Why aren’t more businesses being passed down from generation to generation, and conversely, why aren’t younger generations more interested in taking on big responsibilities in family businesses? Sadly, younger family members may be completely unprepared to take on leadership roles when the business demands them, or may not want to take on the responsibilities — whether managing the business or “reporting” to other family shareholders. There may be several challenging family conditions, often combined. However, many of these obstacles can be overcome with some foresight and openness. This article describes several ways to familiarize young family members with the ins and outs of business today and prepare them to feel comfortable at the helm of the future.
Statistics on family-owned and operated businesses show that while as many as a third of family businesses transition to second-generation leadership, that number has dropped to just 19% over the past five years. According to PwC’s 2021 Family Business Survey, in the U.S., “only one in three have a strong, documented and communicated succession plan…[and] Globally, only 24% of family businesses are focused on next-generation engagement. “
Why aren’t more businesses being passed down from generation to generation, and conversely, why aren’t younger generations more interested in taking on big responsibilities in family businesses? Sadly, younger family members may be completely unprepared to take on leadership roles when the business demands them, or may not want to take on the responsibilities — whether managing the business or “reporting” to other family shareholders. There may be several challenging family conditions, often combined.
Older generations shy away or don’t know how to think about succession and transition; they cross their fingers and start their day jobs, hoping that if they keep running, someone will be ready and willing to lead it at the right time. Children, in turn, may believe that mom or grandpa will go on forever, which is often what their parents want them to believe. Alternatively, one child may be designated “that” and the other children see no reason to participate. Assuming someone else will always be there to take care of the business, this can lead to enormous stress, but it turns out not to be the case. At one of my client’s companies, the sibling who was assigned to take over the business had a terrible accident and the other sibling had to chase, trying to understand everything she had never been exposed to before.
Lack of preparation
The generation of parents can be so powerful, determined, or controlling that even if the child has a specific functional role, they have no opportunity to participate in decision-making or leadership. They may not learn the key skills of management, negotiation or planning. Given their negligible exposure, they may think that managing the business should be straightforward. Or worse, they may think they know what to do just because they grew up in the industry, or that everyone takes them seriously because “I’m from Wellington and my name is on the door”.
The family business could be a turning point. Many times, conversations at home include one complaint or emergency after another. Children may think that working in a family business is difficult, unpleasant and never ending. No one wants to choose a quest that feels like an eternal grind, filled with difficult conversations and painful decisions. “listen [my parents] Conversation at dinner sounds so frustrating and annoying and scary. I don’t want to do that myself,” said one daughter, who was reluctant to even try to work in her family business.
However, many of these obstacles can be overcome with some foresight and openness. Here are a few ways to familiarize young family members with the ins and outs of business today and prepare them to feel comfortable at the helm of the future:
How to prepare the next generation for business leadership
Create a shadow program.
Even young children can feel the excitement of the business environment. You can start with limited activities like “bring the kids to work” as a traditional way to involve all employees without overemphasizing the owner’s children. Combine it with a picnic to encourage the owners’ children and grandchildren to meet employees and their families. Over time, teens can express interest in a particular role or sector, and these efforts can develop into formal internship and apprenticeship programs that expose young people to the business and the types of careers available. Most kids love the idea of helping their parents, so it’s both stimulating and important for kids to see where their parents work and see the company as an exciting place to belong.
Create a progressive development experience.
Moving family members through the organization gives them the opportunity to understand all aspects of the business. They can also have multiple opportunities to manage different working groups if they acquire technical competencies in various areas. In this way, they learn business mechanics while gaining experience in general management. Some family-run organizations require children to work elsewhere to develop an independent business perspective. One of my clients encourages family members to get involved with trade associations to ensure children have other mentors, nuanced industry prospects and a rich personal network.
Provide context for business goals and operations.
Explain the importance and value of building a business, financing and operating model according to the age and acuity of each generation. Dinner-time conversations can start with the goods and services the business provides, including future-oriented conversations about the company’s mission and what it means to be responsible for the livelihoods of employees and others’ families. For multinational companies, these conversations are an opportunity to discuss life around the world and how businesses operate differently under the same principles. Be sure to share the company’s history of success and crisis, how the business survived, and the wisdom you gain from those experiences. Explain how to consider risk and risk mitigation, and the trade-off between growth and stability, in an age-appropriate manner.
Every family has some dysfunction, and individual family members develop bad habits. If a child fabricates the truth at home, they may end up doing the same in a business. If a child is always beating their siblings in obvious competition at a game, they are likely to bring that competition into the business. It is crucial for parents not to ignore these “childish” tendencies and address them early, as these negative tendencies are damaging to the business and should not be tolerated, even – especially – in loved ones.
Make plans for the future.
Know your long-term intentions for your business so you can plan the appropriate career development for the next generation. If your purpose is to develop the entity specifically to sell it, not to build a financial engine to keep the family business going forever, then as one of my clients did, teach kids how to manage their own portfolio . This will allow them to manage their post-sale funds and expose them to functional roles that will allow them to work elsewhere. This emphasis on estate planning ensures a comfortable lifestyle for multiple generations. In this case, parental foresight can prevent the common problem of owners’ children feeling adrift after a sale because they can’t sustain themselves financially and aren’t eligible to work elsewhere.
Educate the whole family.
Not every child chooses to work in a business. However, 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 lives now and in the future. Family councils can be an effective place for families to keep in touch with businesses and with each other. The family council, often supported by outside experts, becomes a place where the family can discuss its mission and principles of governance, and where the 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 different branches of the family. Part of the council’s role is to educate fourth-generation children and young people about business, especially family businesses, helping them decide how much they want to be involved and how to do it effectively. Another client of mine holds all branch and generation family gatherings every summer with fun networking events and business updates as well as education to ensure continued support from the extended family. Family councils provide a forum for teaching business structures, policies and finances that all family members should understand in the same way. It also creates a collection point for family members’ views on social policy, which can be fed back to management and the board of directors.
Leaders of family businesses should assess their children’s skills, talents and aspirations at all stages and give them as many opportunities as possible to learn about the business today and how to ensure its successful future. Using these tried and true methods will help. Even knowing that some children may not want to join the business, it is still possible to build stronger family bonds and support the business to the benefit of everyone.