“First generation takeovers don’t need to be fraught. They don’t need to be negative,” says Paul Andrews, co-founder of Family Business United.
After around 20 years in professional services - including a stint at Grant Thornton, where he conducted research and provided consultancy services for family businesses across the globe - and time spent as the MD of a family business, he recognised that there were no organisations beyond the IFB that truly focused on the family business sector.
“That’s why I created Family Business United”, he says, “as a resource centre, knowledge bank and magazine, to champion the sector and dispel myths about family businesses”. Now, FBU conducts annual research into the sector, runs behind the scenes tours of family businesses, hosts a big annual conference and more.
- More of our articles on running a family business can be found here.
It’s a focus that Vistage shares. With around 50% of our members representing a family business, a number of our members are FBU members too - and vice versa. In short, he was the perfect person for us to talk to about how to make the transition from first generation to second generation as seamless and stress-free as possible.
Communicate with honesty
“The two generations need to come together to have open and honest conversations”, says Paul. “It’ll give them more chance of succeeding”.
The handover will no doubt be a trying time for the older generation – the generation who had the initial idea for the business, and the passion, pride and determination to build it and make it work. For them, the challenge is to be honest with themselves about stepping back and handing over the business leadership to the second generation, potentially leaving themselves with no shares or influence.
The second generation has its own challenges. The individual being primed for the leadership role will need to ask themselves honestly whether they genuinely have the right skills to step up.
“If the answer is no”, says Paul, “there are plenty of things they can do. They can go into a peer group, like Vistage, with other peers and potential leaders. They can arrange a secondment into a more senior role within another family business to learn skills to bring back. Or they can enrol on a training programme: IMD and some US business schools run specific family business courses that can help.”
However, the skill set that the second generation will need may be different to that of the CEO of yesteryear. With the advent of doing more things digitally and the importance of social media, does the second generation leader have the skills to meet the needs of the business?
The importance of culture
With a greater focus on social media and other digital aspects of business, it may be that an incoming second generation leader could want an accompanying shift in company culture. However, this could lead to challenges between the outgoing and incoming leaders.
“If the second generation leader has already been working within the business”, says Paul, “its culture should be in their blood. However, many of this second generation will take the leadership role and want to put their own stamp on it and do things differently. If the first generation has been reluctant to see things change, this could cause problems”.
One solution that Paul recommends is to create a separate ambassadorial role for the outgoing leader - a President or Chairman position that could allow them to continue to play a role as a guiding hand or the public face of the business, rather than forcing a complete change overnight.
Don’t underestimate advance planning
While some family business leaders will expect the transition to the next generation to be a quick process, the truth is that it can sometimes take 10-12 years - and that, in theory, planning for the next generation should be ongoing.
“I was recently talking to the chairwoman of a Scottish family firm”, says Paul. “She became chairperson 18 months ago, and they’re already succession planning for the next senior leadership roles. It creates an environment where everyone is ready for future changes”.
He highlights the importance of beginning conversations about future succession early, to deal with potential bottlenecks as soon as you can. “If there’s no next generation to take the business over, what will happen?” asks Paul. “Will the business be freshly managed, will it be sold, will non-family leaders be brought in?”
Early planning allows you to clarify the future purpose of the business, and the future role that the next generation is working towards. It facilitates communication between those involved now and those who will be involved in the future, allowing them to work together to give the transition the best chance of success.
Be prepared for sticking points
Two of the most common sticking points when it comes to the transition between two generations of leadership are the definition of roles and responsibilities, and the question of salary, remuneration and dividends.
Paul describes how, in some situations, the founding generation will promote the next generation into leadership roles, allegedly giving them leadership and responsibility, but will retain their business ownership and shares.
“In situations like these, the second generation will often see the first as influencing”, says Paul. “They’ll still come in and organise meetings with staff, and try to influence decisions - the second generation won’t feel they have responsibility until those shares in the business have been transferred”.
He stresses that, once again, this is all about communication, and defining roles, responsibilities and governance. The management team should know their roles and parameters, and the roles of the stakeholders should be clearly defined.
“Those with no day-to-day influence could maybe get their say through some kind of formal family meetings or interactions with the board”, says Paul. “There needs to be documentation and definition in place so that everybody understands their role within the bigger picture”.
Part of this, he says, is about deciding where the family line is drawn. “At work, are you a son or daughter talking to a mum or dad, or the director of a business talking to a chairman? When does one stop and the other begin?” Through clear definitions and setting a framework for the business, the line between personal and professional can be clearly defined, helping some of these sticking points to be removed.
Ensuring a smooth transition
“The transition from one generation to the next is a process, not an event”, says Paul. “It doesn’t happen overnight. It takes time to go through the journey and make it right”.
There may be difficult questions and answers. The next generation may not be suitable or ready. If the outgoing leader has more than one child, how can they make it fair for all involved?
“The important thing to remember”, he says, “is that while the decision is an emotive one, it is first and foremost a commercial one. It definitely isn’t easy, but it has to be based on meritocracy. If you don’t choose the person with the best ability to do the job, the business will fail”.
While passing a business from the first generation to the second generation involves a great deal of planning and difficult decisions, it does get easier. “Great planning the first time around will set you up for future generations”, says Paul.
He finishes by stressing the importance of both generations talking to their peer groups - discussing their challenges with others who have already been through the process. “Family businesses aren’t alone”, he says. “People often think that nobody else has ever been through the succession process, but they have to in order to succeed”.