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

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.

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