Passing the torch

Handing a family business from one generation to the next comes with its own unique set of succession problems, all of which have been well researched and documented. In fact, family-owned businesses – particularly successful ones – decidedly pique the interest of greater society, not least because they conjure images of famous family dynasties, greedy in-laws, money-hungry grandchildren with entitlement issues and bored housewives unashamedly milking company loan accounts to finance their extravagant lifestyles. While this may sound wildly Hollywood’ish, it’s not altogether uncommon that family-owned and run businesses suffer at the hands of the second and third generation owners.

Having examined the statistics in last week’s column (“Dropping the baton”), it should be cause for economic concern that only 13% of family-owned businesses survive with a third generation owner at its familial helm. Having determined that third generation failure can be somewhat exacerbated by the neglect of the founding owner to implement effective succession planning, we’d do well to examine the behaviour of the third generation and how it can unwittingly contribute to the downfall of the business. Let’s have a closer look:

Entitlement: One of the most damaging characteristics demonstrated by third generation owners comes in the form of personal entitlement. Taking over the reins of a business as though it is ones indisputable birthright breeds discontent, disrespect and understandable resentment – particularly in the hearts and minds of longstanding and loyal employees of the company. It’s a widely accepted psychological truism that people tend to value less those things which were obtained for free. Being gifted the family business without having ‘done your time’ getting your hands dirty in the mucky engine room of the business is not a winning recipe for future success.

Laziness: Whilst second generation owners may have witnessed first-hand their parents burning the candle at both ends in their passionate attempt to build their business, it’s seldom that the third generation are exposed to the initial drudgery of the founding owners. In fact, the words of Gail Petronis sum up this phenomenon quite succinctly: “In a family business, it’s the third generation that presents the big problems. The first generation founds the company and has the drive and the dedication to move it forward. The second generation rides that wave. The third generation wants to do their own thing. They’ve seen Broadway; they’ve had all the advantages.” And that’s just it. Born too late to witness the merciless hard work of the founding fathers, the third generation instead observed them reaping the rewards of their labour. It’s no wonder that so many third generation owners believe that ‘golf’ is another term for ‘hard work’, believing it’s their right to play endless rounds of golf like it’s nobody’s business. Little do they know that soon it won’t be anybody’s business.

Passion: It’s no secret that most entrepreneurs who achieve success do so because they are driven by an insatiable and voracious passion to avoid failure at all costs. While this passion and vigour are most likely shared with the second generation owners who no doubt work in close proximity with the founding visionary, the chances are that this initial driving passion will never transmit further than that. Assuming control of a successful business without a full understanding of the passion that fuels its very existence translates into empty, uninspired leadership.

Resources & knowledge: All too many times when the founding owner leaves the business he leaves behind a massive knowledge void that can’t be filled, no matter how many MBAs one throws at the gaping hole. While there naturally exists a duty on the owner to pass on his knowledge, it’s essential that the next generation takes responsibility for his knowledge acquisition. If the next generation intends taking control of the family business as though it is his right, he should equip himself with sufficient knowledge to perform the job as though it were his duty. Quid pro quo.

Respect: With any longstanding business comes a colourful history of employees, individuals, clients, service providers, mentors and erstwhile benefactors who contributed to the present-day success of the company. Without a complete understanding of the contribution that each individual made along the road to success, many third generation leaders are likely to encounter business disaster – not because of their lack of vision, but because they fail to render due respect to the collection of men and women who made it all possible in the first place. 

Although the term ‘business succession planning’ sounds enormously complicated – and sometimes it is – our experience shows that there are a number of golden rules which, if followed, can greatly increase the chances of a business thriving as the generational torch is passed on. As a business moves from first to second generation, inevitably the number of members within the family structure increases. With more ‘chiefs’ and fewer ‘Indians’ looking for a prime position and their share of power, the management structure of the business becomes a priority. Putting an effective management structure in place to drive the business forward is absolutely essential. What’s even more important, however, is ensuring the management structure is designed solely to meet the needs of the business and not to accommodate the ever-growing extended family.

Secondly, as the business moves from small family business to larger (extended) family business, the issue of accountability becomes tantamount. Whilst previously the company board may have been made up of family and friends, an effective and accountable board consisting of qualified, educated and experienced professionals needs to be assembled. Whereas in the past ‘accountability’ may have taken the form of family discussions over the dinner table, true fiduciary accountability and responsibility needs to be implemented and enforced unapologetically.

As the third golden rule for successful succession planning, the company needs to ensure performance reviews of all its employees, managers, senior managers and directors – without exception. Familial ties to the founding owners of a business should not exempt anyone from having their individual performance rated, reviewed and rewarded.

Fourthly, if the business intends employing the skills of its family members, it should focus on doing just that. Rather than assume that the business reins will automatically be handed over to the next generation, the business should start identifying the skills set of each individual to see if and where he fits into the organisation. Instead of creating positions for family members, companies should be encouraging family members to up-skill themselves to a point where they adequately qualify for already established positions within the business.

And lastly, early and ongoing communication between the first and third generation has proven to be a powerful tool in bridging the chasm that currently exists between so many passionate, pioneering business founders and their somewhat lesser motivated grandchildren. Rather than rely on the second generation to fulfil the job of torch-bearer, first generation entrepreneurs are encouraged to take personal responsibility for igniting the flame of passion in the hearts of their grandchildren. The mammoth task of ensuring the future survival of the family business then becomes less about passing the torch and more about fanning the flames of an already burning desire within the hearts of the third generation to succeed.

Have a blessed long weekend!

Regards

Sue

Gareth Ackerman has been featured on the international list of the top 50 leading family-led companies released by Campden FB/Ernst & Young in March 2012.



Categories: Lifestyle Financial Planning

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