Nothing is more important to the long term success of a family business than the transition between the first (G1) and second (G2) generation. Approximately 30% of family businesses make it from the first to the second generation, 70% don’t. One might think that making this transition would be easy, but that isn’t the case. The first transfer is the toughest; and yet, if done correctly, it can become the cornerstone for future generations.
Entrepreneurial founders are typically “type D” personalities. They are highly driven, strong leaders and intelligent. They are driven to success – so driven that they often neglect their family during the early years, causing future baggage. They treat their business as their “baby”, giving it equal status with their other children and being just as concerned with its wellbeing and future. Mind you, as the business goes through its growth phase, these owners believe that what is good for the business is good for the family and vice versa. They frequently express – formally or not – that value to the family and value to the business are one in the same. As success and wealth accumulate, the founders begin the soul searching of what’s next for both the family and the business.
Enter the next generation. They enter the business for a variety of reasons: to remain close to their parents, financial security, fast-track careers, future ownership, family legacy, or just because it is expected. Regardless of the reasons for entry, once employed, future ownership is assumed, as is the ascent to management and control. These topics are rarely discussed and even less frequently planned. Parents remain in control until they either willingly give up part of the kingdom or events (like death or disability) require change. Let’s face it – the path of succession becomes a long and winding road for G2.
As time passes, the children are more firmly entrenched in the management of the business and the founders (G1) are semi-retired. Semi-retirement lacks any real definition – it seems to mean less work, but not less compensation or less control. This phase is very confusing to everyone. Parents don’t understand why their children don’t accept that they have made all this possible and they will control the purse strings for as long as they like. Middle-aged children have been waiting for a chance to really take over and prove themselves without parental oversight. Employees wonder: who is the boss? Outsiders try to define who makes what decisions only to find that it changes routinely. It is very confusing – and still no one wants to come to the table to establish a plan.
The problem is that the stars aren’t aligned and no one is even looking through the telescope. Parents want financial security and what is best for the family. They see that being accomplished through their life’s work – the business. They usually want to remain in control until they feel confident that their goals will be met – financial security, family harmony and family legacy. All three are important and the potential failure of any one is just cause to remain in control.
The children don’t necessarily see it that way. They can buy into financial security for Mom and Dad, but not necessarily for the inactive siblings, or to the extent that wealth bypasses them and passes to the grandchildren. Since Cain and Abel, sibling rivalry has existed in most families with more than one child, and the children aren’t always as committed as Mom and Dad to family harmony. As for the family legacy, frequently the children find working under the thumb of G1 demeaning.
How to align the stars? Try focusing the telescope. Here are some suggestions to get that accomplished.
1. Draft a clear Vision/Mission Statement and gain buy-in from all existing and future players, then focus decision-making on meeting the defined criteria.
2. Address family financial security, family harmony and family legacy directly and transparently and include all players.
3. G1 – develop retirement activities outside of the business so that the business does not become the retirement activity.
4. Empower business decision makers (G2) with real control and formally evaluate the results.
5. Separate the importance of family from the value of the business asset.
Growth & Profit Coach, Financial Strategist, Cash Flow Doctor, CEO Mentor