A family business can be a great source of wealth, opportunity and personal fulfillment. But without a plan for ownership and management succession, the business may not survive the transition from one generation to the next.
Here are five tips to prepare younger family members to take on a leadership role in the future.
1. Establish policies
Children often work in the family business without the necessary job skills or experience, or wind up in the business by default. This can create tension with employees who may have invested years of hard work in the business. To avoid this situation, and to set the next generation up for success, it’s critical to establish and clearly communicate policies to children and other family members. These policies should detail the level of education, training, skills and other characteristics required to enter the business and rise through the leadership ranks. For example, a policy may require or encourage potential leaders to obtain degrees in engineering or supply chain management, or to work for another company in the industry for a fewyears to gain different ideas and perspectives.
New employees should also be provided with individual development plans (IDPs) as they join the business. These plans:
- Set roles in the business
- Establish objectives
- Outline their development paths
- Describe the training and educational processes that will prepare them to be future leaders
Education and training include a variety of learning experiences, such as job rotation, outside classes, on-the-job training and coaching. As leadership candidates progress, their IDPs should be revised depending on their strengths and weaknesses.
2. Develop a strong governance structure
This will help ensure that the business is managed by those best suited for the job, that family members’ compensation and other employment terms are reasonable, and accountability is consistent. Independent boards of directors, or several independent directors on the board, may provide objective voices and new perspectives, resolve intra-family conflicts, approve insider transactions, and ensure that all employees are treated fairly. An advisory board often brings independent thinking.
3. Involve family members in governance
A parallel focus on family and business interests is often the most effective strategy. Family-first and business-first philosophies of governance may be equally important. A family council may be another vehicle to involve family, establish policies, and guide decisions and actions. As leadership candidates progress and enter the management stage of their careers, they should gradually be involved in governance. Many companies begin, for example, by inviting family members to board or management meetings as observers.
4. Get the lead generation ready
It can be difficult for parents or other senior family members who have been intimately involved in the business for decades to make way for the younger generation to take the leadership reins. There are multiple ways to transition:
- Current leaders can take more vacations or spend time away so the new generation of leaders can “test drive” the business. This way, the current leaders can monitor the business and gradually increase the younger generation’s day-to-day responsibilities.
- Individuals can be moved into new positions with an assigned mentor.
- Senior members can provide consulting services during a gradual transition, providing input and oversight without day-to-day involvement in operations.
5. Talk about money
There may be different expectations about ownership succession and the role the family business will play in financial futures. It’s important to have open, ongoing dialogue with family members.
- Children may expect to inherit the business, and are unaware of the extent to which their parents depend on the income it generates.
- Senior members may rely on their equity in the business to fund their retirement.
Transition options, including gifting and sale to the younger generation or to a third party, should be considered. Compensation and benefit policies provide consistency and fairness to all individuals.
