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December 7, 2022
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How to Prepare the Next Generation to Run the Family Business

How to Prepare the Next Generation to Run the Family Business

Why don’t more businesses pass down through the generations, and conversely, why aren’t younger generations more interested in taking on significant responsibility in their family businesses? Younger family members may be woefully unprepared to take on leadership roles when the business needs them, or may not wish to take on the burden of responsibility — either for managing the business or for “reporting” to other family shareholders. Several challenging familial conditions may exist, often in combination. And yet so many of these obstacles could be remedied with some forethought and openness. This article covers several approaches that can familiarize younger members of the family with the ins and outs of today’s business, and get them ready to feel comfortable taking the reins in the future.

Statistics on family-owned and -operated businesses show that although as many as one-third of family businesses transition to second-generation leadership, in the last five years, that number has dropped to only 19%. According to a 2021 Family Business Survey by PWC, in the U.S., “only one-third have a robust, documented, and communicated succession plan in place…[and] globally, only 24% of family businesses are focused on next-gen involvement.”

Why don’t more businesses pass down through the generations, and conversely, why aren’t younger generations more interested in taking on significant responsibility in their family businesses? Younger family members may be woefully unprepared to take on leadership roles when the business needs them, or may not wish to take on the burden of responsibility — either for managing the business or for “reporting” to other family shareholders. Several challenging familial conditions may exist, often in combination.

The Obstacles

Unawareness

The older generation avoids or doesn’t know how to think about succession and transition; they cross their fingers and go about their daily duties, hoping that if they keep the business going, someone will be ready and willing to lead it at the right time. In turn, the kids might believe that mom or grandpa will go on forever, and often that’s exactly what their elders want them to believe. Or, a child might be designated as “The One,” and the other kids don’t see any reason to get involved. The assumption that someone else will always be there to take care of the business can lead to great stress when it turns out not to be true. At one of my clients’ companies, the sibling designated to take over the business suffered a terrible accident, and the other sibling has had to play catchup trying to learn everything that she had never been exposed to before.

Unpreparedness

The parental generation may be so strong, staunch, or controlling that even if children have specific functional roles, they don’t get the opportunity to participate in decision-making or leadership. They may not learn crucial skills of management, negotiation, or planning. Given their paltry level of exposure, they may believe that managing the business is supposed to be easy and straightforward. Or worse, they may assume that they know what to do simply because they grew up in the business, or that everyone will take them seriously because “I’m a Wellington and it’s my name on the door.”

Unwillingness

The family business can be a turn-off. Too often, the conversations at home consist of one complaint or emergency after another. Children may absorb the idea that working in the family business is difficult, unpleasant, and never-ending. No one wants to choose a pursuit that feels like an eternal grind, full of difficult conversations and agonizing decisions. “Listening to [my parents] talk at dinner sounded so frustrating, annoying, and scary. I didn’t want that for myself,” said one daughter who wouldn’t even try working in her family business.


And yet so many of these obstacles could be remedied with some forethought and openness. Here are several approaches that can familiarize younger members of the family with the ins and outs of today’s business, and get them ready to feel comfortable taking the reins in the future:

How to Prepare the Next Generation for Leadership in the Business

Build a shadowing program.

Even young children can be exposed to the excitement of the business environment. You can start with something as limited as a “Bring Your Children to Work” day as a way to get the tradition of involvement going for all employees without placing undue emphasis on the children of owners. Combine it with a picnic to encourage the children and grandchildren of owners to get comfortable with meeting employees and their families. Over time, teenagers can express interest in particular roles or departments, and these efforts can grow into formal internship and apprenticeship programs in which young people learn about the business and what kinds of careers are available. Most children love the idea of helping their parents, so it’s both stimulating and important for kids to see where their parents work and to think of the company as an exciting place where they belong.

Create progressive developmental experiences.

Moving family members through the organization gives them the opportunity to learn all aspects of the business. As they gain technical competence in various areas, they can also have multiple chances to manage different work groups. In this way, they learn the mechanics of the business while simultaneously gaining experience in general management. Some family-operated organizations require children to work elsewhere to develop an independent business perspective. One of my clients encourages family members to participate in the work of industry associations to ensure that the children have other mentors, nuanced industry outlooks, and substantial personal networks.

Offer context for business goals and operations.

Gear explanations about the importance and value of building the business, its financing, and its mode of operations to the ages and acumen of each generation. Dinnertime conversation can start with the goods and services the business delivers and include future-oriented conversation about the company’s mission, as well as what it means to be responsible for the livelihoods of employees and therefore other people’s families. For global companies, these conversations are an opportunity to talk about life around the world and how the business operates differently but under the same principles. Be sure to share the company’s history of successes and crises, how the business survived both, and the wisdom that came from those experiences. Explain how to think about risk and risk mitigation in age-appropriate ways, and the trade-offs between growth and stability.

Insist on integrity.

Every family has some dysfunction, and individual family members can develop bad habits. If a child fudges the truth at home, they may eventually do the same in the business. If one kid always trounces their sibling in obvious rivalry during play, they will likely bring this competition into the business. It’s crucial for parents not to look away from these “childish” tendencies and to address them early, because these negative inclinations will create damage in the business, and should not be tolerated, even — or especially — in loved ones.

Make a plan for the future.

Know your long-term intentions for the business so you can plan appropriate career development for the next generation. If your purpose is to grow the entity specifically to sell it, rather than to build a financial engine that will keep the business in the family in perpetuity, then, as one of my clients did, teach the kids to learn about how to manage their own portfolios. This will allow them to manage their money post-sale and expose them to functional roles that will equip them to work elsewhere. This approach, which emphasizes estate planning, can ensure a comfortable lifestyle for multiple generations. The parents’ foresight in this case can prevent the common problem of owners’ children feeling adrift after a sale because they can’t sustain themselves financially and aren’t qualified to work anywhere else.

Educate the entire family.

Not every child will choose to work in the business. And yet all family members who may become shareholders and whose lives may be affected by the business will benefit from understanding how the business fits into their present and future lives. A Family Council can be an effective venue for keeping the family connected both to the business and to each other. The family council, often with the support of outside experts, becomes a place where the family can discuss their mission and governance principles, and where different branches of a larger family can get to know each other.

At one of my client’s companies, the council is chaired by third-generation, non-employee adult cousins from the different branches of the family. Part of the council’s role is to provide education to the fourth generation of children and young adults about business in general, and the family business specifically, to help them decide how much they’d like to be involved, and how they can participate effectively. Another of my clients holds family gatherings of all the branches and generations every summer, which include both fun activities for connection and business updates and education to ensure continuous support from the extended family. The family council provides a forum for teaching the business structures, policies, and financials that all family members should understand in the same way. It also creates a collection point for family members’ views about social policy that can be conveyed back to the management and the board.

Leaders of family businesses should be assessing the skills, talents, and desires of their children at all stages, and giving them as many opportunities as possible to learn about the business today, and how to ensure its successful future. Using these road-tested approaches will help. Even while understanding that some kids may not wish to join the business, it’s still possible to build a stronger family bond and support the business, to everyone’s benefit.

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