Why Is It So Difficult for Businesses to be Transferred to the Next Generation of Leaders?

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Statistically only about one-third of family owned businesses are passed on to the second generation successfully. The odds are even smaller for a successful hand off to the third generation. According to research by the Boston-based Family Firm Institute, only 13% are successful. Why is that?

In our last issue (Are You Developing the Next Leader / Your Successor for your Business Now?), I suggested that in order for your “successor” to be successful, a well thought out development plan should be created and implemented. But is a lack of a development plan the primary reason that the generational transfer record is so poor? Probably not, based on our experience and the research and reading that I have done on this topic.

See if this sounds familiar. Founders are typically strong controlling leaders with Type A personalities. The business is an integral part of their identity-it’s who they are. They tend to believe what is good for the business is also good for the family. Often times they retain control of most decisions and nothing can be done without their blessing. As a result the next generation may not get the experience or background to make the important decisions wisely. When the Founder does begin to retire, he/she often does not give up control easily or willingly. They know that they have a lot to continue to offer to the business, but it seems to them that there is very little acknowledgement of that fact from the next generation.

The “next” generation working in the business tends to think that future ownership is a given, as is the progression to management control. Often there is an entitlement mentality. Rarely are the issues and concerns discussed or planned. In the most difficult of situations, each of the two generations feels undervalued and underappreciated. That only makes the Founder generation feel that they must retain control longer. Succession becomes a long, tedious, and contentious process. As time passes, the next generation becomes more involved with management and the Founder(s) are semi-retired, but retirement lacks any real definition other than less work, but perhaps not less pay, or less control. Resentment grows.

Unfortunately, while ”family” has always been extremely important, the anger and hurt that often develops can destroy the family. Everyone is confused. Parents don’t understand why their children don’t accept that they have made all of this possible and that they will control the purse strings for as long as they like. Middle aged children (yes that is frequently the case) have been waiting for a chance to really take over and prove themselves without parental oversight. Employees wonder: who is the boss? It is very confusing — and still no one feels comfortable coming to the table to establish a plan.

Often it helps to have a respected third party work with the two generations to sort out what is important to each and to help the families develop a plan. We call it a Legacy Plan. As part of this process, we think it is important to develop a Vision/Mission statement to which both generations would be committed to. This would also identify the important goals and action plan for how and when the families and business will achieve that vision. This plan may need to include addressing the non-active siblings — also often a source of bitterness. To be successful and fulfilling, some Founders need to develop retirement activities outside of the business so that the business does not become the retirement activity. The next generation of decision makers must be empowered with real control and be formally evaluated against actual results.

It is not easy to let go. It can be made easier with proper planning, including a training and development plan for the next generation to help “round” them out. It is very important to have empathy for what both generations are going through because each has very valid concerns and feelings.

Interestingly, many of these same issues are in play in non family owned businesses as well. This is just the second critical area associated with business transitions. I look forward to sharing my thoughts on additional matters in our next issue.