Top 5 mistakes the next gen might be making when taking over the family business.
My Inspiration to write on this topic came from one research study conducted by one of the leading Management advisory groups highlighting the reason for failures of family-owned businesses as the 2nd or 3rd generations take over.
Passing control from one generation to the next is a critical moment for a family-owned business. It can be positive, but often businesses lose momentum. It can bring a family together, but too often it drives a family apart.
1. LACK OF LEADERSHIP & STRATEGY
Most of the founders of successful family businesses are overly conservative, thus not being able to have a clear vision for their business and are weak in knowing how to manage funds both to sustain a business and to make it grow from its core purpose. Long term vision and strategy are key to a family business’s continuity.
2. EXCESSIVE DEPENDENCE ON FOUNDERS
2nd generation leaders often lack the hunger and drive for success that the first-generation founder had in abundance. 2nd generation leaders sometimes have less self-initiative. Thus, when problems arise, rather than looking to solve them, they look to their first-generation leaders for answers and solutions.
3. SECRETIVE STYLE OF MANAGEMENT
Lack of information sharing with core management team, lack of clearly conveying what the goal and objectives are, believing that everyone is on a “need to know” basis. Most often the lack of transparency is due to the fact that the 2nd generation leaders don’t really know how to establish a sound business plan to take the business into the future. Their uncertainty does not allow for transparency and information sharing. This makes planning and implementing difficult, leaving their team and employees with little to no direction and without a clear blueprint to proceed.
4. FRICTION DUE TO LACK OF SUCCESSION PLANNING
A succession plan establishes an orderly transfer of the management and ownership of the business to the 2nd generation avoiding the liquidation of the business. It considers tax treatment and other anticipated expenses and allows the incorporation of the family's non-tax objectives. Without a clear succession plan, the 2nd generation may compete for power positions and engage in power struggles to win the most important roles within the business, even if they are not qualified. These power struggles can cause a volatile work environment leaving team members and employees unmotivated to do their best and give their best at work.
5. ‘ELDEST FIRST’ RULE DOESN’T HAVE TO APPLY
The best succession plans are based on a cool-headed appraisal of the different strengths and preferences of the next generation of potential leaders. That might mean favoring younger siblings over elder siblings, skipping a generation or going outside the family. What is important to remember is to safeguard the business and keep the legacy going. It is not a question of inheritance but competence. A meritocracy approach needs to be applied. And you need to be open to an outsider (non- family) candidate to be the best person to take the business into the future.
Remember that ownership and management are two different things and offer different ways of contributing to the firm’s success. Family members can play an important role in the firm’s success by being good owners, putting in place strong governance and processes at the ownership level. The notion of “de-linking” ownership from management would safeguard and ensure that the business will be around for generations to come, so it’s not about continuity and the 2nd generation needs to apply this mindset when taking over.