HR & Management

How to successfully pass on the family business to the next generation

5 min read

14 May 2014

Succession plans for a family-owned business can be a nightmare. Here is how to pass on the family business from generation to generation more smoothly.

Around half of UK employment, and half of economic activity, is dependent on family-run firms. Given the potential for strained relations, fall-outs and problems with finding successors, that’s a tenuous foundation. 

The plain statistics are hair-raising: only 30 per cent of firms survive the transition from the first to the second generation, 12 per cent from second to the third generation, and just 4 per cent from third to fourth generation.

We need a better understanding and model for what makes for a successful transition across generations, for the sake of firms and families, but also all the other networks of business linked into these enterprises. 

When they work – for example, in Italy and Germany, where family business has traditionally been a genuine bedrock of the economy – these types of business are sustainable and resilient in ways that publicly-owned organisations struggle to replicate.

From my research and experience as a researcher and management consultant on this issue, there are three basic causes of problems: 

  • All of the potential family successors decline the leadership opportunity; 
  • Dominant leaders reject all the potential family successors;
  • Or they decide against continuing, even if there are acceptable successors, because the business is not believed to be financially viable or rewarding.

The underlying factors are actually around individual abilities, conflict and rivalries, financial position, business performance and practices. 

It’s also necessary to be wary of the headline figures on failed transitions. Not all family firms want to continue so, for example, if only 50 per cent of family controlled firms intended to pursue intra-family succession, then the fact that 30 per cent of family firms achieve it suggests a ‘success’ rate of 60 per cent.

Succession planning can be critical. Define the family goals and make sure that ownership, governance and management goals are compatible with the long term family goals. Plan the successor’s entry and time the succession. 

A lack of ‘legitimacy’, of having the right credentials beyond just being the ‘next in line’, is one of the most important reasons for the failure of family transitions. The successor needs to look and feel right. 

CONTINUE READING ON PAGE TWO…

There needs to be a planned programme of support to develop an ongoing sense of legitimacy among the younger members of a family business. 

Ways of doing this include ensuring they always gain substantial and notable experience outside of the firm, more formalisation of explicit and objective criteria for career upgrades and appointments – so there are no easy ways up – and for the involvement of unbiased third parties in the committees in charge of assessment and rewards, and to be part of selection processes generally.

It is important to introduce feedback mechanisms for all stakeholders – both the range of family members as well as senior staff who might not come from the family – and give them a chance to input into discussions throughout the succession process, ensuring there is communication and sense of consultation, and nothing is presented as a fait accompli. 

There should be a formal education/training programme for the new leader. Formalising the new roles of both the incumbent and successor, defining a period of ‘collaboration at the top’, has proved to be a helpful way to make more people cope with transition. 

It’s important to prepare the incumbent for ‘letting go’, and avoid the kind of perceived ‘meddling’ which is so much more likely in a family firm. 

There also shouldn’t be a simple transfer to the successor, but an ongoing plan for assessment of their performance, maintaining that sense of management and collaboration that steadies nerves in the family. 

And finally, succession should always be seen as being about opportunities for innovation – not finding a ‘clone’ to carry on traditions.

Experience shows that a perfectly smooth succession is possible without any planning at all – if the circumstances are right – but life in family firms is often not so simple, and with so much business potential at stake, no-one involved should be taking chances.

Alfredo de Massis is director of The Centre for Family Business at Lancaster University Management School.