Taking the family business beyond the founder’s vision

Many entrepreneurs create vast wealth that they hope to pass on to their children and grandchildren. They are not yet a family business, but they want to be a family business. They want to see wealth used wisely and their businesses and investments continue to add value. But the mindset that led to their success often diminishes their openness to the changes needed to carry the business into the second generation.Here’s the next generation’s dilemma: How future generations can protect the founder’s legacy and Continue to build a thriving family business?

Business founders often fall into common traps that hinder their continued success:

  • They became so confident in their superpower that they stopped listening to others.
  • They feel like they are the only ones who know how to run a business, so they are reluctant to step down or let go.
  • They expect growth to continue and no major changes are expected.
  • They want to find a successor like them who will run the business like them.
  • They seek advisors, executives, and even family members who won’t challenge them.
  • They want their children to repeat their “do it yourself” journey.
  • They think that preparing for the future is to keep things as they are, because after all they have had great success.

This creates huge problems for the next generation of members, who often see the need for major business changes. While the elders continue to develop their businesses, the younger generations are often studying, traveling, working for other businesses, discovering new opportunities and possibilities, and taking proactive steps to prepare for entry into businesses. They have a lot to offer, but the behavior of founders can be frustrating and make them feel like their voices are not being taken seriously. How do they overcome the avoidance and reluctance of their elders when they clearly see the need for innovation?

For example, a family I work with has developed a large real estate portfolio under the leadership of their 80-year-old entrepreneurial father. Four of his seven descendants worked in business in their 40s and 50s but felt they couldn’t talk about new directions, while others worked elsewhere, sometimes in related fields. They know that business and their relationships require work. They want to meet and think about how to work together after their father dies, but he gives them a message they shouldn’t. Are they children who must obey their powerful and successful father? They decided to meet anyway and informed their father. They consider renewing businesses, new acquisitions, how much mobility they need in their lives, environmental concerns and the impact their buildings will have on their small city. They were content to wait for their father to pass away, but they wanted to prepare for the big changes they felt needed to happen in the way they did business.

I interviewed older and younger family members from 100 large global family businesses that are thriving after the third generation, asking them: “What have you done to overcome these founder tendencies? How did you Is the company on a new path?” Successful families understand that their company will not continue to grow, so they must consider whether it is time to sell their traditional business or start a new one. Others may not be ready, willing or able to do it, but it has to happen. Transgenerational success depends on overcoming this hurdle first.

How can they do this? These successful businesses have a unique resource that doesn’t exist in non-family businesses: their new generation. This generation — who grew up in the shadow of the founders with the expectation of inheriting ownership and leadership — often has no formal power, but they do have moral power and influence. They often find ways to stand up and convince elders and family members to make changes.

When I asked these families who was responsible for their most significant changes, they reported that two-thirds of the changes came from members of the offspring who took the initiative and had parental support. Many families report a major shift in their second- or third-generation family culture, from the success of a single business to a multifaceted collaboration that includes diversification, major innovation, and redefining the business. Often, the family continues to exist as a shared entity, but the business itself takes a very different form. This huge shift is not coming from the top, but mainly from the younger generation.

In order to maintain a long-term family business, it is clear that having a founder who can build a great business is only the first step. When second and third generations redefine businesses and develop new opportunities, successful families require a second transformation. Unlike the founding generation, their reality is that they need to collaborate and develop a structure to seek and develop multiple opportunities together. The challenges that come with it are often not fully understood by the founders, so future generations will either need to gain the support of the first-generation owners or develop their own to prepare for succession.

My research found that the young generation generally does not wait for permission. They took the initiative. After all, it’s not the founders’ problem, it’s their problem: how will their legacy continue? They come together to take action and lead significant change. As members of Millennials or Generation Z, they grew up in a digital and connected world with a far broader education than their peers. They look to the future and share a concern about what needs to change in their business and how families can work together to implement the changes they deem necessary.

In particular, three structural innovations have enabled them to move from simply continuing past successes to preparing and envisioning how to meet future challenges:

Actively participate in the business.

The new generation must understand and participate in the business. If they wish to become owners, whether they work in the business or not, they must be prepared to oversee them as responsible owners. This starts with the sharing of information, but the sharing must be active and the communication must be two-way. Transition and change cannot proceed unless everyone understands what is happening. As potential owners, they want more than financial information; they want to understand upcoming values, policies, practices, strategic goals, capabilities, and threats.

Active learning can take many forms: Young family members may be invited to become board observers, although they are not ready to join the board as full members. It’s like an apprenticeship, where they can meet and learn from family and non-family board members and become familiar with the challenges facing their traditional business and other joint ventures. Other families have created what they call “junior committees” that meet regularly with key executives to learn about current business challenges. A junior committee takes up a current issue each year and produces a report on recommendations to address the issue. Many of their ideas became major innovations. These opportunities provide a way for young family members to present ESG and sustainability values ​​that they feel should be incorporated into the business.

Mentoring and development plans with clear criteria for governance roles.

To become leaders, young family members must develop their abilities. Families must invest in their development and provide them with opportunities to use what they have learned. In the example above, young family members are encouraged to develop their skills through family-paid tutoring, assessment, and education programs. Being the owner of a successful business, and inheriting the family wealth that comes with it, comes with enormous responsibility that makes it imperative that each family member carefully develop business skills and consider a role in family governance; they cannot be passive bystander.

Corporate and family governance roles are clearly defined, along with eligibility and selection methods. Family members are invited to prepare for these roles, and the family has a clear plan for bringing in the next generation. All are part of an active family-based education and development program.

Set up a family bank.

Family businesses often have investment funds, and many of the young family members I interviewed were able to participate in decisions about structuring their portfolios, such as reflecting ESG values. Additionally, there is a process for family members to bring business ideas, or even their own businesses, into the home. As some families sell their traditional businesses and become investment families, younger generations are entrusted with bringing families into new investment opportunities. In some households, the older generation leans toward traditional businesses, while the emerging generation becomes social investors. This opportunity is provided with the right checks and balances, often requiring non-family counselors to help ensure the success of the effort. Younger family members can use family wealth to gain entrepreneurial ideas, but they are also responsible for how that wealth is used.

As the traditional business and entrepreneurial leadership of the founding generation gives way to a new generation, they enter a new era of thriving from a single-leader business to having multiple related family owners and often creating a need to rethink what they do business, what goals to develop and how they will do it. The second transition is usually undertaken by members of the second and third generations, who themselves become entrepreneurs and trailblazers. Their leadership is less than that of the founders, but just as important.

Increasing a family’s wealth does not depend solely on circumstances, or by imitating the success of the founding generation. Each new generation of business families has to reinvent themselves, and that reinvention is done by an emerging generation of capable, loyal and collaborative owners. The older generation has to prepare for them and then trust that they will carry on in their own way. Family wealth can continue to grow across generations when they are ready to be leaders.

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