Four Recommendations for Successfully Transitioning Your Family Business to the Next Generation
Transitioning a company to the next generation of leaders is a complex process that can easily fail if there’s not a strong plan in place. When we talk about succession, we’re focused on BOTH management and ownership. These two are tightly intertwined and must be considered together. If either management or ownership succession fails, uncertainty and misplaced expectation can have major repercussions that can lead families into conflict.
Encouraging family members to join the business as an employee without considering ownership succession will inadvertently raise false expectations of ownership, issues of fairness, and give mixed messages to employees and partners. To avoid failure during this time of transition, it’s essential to have open communication and clear policies and guidelines in place.
Addressing nepotism
While it may seem fairest to say you’re going to treat your family member exactly like other employees, the reality is that they are not like other employees. Family member employees don’t need to be treated better than others, but they should be treated differently and held to the highest standard of performance and behavior. For example, they should be reviewed more robustly than other employees to ensure they’re not straying from the path to success. Also, they need to understand they can’t engage in office gossip about leadership like other employees can and need to be wary about socialization outside of the workplace. In short, they carry the responsibility of representing the family’s values and reputation at the company.
We believe that employing family members needs to be done in a thoughtful manner with a lot of process and structure in place to help them succeed or exit gracefully. The benefits of having family members in leadership positions, when done right, can be enormous. The right family members will set the standard for work ethic and burn the midnight oil when the going gets rough, rather than put their resume out on the street. This high level of commitment makes the right family employee the best possible employee to invest in.
Be open about ownership intentions
Being proactive about ownership planning is crucial. Having an honest conversation with your family about your intentions for the business can avoid unintended consequences. For example, if you’ve just hired your child to work for the company but you’re planning to sell the business in 10 years, let them know that. If you’re planning to have siblings share equal ownership regardless of employment in the family business, be upfront about that early on. Conversely, if working in the family business is seen as a path to ownership, or proportionately more ownership and maybe even control, it is important to make that clear. Not engaging in these kinds of discussions will foster false assumptions that can damage family relationships and could eventually compromise leadership transition planning.
Have a well-thought-out exit plan
Things change, and family members may choose to leave the company or may be encouraged to depart. Having policies designed around exit plans can protect not only the business but the family as well. For example, be upfront with family employees that if they’re underperforming, they’ll be reviewed closely and poor performance will lead to consequences, like being asked to step down. Or, if a family member chooses to leave for other reasons, ensure there’s a plan in place that will allow them to do so without causing any turmoil in the business ranks. Having an exit plan for family employees before they begin working will avoid conflict and disagreements when and if a family member decides to leave or is asked to leave. Having a robust strategic HR department and independent advisors or directors might be useful to help engage family members in these difficult, but very important, discussions.
In addition to exit plans in management, liquidity plans for ownership should also be developed. Stockholders should be aligned in their vision for the company and be able to agree on basic strategic choices facing the company. Having liquidity options and a robust buy-sell agreement makes for good business partnerships.
Offer clear career paths
Having clear expectations and long-term plans for family members’ careers before they join is crucial. There are only so many roles that a company can offer to family members and often the eldest family member may have a head-start simply because they were able to show up first. . This may put them in a better position in the company moving forward and may cause issues of perceived unfairness with younger siblings who feel they haven’t had a chance at leadership. Have open conversations among all family members about their potential roles and direction at the company so there are no surprises.
Chosing NOT to work at the family business is an equally important consideration. Training rising gens to have access to roles as engaged owners and directors can be valuable paths for the family and its business. This also allows individuals to pursue their own professional dreams outside the family business. Remember, living someone else’s dream can be a nightmare. Be aware of many of the assumptions that children often grow up with—that they are expected to work at the family business; that not chosing the family business for their livelihood would be disloyal; or, that they have an obligation to ‘save’ the family business in some manner.