Anecdotal and research evidence indicate that a minority of generational transitions are well prepared, involving all of the stakeholders in a comprehensive planning process. A family embarking on the first steps of this often long and difficult process soon become aware of the complexity of the process. The process is multi-faceted and complex and is often not understood at the outset by those engaged in the activity.
All too often the founders find themselves contemplating issues of concern to the family and the business in isolation to the rest of the family and the business. Analysing and reflecting on how to develop for the future is done more effectively when all of the key stakeholders are involved in the process. Often decisions that impact the business are made based on the parents love and concern for their children and once children are ‘in the business,’ decisions they make about their own future are influenced by their love and concern for their parents.
Decisions made about ownership and wealth creation are often driven by love, sometimes expressed as ‘fairness’. However, ownership is also about power: Who’s got it? Who’s using it? Who’s influencing it? And the issue of power becomes a very difficult issue when it involves parents and children and the often-deadly rivalry between siblings gets enacted out in the confines of the family business.
Linking rational business arguments with emotional concerns is a potential minefield that most families feel unable to handle
Linking rational business arguments with emotional concerns is a potential minefield that most families feel unable to handle and not doing so is the root cause of many horror stories about families in business. There is always a continuous interaction between family and the business and this is always exacerbated in times of:
• Growth
• Contraction and /or hardship
In the early days the founder identifies the business opportunity and then by actively developing and managing the company, adds both financial and human resources. These resources are the ‘tangible added value’ that puts family into business. In addition to these ‘harder’ contributions are the ‘softer’ contributions:
• Vision for the business
• The values that drive the business
These values and the vision are often the ‘intangible added value’ in the business, harder to detect, feel, see and appreciate.
Traditionally, both the tangible and intangible added values peak at the beginning of the life cycle of the family business. To implement a business vision a hardworking entrepreneur invests human, (sometimes described as human capital) and financial resources. He/she also often invests too much of themselves to the detriment of the healthy, sustained growth of the family relationships.
The identity of the founder(s) and the enterprise itself is closely linked. As the family and the business grows; the added value relationship between family and business changes. Particularly for the tangible added value, the natural propensity toward risk diversification dictates that the family wealth should not be concentrated in only one type of asset, namely the business.
As the family becomes increasingly reluctant to devote more financial resources to the original business, it is tempted to invest in other areas.
Similarly, through succeeding generations, the family’s human resource added value tends to become less oriented toward management and more toward ownership.
In smaller families, there is often no natural successor, and the kids may not be interested in the business or may lack the necessary skills.
In smaller families, there is often no natural successor, and the kids may not be interested in the business or may lack the necessary skills. In larger family businesses, often successful through the generations, family is all about ownership and not about management. However, this is not just a financial and management process, this is about letting go and trusting non-family management with the family business, a difficult and emotional journey that many family businesses do not successfully undertake, which could account for why, in part, a large number of family businesses do not make it through generational transitions.
Some of the most successful family businesses are in the hands of non-family management, with some families going to the extreme of having a dictum that prevents family members from having involvement in the management of the family business.
Seen from a multi-generational perspective of the life cycle of the family business, the family’s tangible added value is likely to be a downward sloping curve. There is a danger that when a family adds less value in financial and human resources, the distance between family and business increases over time. With the family focusing more and more on subtracting financial value from the business, it is predictable that sooner or later the business will need a new owner. Avoiding this all too common fate of the family business requires families to reflect early on the nature of both their harder tangible added values and their softer, intangible added values. The family constitution is an ideal vehicle for carrying out this reflection.
The family vision for the business is traditionally stronger in the first generation. A vision is a stretch; it engages people and creates passion. Creating passion and engaging vision requires immense emotional energy, often leading to an incredible, unspoken, often not understood, emotional ownership of the enterprise. It also creates hidden bonds, feelings of duty and responsibility, particularly in the second and third generations.
As times change, few visions are powerful or appropriate enough to pass unchanged to the next generation. So, in the transition there is great opportunity for the next generation, whether managers or owners, to build on the work done by the previous generation and create a new vision for their own family and business future.
Family businesses are the most complex form of business model. The added value concept helps to rationalise the interaction between family and business as it reminds families that building wealth around a business demands an ongoing engaging and transparent process of informing, educating, and communicating with the largest possible number of family members.
Such an enlightened process prepares successors, whether owners and or managers for the question ‘How should we continue to operate this family business?
