Multi-Generational Family Businesses

Posted on June 11, 2019 by Phil Schwartz, One of Thousands of Business Coaches on Noomii.

“All Happy families are alike: each unhappy family is unhappy in its own way (first sentence of Anna Karenina – Leo Tolstoy).
Similarly, successful multi-generational family businesses have a common characteristic that is usually not shared by their unsuccessful counterparts. The key commonality shared by successful multi-generational family businesses is planning. Successful multi-generational family businesses integrate the next generation into the business with a comprehensive plan.
Most of us are familiar with harrowing stories of family businesses, including squabbles and ultimately separating (and often not talking) to going out of business. Occasionally we hear of success stories.
I recently spoke to a father and son who shared the story of their success. After college the son spent five years working outside his father’s business. He gained a lot of experience and knowledge including how other businesses operate. At the age of 28 (the father was 57 at this time) this young man was ready to join his father but before doing so they went to an advisor to help plan this transition. The father and son and advisor mapped out a plan for the son’s integration into the business all the way to the son taking complete control of the business. There have been minor hiccups with regard to keeping to the plan, but now, 8 years later, they are close to the transfer of control as initially planned. The business is thriving, the father and son enjoy a great relationship… a happy ending.
Statistically speaking, multi-generational businesses face difficult odds as only 30% survive into the 2nd generation, 12% survive into the 3rd generation, and a scant 3% survive into the 4th generation and beyond. Of course, the lack of a plan is not the only reason that multi-generational family business shut their doors. The reasons for multi-generational business failures are varied and include lack of interest or talent in the next generation, inability to adjust to changes in technology or the economy, the inability of leaders to work effectively together, … In this regard multi- generational family businesses are not that different from all other businesses in that they need to effectively adjust in an ever-changing world. Nevertheless, multi-generational have an added level of emotion and complexity not found in other businesses. For example, the founder of the business who is not willing to cede any authority, or the task of integrating several members of the next generation with varying educations, skills, work ethics, financial needs… Or the task of balancing the interests and claims of family members working in the business, versus family members not working in the business. Nevertheless, planning is still the key determining factor in the success or lack thereof in multi-generational family businesses.
There are seven key areas that a multi- generational business plan must effectively address. These components should be in place before a member of the next generation joins the family business.
1. The next generation should obtain an education that leads to an expertise not processed by any of the current members of the family business. For example, an accountant lawyer, marketing, MBA…
2. Work experience outside the business – the incoming generation and the overall business will benefit greatly from work experience outside the family business. First, the younger generation will bring back to the business expertise, experience, and ideas that are currently non-existent in the family business. Second, the younger generation will experience a feeling of value that might otherwise be difficult to duplicate.
3. Education and training within the family business. It should be noted that parents or other senior family members are not always the best teachers for junior family members. Senior members of family businesses often feel that no one trained them. An outside trusted adviser can help insure and monitor that that training is moving along at an agreed upon pace.
4. Job responsibilities and expectations in both the short, medium, and long term should be listed, on paper, before the next generation of the family business begins working. It should be spelled out how and when the junior family member will advance in the business. If these advancements do not happen, there needs to be conversations regarding why this did not occur along with a new time line.
5. Family members not working in the business – what are the rights of family members not working in the business with regard to ownership, and inheritance claims. It’s very important to spell out, in writing, what claims, if any, family members not working in the business have against the family business. Are they owners? Do they have the right to engage in business decisions? If not, the senior member(s) of the family business should consider compensating non-working members of family business with disproportionate shares of personal, as opposed to business assets. In other words, family members not working in the business may receive more money, and personal property… than the family member who will inherit the business. Of course, valuations change over time – thus the need for a formulaic approach to valuing the multi-generational family business.
6. Succession planning – This will spell out, in writing, when the junior family member(s) will become full partners, and how the senior family member(s) will be paid. A succession plan will also spell out the timing of the transfer of ownership. This task may require several specialists including a Financial Planner, an Accountant, an estates Lawyer and possibly more. Nevertheless, I highly recommend that an adviser with experience in multi-generational family businesses remains as the “quarterback” of this team
7. Conflict resolution – The mixture of family and business often leads to heightened emotions. Family members of any generation may feel underappreciated, taken for granted, not receiving their fair share… Therefore, it is important from the outset to have a clearly defined system to air grievances, before they fester. Again, a trusted impartial adviser will be a great help in this area. Moreover, having a plan, as described above in place and in writing, will mitigate conflict as expectations about the current and future state of the business will already be agreed upon.
In conclusion, surviving is difficult for any business regardless of the ownership structure. Survival of multi- generational family businesses is even more precarious as they face all the difficulties that are part of being in business, and they have additional issues layered on top of the normal business issues. The additional issues are largely emotional and include appreciation, respect, autonomy, and fairness. Creating and adhering to a plan is essential to mitigating the complexity and difficulties inherent in a multi-generational family business.
Please feel free to reach out to me to discuss your families business and your unique situation.
Phil Schwartz
Cell 310-795-2204
E-mail pschwartz@focalpointcoaching.com