Publications

- December 1, 2019: Vol. 6, Number 11

Raising a business family: Transferring leadership from one generation to the next is perhaps the greatest challenge

by Ashley Remmers

As a financial adviser, clients often come to me and say: “My children do not know what is required to build the wealth they were born into.” Rather than diving into financial strategies, my first reaction is to ask the client what values they hold for themselves and their children. Have they written them down? Do the parents exemplify these values in both word and deed? What about the children themselves, have their individual values been listened to and observed as well?

Established values build the foundation, transition and, most importantly, continuation of a family business. Transferring leadership from one generation to the next is perhaps the greatest challenge a family can endure; however, the smoothest transitions come from those who understand that succession requires planning and change management long before the change itself takes place.

If a family owns a business, early exposure is critical for younger generations. For parents, this includes living by their values as well as creating an authentic connection between their child and the business. The best strategies are simple, such as a real estate developer bringing his or her daughter to tour various properties, attend zoning hearings or listen in on management meetings. Such exposure will help them gradually absorb and embrace the company’s approach, mission and management values.

As children age, rules must be implemented for those interested in entering the family business. Ideally, these conversations would take place as a child is applying for college, allowing his or her parents to set predetermined guidelines such as achieving company-specific degrees; developing critical skills and leadership management fundamentals; and obtaining first-hand work experience outside of the family business.

Well before the first child enters the business, parents should prepare a personal philosophy to help navigate two difficult, yet unavoidable, objectives: determining who is best suited to enter the family business, and who will one day own the business. More often than not, this is where parents find themselves at a crossroads as they are forced to decide who should — or should not — continue the legacy.

Typically, families will enlist the support of their financial adviser during this part of the process. Legacy aside, family businesses are an asset, which means financial ramifications will differ for those who choose to partake in the family business. Should there be a sense of discord among family members, the adviser may recommend additional support from a family business consultant — a new, yet dependable resource for business owners as they decide whether they will sell their business or pass it along to the next generation.

Initially, the family business consultant will focus on the family itself, often holding a series of individual and group meetings to assess the family’s overall values, talents and mission. Their focus will then shift to gaining a comprehensive understanding of the business culture and outlook with senior management. Given that most financial advisers have a more in-depth knowledge of the family business, it is not unusual for families to request that he or she meet with the family business consultant to discuss specific issues, concerns and overall progression.

As a child prepares to join the business, consultants re-enter the picture to work alongside both the family and the adviser to discuss job training as well as relevant leadership and community involvement initiatives. Strategies vary as one child may have been an outstanding employee in their prior job but lacks leadership experience, while another is a seasoned manager but remains indecisive about leading the family business. Depending on the situation, the adviser and consultant can determine if a child would benefit from a personal coach with whom he or she can practice day-to-day business interactions and develop critical leadership skills.

When a child is ready to join the family business as an executive, both the adviser and the consultant pivot their focus to the parents and their readiness to act on a management succession plan. Stepping down from the family business can be a challenge for the first generation, as it requires letting go of control. This transition inevitably results in a shift within the family’s culture, making the consultant’s role even more vital as he or she works to establish a harmonious agreement between the two generations. Conversations can risk being perceived as a “net zero outcome” for one of the parties, calling for customized exercises from the consultant, such as generating a list of what and when the parents will need to let go. As parents progress in ceding management control, it is the financial adviser’s job to plan the economic transition of stock ownership and voting control to the next generation.

Outside of the family, succession changes the business culture as well, especially when the industry’s shift from paternalistic to more egalitarian teams is taken into account. As the first generation steps down, senior managers find themselves needing to learn new management styles and accept new team players, often relying on the consultant’s independent eye to help form and transition the next generation’s team.

Regardless of a family’s business and history, the answer to a successful succession is simple: start early. From leading by example to establishing expectations, every action counts leading up to the next shift in management control. This type of business is particularly complex, as there will never cease to be an emotional component throughout each transition. In order to set a precedent for success, families must work in tandem with their adviser and consultant to ensure that both the family and business dynamic ring true to their foundational values for each and every generation.

 

Ashley Remmers is a principal in the Memphis office of Diversified Trust.

 

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