I often get asked this question by business owners who wonder if they should put the burden of owning and running a family business on the shoulders of their children.
They remember the sleepless nights, tough times and challenges they had to face in their own business life. In my opinion, a better way of phrasing the question might be: “Why do I want to pass on the business to my children?”
In a recent seminar this question was asked to the participants all facing succession in the near future. Inner motives characterized most answers from the senior generation: ‘It brings pleasure and is motivating’, ‘It makes us proud if they want to continue the business’, ‘Just ego-driven: the legacy will be continued’ and ‘We want to give them the opportunities we have had’. Some gave an answer by giving advice to their children: ‘If you want to be a business owner then being an owner of your own family business is the best alternative you can imagine’ and ‘You have to work to make a living, so may as well work for yourself’.
An inner motive to pass on the business does raise the question of if you can bother your children with the business – as the desire to transition is coming from you – rather than from them. While having this motivation is fine, it is also important that you encourage and allow your children to discover for themselves their own inner motivations and talents. You will not be ‘bothering them with the journey’ if it is a journey of their own free choosing. If they are eager for the challenge and equally motivated to take over the legacy, then you can really be proud that this brings pleasure to you both that the business will make a successful generational transfer.
Recently a family business owner asked me if he should step down now. “Why do you ask me this”, I replied. He told me he had planned his succession very carefully and was supposed to hand over the CEO seat to his successor. But he has since developed serious doubts because the recession is hurting the company rather badly.
There are pros and cons to handing over the reins in recession time.
Reasons to step down during a recession:
A young successor has new ideas and a lot of energy which can boost innovative thinking and change
The drive and energy of the incumbent might not be enough to take the company through yet another recession
It may be too difficult to make some of the ‘hard choices’ after many years of building up the company – there may be a lot of baggage.
There is no better learning opportunity for a successor than taking over in bad times
Reasons to stay during a recession:
To leverage the experience with previous recessions to help navigate this one
Staying on demonstrates commitment and strengthens loyalty of key people in the company
To be able to leave the company in stronger shape for the successor
To protect the successor from an unrealistic and unachievable task
What is wise to do depends on the specific situation. As I have seen families in business so often do, the owner in this particular case came up with an original solution. He decided to stay but realized that he wanted to control too much. He was worried that instead of giving his management, including his two children, more responsibility and freedom to take the measures they think are right he would become a real control freak. To counter this, he created a task force with the powers to decide and himself as an advisor to the task force.
We would enjoy hearing from others about how they have managed the challenge or opportunity that is a succession during this ‘great recession’…
In today’s world companies are much more vulnerable to opinions and statements from a wide range of sources. These can harm their reputation and credibility very fast. Take the example of McDonalds a few months ago. They claimed on Twitter that their food is healthy. Within a few hours there were a lot of negative reactions. The company withdrew their Twitter campaign immediately because the credibility of the McDonalds brand was at stake.
This is but one illustration that building and nurturing a brand has become a necessity for companies. However, when the company name is the same as the family name – brand management has an extra dimension: the family.
Some business owning families are well aware of that extra dimension and have what I call a ‘Family Brand Manager’. The Family Brand Manager is not about branding the companies’ products or services. It is about branding the family’s role and the value the family brings to the company and its stakeholders. Usually a family member takes on the role of family brand manager although he or she may not always be aware of this role.
Some of the tasks of an effective family brand manager are to:
Identify and cultivate the unique values and personality of the family
Determine how to execute their role as visible and positive owner and to make that tangible for both family members as well as other company stakeholders
Make explicit what their long term aspiration is, e.g. ‘no intention to sell’ or ‘if we enter a market we intend to stay’
Uncover and communicate the family and business stories that really matter to the success of the company
Provide guidance to the board and the management with a clear owners’ vision
To think about the family as a brand and make the effort to uncover that brand can be a real challenging job but very rewarding for family and company. Done well it really helps to maximize the advantages of family ownership.
In a recent program for business owning families one participant asked what the options are when the next generation may not be interested in taking over leadership of the business – but may not want to sell either. Are there options beyond: ‘To sell or not to sell…?’
What we find is there are alternatives if the family is willing to develop themselves into different roles:
1) The family remains the owner but the management of the company is taken care of by professional non-family executives.
2) Ownership is shared between family and some key executives.
3) Part of the business is sold, creating a different and smaller company that the next generation is willing and capable of owning and managing.
4) Not all members of the next generation take over ownership but only one or a few – there is a ‘pruning of the ownership’
Most families will be confronted with two big changes if they decide not to sell but go for one of the alternatives listed above.
The first is to let go of the ‘equality’ principle. In the case of the family that raised the question, to date the brothers had equal shares and equal salaries. The reality is, in most alternatives described above this principle will have to go.
The second big change is to move from operational roles as owner to governing roles as owner.
Governing owners are active with the board, involved in strategic discussions but do not have to take on the day-to-day responsibility of managing the operations. For next generation members with their own careers outside the enterprise, this often can be an interesting alternative. For the family it means that the business is not sold. If it performs well it also means better financial returns in the long run.
Rather than only ask if it is time to sell the business – perhaps the a first question should be, is the next generations willing to prepare for a different role in the family business than their parents had? If so, continuing the family legacy can be a rewarding option for both generation as well as the business.
Do you sometimes think of the ‘good old days’ when you started in your family business with lots of business opportunities and a growing economy? As your children’s generation is starting their career in business life – things are very different…
In the US and Europe economies are suffering from recessions and limited growth. Many family businesses face mature markets, populations that are shrinking, and fierce competition from other continents. Companies are getting used to a constant flow of cost cutting and downsizing operations. But is that the nature of an entrepreneur?
Most family business owners I speak to say no to this question. They say entrepreneurship is about seeking opportunities, about adding new business activities, about strolling the market and getting ideas for new products or services. Many young people tell me these are important entrepreneurial skills but their own family business may not be the right place to learn those skills.
So what to do about this and how to teach those important skills to the next generation? Here are a few examples gathered from family businesses in those suffering economies that want to stimulate the right entrepreneurial skills for their next generation.
Start your own business A fourth generation family business stimulates their next generation members to start their own business as one of the ways to gain outside experience. They value it equally to working in another company for a number of years before joining the family business.
Explore a totally new market Stimulated by their father, three brothers went to China to explore new market opportunities for their company. They hardly got support and had to find their way. Two brothers stayed in China and now have their own company. The third is now working in the family business and is leading new business activities.
Provide equity to next generation members One family that has acted for a number of years as informal investors with their own private equity firm – decided to actively provide equity to next generation members who want to start a new business venture. Upon submission of a business plan the family investment committee assesses the proposal and provides equity. They acknowledge that it is a risk and you may also fail. But as long as you are willing to learn and expand you skills the family sees it as a long-term investment in the entrepreneurial culture of their family.
Become venture philanthropists Another family who sold a substantial part of their family business decided to totally reorganize their charity activities. Instead of donating to projects they now invest in social ventures. But more importantly the next generation is actively involved in the selection and governance of those social ventures, thereby developing skills to seek opportunities and build new businesses.
Start a new business venture An old time idea but maybe even more valid now is to give a next generation member that is working in the family business the task to open a new location, start a new business activity or start in a new market where the company wasn’t active before. This stimulates seeking opportunities and if successful it is maybe the best way to boost confidence and prepare for executive responsibility.
Business should be fun! Downsizing usually is not, so business families should create other opportunities for their next generation to acquire the right entrepreneurial skills and confidence for their future and the future of the family business.
Do you have other great ideas or experiences for the next generation? Your reactions on this blog are most welcome.
Corporate governance debates created more caution among many family business owners to start with or expand outsiders and non-executives on the board. A common reaction I get is that regulations have turned non-executives into ‘box tickers’. “They don’t understand anymore what it means to be entrepreneurial and take risks. They check whether their personal liability is in danger and tick off the items on their checklist”, as a second generation CEO told me recently. Indeed, it is something that can happen but the real question is why do non-executives move into the direction of becoming box tickers. Is it only new laws and regulations they feel they have to comply to? Or, could it be something about how the board functions? Is it about how the dialogue between executives, family and non-executives is taking shape in practice?
There are several reasons that make non-executives cautious.
In some cases non-executives are used as sounding board but only when the family feels the need. It’s one way instead of a constant exchange of ideas and questions. Sometimes there is a lack of information or transparency on decisions made by the family. Especially when board members are confronted with decisions the board should know about or least have been consulted on. It also happens that there is a mismatch of expectations. Monitoring and control are assumed to be the primary goals of the board by some board members versus the role of sounding board for (family) executives or the entrepreneur.
A final reason to mention is the lack of understanding of the special dynamics of family businesses. Non-executives underestimate it on the one hand and family business owners don’t include it as an important element in the profile and assessment of board candidates.
These and other reasons easily lead to a board culture that becomes more formal, more procedural and more risk averse. It dilutes in depth and open-minded discussions within the board. It can also lead to a lower level of trust.
A constructive and inspiring dialogue in family business boards is hardly influenced by regulations. In my experience effective family business boards adapt to new regulations but keep the core in tact: a board culture that is build on mutual trust and respect between the non-executive outsiders and the family, a board that puts its sounding board role at the forefront, as well as a shared willingness to discuss in depth the strategic issues at hand.
How do they do that? Some examples.
One board adopts the 80/20 rule: 80% of board time is used for strategic discussions, 20% on finance and compliance issues. Another board puts a strategic topic on every agenda. Management is invited to present the case and background followed by an in depth discussion. Some boards start every meeting with the A.O.B. (any other business). Usually this is put at the last item on the agenda. By putting it first the board ensures there is time enough for pressing issues and that there is a good balance between long-term focus and short-term priorities. A final example is a family business where the non-executive outsiders meet with the family owners separate from the shareholders meeting. One purpose is to make the next generation comfortable with the board and facilitate conversation between family and board.
Two good questions to think about when you travel back after a board meeting.
1) How did I add value to todays dialogue in the board?
2) What made the conversations fruitful or even better than the previous board meeting?