – even the old-fashioned lemonade stand at an early age – can be a creative way to teach concepts such as cost of goods sold, marketing, sales, revenue, expenses and profit.
The next generation should take opportunities to attend educational programs, such as seminars and camps on entrepreneurship and short-term university programs tailored to family businesses. There are many such resources for families to create an education program that spans age groups, from the very young to young adults. Nurturing financial acumen just takes intentionality and commitment.
Creating and sustaining a family business is not an easy task, and families have to recognize daunting statistics that indicate a high failure rate in transitioning the business. By embarking on an intentional process of both engaging and preparing the rising generation to lead, however, families can increase the chances of the family and the business continuing to succeed in the years and generations to come.
For help with this process, considering consulting one of our family business experts.