Preparing the next generation: five ways to guide the future of a family business
A family business can be a great source of wealth, opportunity and personal fulfillment. But without a plan for ownership and management succession, the business may not survive the transition from one generation to the next.
Here are five tips to prepare younger family members to take on a leadership role in the future.
1. Establish policies
The adult children of business owners often work in a family business without the necessary job skills or experience, or wind up in the business by default. This can create tension with employees who may have invested years of hard work in the business. To avoid this situation, and to set the next generation up for success, it’s critical to establish and clearly communicate policies to children and other family members. These policies should detail the level of education, training, skills and other characteristics required to enter the business and rise through the leadership ranks. For example, a policy may require or encourage potential leaders to obtain qualifications in engineering or supply chain management, or to work for another company in the industry for a few years to gain different experience and perspectives.
New employees should also be provided with individual development plans (IDPs) as they join the business. These plans:
• clarify roles in the business
• establish objectives
• outline development paths
• describe the training and educational processes that will prepare future leaders.
Education and training include a variety of learning experiences, such as job rotation, outside classes, on-the-job training and coaching. As leadership candidates progress, their IDPs should be revised to reflect their strengths and weaknesses.
2. Develop a strong governance structure
This will help ensure that the business is managed by those best suited for the job, that family members’ compensation and other employment terms are reasonable, and that accountability is consistent. Independent boards of directors, or several independent directors on the board, can provide an objective voice and new perspectives to help resolve intra-family conflicts, approve insider transactions and ensure that all employees are treated fairly. An advisory board often brings independent thinking.
3. Involve family members in governance
A parallel focus on family and business interests is often the most effective strategy. Family-first and business-first philosophies of governance may be equally important. A family council may be another vehicle to involve family, establish policies and guide decisions and actions. As leadership candidates progress and enter the management stage of their careers, they should gradually be involved in governance. Many companies begin, for example, by inviting family members to board or management meetings as observers.
4. Get the older generation ready
It can be difficult for parents or other senior family members who have been intimately involved in the business for decades to make way for the younger generation to take the leadership reins.
There are many ways to transition, including the following.
• Current leaders could start to take more vacations or spend time away so the new generation of leaders can ‘test drive’ the business. In this way, the current leaders can monitor the business and gradually increase the younger generation’s day-to-day responsibilities.
• Younger family members can be moved into positions of responsibility with an assigned mentor.
• Senior family members can provide consulting services during a gradual transition, with input and oversight, but without day-to-day involvement in operations.
5. Talk about money
There may be different expectations among family members about ownership succession and the role the family business will play in their financial security. It’s important to have open, ongoing dialogue with family members.
The younger generation may expect to inherit the business, but be unaware of the extent to which their parents depend on the income it generates. Senior family members may rely on their equity in the business to fund their retirement.
Transition options, including gifting and sale to the younger generation or to a third party, should be considered carefully. Compensation and benefit policies can provide consistency and fairness to all concerned.
Start planning now
Planning at the earliest opportunity will give a business greater control over the timing and manner in which changes happen, and give the business the best chance of surviving the transition from one generation to the next.
For more information, contact:
Mary Van Skiver
T: +1 616 975 2839