The transition of family businesses from Generation 1 to Generation 2 are complex, yet complexity increases exponentially in transitions from Generation 2 to Generation 3 and beyond. In this article we look at (1) the reasons for the complexity and (2) four building blocks of sustainable family business transitions.
Families: They’re Complicated!
Transitions from Gen. 1 to Gen. 2 typically involve parents and children in one family unit. This family could be blended (meaning it includes children from prior marriages), and that only some children might want to participate in the business.
In the transition from Gen 2. and beyond, however, there are likely multiple family units, and the odds increase that these families not only include stepchildren, but also estranged children, children with cognitive impairments or addictions, and multiple spouses.
More people equal more issues to manage, more lines of communication to maintain, more opinions to consider, and—without a roadmap to keep everyone moving in the same direction—more confusion, misunderstandings, and hurt feelings.
Lean In, Not Back
It’s understandable that owners of any generation can be overwhelmed by the magnitude of the task of transitioning a business because the stakes are higher than any other form of business transfer. At risk are family relationships.
In addition, unlike unrelated owners and successors, family members have history, and with long histories come long memories, grudges, unresolved conflict, and rivalries, as well as love, inclusion, pride, and support.
The natural reaction to hurt feelings or being unsure or feeling unheard is to retreat or lean back. Think of skiers navigating a double-black diamond slope: When they become overwhelmed or begin to lose control, the worst thing they can do is lean back. And yet, most do. The skiers who make it safely to the bottom of the slope are those who lean in or down the slope.
Four Building Blocks of Sustainable Family Business Transitions
Building Block 1: Curiosity
To help owners and their families lean in and minimize misunderstandings, we introduce them to three communication “rules of engagement.”
- Always assume the other party has the best of intentions. Leaning in means asking questions when you don’t understand why someone does or says something. Leaning back is shutting down and assuming you know another person’s motives.
- Be honest and never accusatory.
- Be playful because positivity and lightheartedness can help smooth even the roughest waters.
When family members assume that others have the best of intent, they don’t assume, for example, that a child isn’t all that interested in becoming an owner. They ask!
Curiosity is especially valuable when owners are trying to decide which members of the next generation will and will not participate in the business and how. Asking questions and inviting input are far more effective in building sustainable family transitions than are making assumptions and issuing edicts.
Building Block 2: Invitations
For a moment, imagine being asked to participate in the operations of a business as an investor or employee without being told exactly what is expected. As a potential investor, would you first want to see current and past financials? As a prospective employee, would you first want to learn about the role, salary, benefits, and opportunity for advancement?
Now imagine being given the opportunity to ask questions before deciding whether to participate in or own a business. The contrast is stark.
Critical elements of any invitation are the what, the who, and the when. What are you inviting someone to do? To whom do you issue invitations, and when is the appropriate time? We call those elements: structure, the third building block.
Building Block 3: Structure
Let’s return for a moment to our initial premise: transitions from Gen. 2 to Gen. 3 and beyond. In these transitions, there are likely several family units involved. Some families may be blended, and all include members with a wide range of talents and interests.
At this point (if not before), people want to know:
- Who is included in leadership?
- Are leaders appointed or elected, and by whom?
- Is every family unit represented?
- Who is included in ownership: all family members or just those involved in the operation of the enterprise?
- Do my children inherit my share of ownership?
- What is expected of me as the transitioner?
- If my children are not a business owner or leader, or not involved in the business in any way, do how will they reap any benefit from the family’s wealth?
- What does the family value and what is its mission?
- What happens if there’s a conflict?
These are just a few of the many questions that come up in family business transitions, and there are as many answers as there are families. The framework for answering these questions is a more formal business culture, structure, and governance that operates according to a written aligned business constitution.
Building Block 4: Formal Family Business Governance
The primary purpose of a more formal family business governance is to build a bridge that carries the wisdom, experience, values and goals from one generation to the next. Governance accomplishes this by defining the (1) rules and processes for how decisions are made and by whom, and (2) types of decisions people in various positions are authorized to make. (Click here for more details about the benefits of family business governance.)
Complementing formal family business governance is formal family governance (e.g., a family alliance or council). Business governance provides the foundation for the transition of a business; family governance strengthens relationships by preserving the history of the family and keeping family members engaged in activities that bring them together.
The question is: How does a family develop these governance structures??
A Family-First Example
We were initially approached by a member of the second-generation in a family business after a disagreement about both business and family issues had put a huge wedge between father and son. The two weren’t speaking (i.e. they were leaning back) and their rift was damaging the business and the family.
When we contacted the father to meet with us, he made it clear that family came first — before the business or anything else. If we could help him repair his relationship with his son and provide a framework for the entire family to move forward, he was all in.
Not everyone puts family relationships ahead of financial assets and business success, but this family did. With that foundation we were able to help father and son reestablish trust, honesty, and transparency first by reconnecting them as individuals, then by building transition roadmaps for the business and for each of the multiple family units involved. Families are complicated, so transitions of family businesses are complex. The four building blocks of sustainable family business transitions—curiosity, invitations, structure, and formal business governance—create the foundation for both successful family business transitions and thriving family relationships. If you are curious about how you can use these blocks in your family business, we invite you lean in and sign up for a free consultation, or join us for one of our free, 90-minute workshops, or our threeo-day, in-person Master Class.
