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DefiningFamilyBusinessSuccession

DefiningFamilyBusinessSuccession
Family business succession is the process of transitioning the management and the
ownershipofthebusinesstothenextgenerationoffamilymembers.
Thetransitionmayalsoincludefamilyassetsaspartoftheprocess.Familymembers
typically play a controlling role in both the management succession as well as the
ownershipsuccession.
Assuch,theeffectiveintegrationandmanagementofthefamilycomponentwillhavea
determiningeffectonthesuccessofthesuccessionprocess.
Familybusinessesaredifferentandwhatmakesthemdifferentisthefamilycomponent.
Thepotentialimpactthefamilycomponentcanhaveonthemanagementandownership
ofthebusinessissuchthatitneedstobeunderstoodandeffectivelymanaged.
Manyfamilybusinesseshavesuccessfullymanagedtheirfamilycomponentsandhave
donesobyapplyingprovenfamilybusinessbestpractices.
TheBenefitsofFamilyBusiness
There are many benefits to being a family in business. Unfortunately, far too often,
family business is portrayed (especially in the media) as being plagued by
intergenerational and sibling conflicts, fiscal irresponsibility, incestuous hiring and
promotionalpractices,andongoinglegalbattlesamongshareholders.
Ofcourse,familybusiness canprovidenumerous benefits tofamily members, non
familyemployees,andthecommunitiesinwhichthesefamilybusinessesoperate.
Thesebenefitsoftenservetodifferentiatethesefamilybusinessesandelevatethemtoa
levelofpreferredstatusandcompetitiveadvantage.
Thebenefitsderivedfrombeingafamilyinbusinesswillvarydependingonthemakeup
and size of the family as well as its stage of evolution (i.e., first, second, or third
generation).
LoyaltyFamilymembersinbusinesstendtodemonstrateagreatersenseofloyaltyto
eachotherandtothebusiness.Theyalsotendtobemorecommittedtoitssuccessand
aremorepassionateaboutwhatthebusinessstandsfor.

LegacyFamiliesinbusinesshaveanopportunitytocreatealastinglegacythatbrings
withitasenseofaccomplishmentandastrongsenseofpride.Buildingontheeffortsof
theirforefathersisastrongmotivatorforsubsequentgenerationstobecomestewardsof
thefamilybusinessandcarryittonewheightsinthenameofthefamily.
Labour pool Multigenerational family businesses have access to a labour pool of
family members who, as previously mentioned, tend to be more loyal and more
committedtothebusiness.Familymembersalsotendtobemoreflexibleintakingon
differentjobfunctionsandfillinginforothers.
KeyemployeesKeyemployees(nonfamily)appreciateandenjoytheuniquework
environmentcreatedbyafamilyinbusiness.Theworkplacetendstobelessformal,more
handson,andmorepersonable.Manykeyemployeesaretreatedlikeextendedfamily
anddevelopastrongbondwiththefamilyandthefamilybusiness.
Relationships The opportunity to work with family members to pursue common
business goals can be a very rewarding experience. Years of bonding among family
members can create a strong sense of belonging and interdependency. Effectively
managingthesefamilyrelationshipswillgoalongwayinensuringlongtermfamilyand
businessharmony.
PatienceFamilybusinessestendtobelessdrivenbyshorttermfinancialresultsandare
preparedtosacrificeshorttermgainsfortheachievementoflongertermgoals.This
allowsthebusinessestoalignthedeploymentofresourceswiththeirstrategicobjectives.
Thislongtermapproachtoinvestingisoftenreferredtoaspatientcapital.
ValuesFamilybusinessownershavetheopportunitytoteachandpassalongtheir
businessandpersonalvaluestothenextgenerationoffamilymanagers/owners.Family
memberstakeprideinupholdingthesefamilyvaluesandbuildthemintotheirdaytoday
workandpersonalactivities.Theworkcultureisoftenareflectionofthesefamilyvalues.
Career opportunities Family business owners pride themselves on being able to
providefamilymemberswithcareeropportunitiesinthebusiness.Thefamilybusiness

canbeagreattraininggroundforfamilymemberswhoaspiretopursuebusinesscareers
elsewhereorwithinthefamilybusiness.Familymembersarealsoprovidedwiththe
opportunitytobecomemanagersandownersofthefamilybusiness.
FinancialrewardsSuccessfulfamilybusinessesareabletoprovidefinancialrewardsto
bothactiveandnonactivefamilymembers.Itisnotuncommonforfamilybusinessesto
rewardfamilymembersmorethantheycouldobtainelsewhere.Thisisoftenviewedas
oneoftheprivilegesofbeingfamily.
SuccessionAswellasprovidingcareeropportunities,familybusinessesalsofavour
passingthebusinessalongtothenextgenerationoffamilymembers.Theopportunityto
be an owner of the family business or of any business for that matter can be both
motivatingandrewarding.
CommunityandphilanthropyMostfamilybusinessesareactiveintheircommunities.
Thecommunitiesbenefitfromboththefamilymembersasvolunteers/supportersand
fromthefamilybusinessthroughfinancialsupportandemploymentopportunities.This
commitmenttothecommunitytends topermeatethegenerations andprovidefamily
members with the opportunity and rewards that stem from this ongoing community
support.
Challengesinfamilybusiness
Conflictinggoals/valuesFamilymembers,especiallybetweengenerations,canhave
different personal and business goals/values. These goals/values need to be clearly
expressedandunderstoodbyall,toavoidunnecessarystressandpotentialconflictamong
familymembers.
ConflictingpersonalitiesEveryoneisdifferent.Differentpersonalitiescanoftenleadto
siblingrivalriesandintergenerationalconflicts.Leftunattendedorunmanaged,theycan
destroyfamilyandbusinessharmony,andinsomecases,destroythebusiness.
ExpectationsFamilymembershavedifferentexpectationsfromthefamilyandfrom
the business. Expectations with respect to employment, management, ownership,
compensation,workassignments,training,useofbusinessassets,etc.willvaryamong
familymembers.Theseexpectationsneedtobeaddressedandmanagedinorderforthe
familyandthebusinesstooperatesmoothly.Leftunattendedorunmanaged,theywill

negativelyimpactfamilyandbusinessharmony,andchallengethelongtermsurvivalof
thebusiness
WorkethicTheworkethictendstodiffersignificantlyasthefamilybusinessmoves
throughitsgenerations.Thenewergenerationstendtobelesspreparedtoinvestthekind
oftimetheirparentsinvestedinthebusiness.Thiscancauseconsiderablestressand
disaccordbetweenthegenerationsandcanalsounnecessarilydelaythetransitionofboth
managementandownership.
EmploymentoffamilymembersWhogetstoworkinthefamilybusiness?Whogets
whatjobs?Canspousesandinlawsworkinthebusiness?Willemploymentbebasedon
whatthefamilieswant(bloodline)orwhatthebusinessneeds(competencies)?Howare
theseemploymentdecisionsmade?Ifnoteffectivelyaddressed,alloftheseissuescan
turnintoliabilitiesforboththefamilyandthebusiness.
CompensationCompensationandtheinappropriateuseofcompensationtoachieve
family or personal goals instead of business goals continues to be one of the most
challenging issues facing family businesses. The expectations to be fair are often in
conflictwiththedesiretotreatfamilymembersequally.Emotionscanrunhighwhenthis
topicisaddressed.
ReluctancetoplanGenerally,familybusinessowners(especiallythefounders)arenot
verygoodatarticulatingandsharingtheirvisionforthefamilybusinessortheirlong
termbusinessgoals.Businessplanning,successionplanning,andfinancialplanningare
oftenviewedasanineffectiveuseoftimeinsteadofanecessarybusinessprocess.Asthe
businessmovesthroughthegenerations,theownersvisiontendstogetlostorblurred
andthenextgenerationofownersoftenfindthemselveswithoutdirectionastheyplanfor
the future. The dining room table often replaces the boardroom table, and whatever
planningisdonetendstobeinformalandirregular.
TheelementoftimeIngeneral,thefamilycomponentgetsmoredifficulttomanageas
thebusinessmovesfromonegenerationtothenext.Therefore,learninghowtomanage
thefamilycomponentearlyonintheevolutionofthefamilybusinesswillpaydividends
downtheroad.

Successionplanningmodel

SuccessionProcesses
The family business succession plan comprises two processes, the management
successionprocessandtheownershipsuccessionprocess.
Numeroussuccessionactivitiesareoutlinedforeachofthetwoprocessestoachievethe
desiredsuccessionoutcomes.
Themanagementandownershipsuccessionprocessescanbeundertakensimultaneously
oroneatatime.Itisrecommendedthatthemanagementsuccessionprocessbecarried
outfirstsothattheownershipsuccessionplanreflectsandsupportsthemanagement
succession.
SuccessionActivities
Themodelshowsanumberoffamilybusinesssuccessionactivitiesintendedtointegrate
familymembersintothemanagementandownershipsuccessionprocesses.
Theactivitiesarealsointendedtomakefamilymembersfeelcomfortablewithboththe
successionprocessanditsoutcomes.
Theultimategoalistoallowfamilymemberstomakeinformeddecisionsabouttheir
individual and collective futures in the management and ownership of the family
business.
Establishingfamilycommunicationactivities,suchasfamilybusinessmeetingsforthe
active family members, family council meetings for the broader family, and family
businessrules,willservetoguidetheoverallsuccessionprocess.
Thesecommunicationactivitieswillpavethewayfortheeffectivemanagementofthe
allimportantfamilycomponent.
The management succession activities also include the grooming of successors and
integratingtheactivefamilymembersintoanumberofkeymanagementactivities.The
model also shows the ownership succession process including a list of succession
activitiesinvolvingfamilymembers.
These activities comprise the same channels of communication as indicated in the
managementsuccessionprocess.Theownershipsuccessionactivitiesalsoincludefamily
governanceandshareholderagreementissues.
Themanagementandownershipsuccessionactivitiescanbecarriedoutsimultaneously.

However,itisrecommendedthatthemanagementsuccessionprocess/planbeunderway
orinplacebeforeundertakingtheownershipsuccessionactivities.
You will notice that the proposed activities to manage the familys communication
(familybusinessmeetings,familycouncilmeetings,andthefamilyrules)arethesame
forboththemanagementandownershipsuccessionprocesses.
Whatwilldifferisthetypeofsuccessionissuesthatareaddressedatthefamilymeetings.
Itisstronglyrecommendedthatregardlessofwhichofthemanagementorownership
successionprocessesareundertaken,youstartwiththefamilycommunicationactivities.

DesiredOutcomes
Thesuccessionactivitiesoutlinedintheabovemodelareintendedtoachievethedesired
successionoutcomes.Byintegratingfamilymembersintotheprocessandbyproviding
sufficient comfort to the current and future owners of the family business, informed
decisionscanbemade.
Itistheseinformeddecisionsthatwillensureasmoothandeffectivefamilybusiness
transition. If the current owners are not sufficiently comfortable with the proposed
financialarrangements,themanagementsuccessionplan,ortheownershipsuccession
plan,theywillmostlikelynotletgo.
Theownershaveinvestedfartoomuchinthefamilybusinesstopassitonwithoutthe
necessaryassurancesthatitwillcontinuetoprosper.Furthermore,theownerswanttobe
assuredthatthefamilyandkeyemployees,oftenreferredtoastheextendedfamily,are
alsotakencareof.
Thesamecanbesaidforthenextgeneration.Ifthenextgenerationisnotsufficiently
comfortablewiththeproposedrolesandresponsibilitiesofthemanagementsuccession
team,thecompensationphilosophy,thedistributionofwealth,andthefundingofthe
ownershiptransition,theywillmostlikelydelayordefertheirwillingnesstoimplementa
successionplan.
Therefore,thesoonerthesuccessionactivitiesgetunderwaythemoreopportunitythereis
for each party to build their comfort zones. The higher the comfort levels of those
involved,theeasieritisforthemtomakedecisions.

Thespeedatwhichthesuccessionprocessunfoldswillbeinlargepartbasedonthe
ownersknowledgeoftheiroptionsandtheirlevelofcomfort,bothofwhichwillleadto
informeddecisions.Therefore,developingthesuccessionprocesswithactivitiesthatwill
provide options, assess comfort, and allow for informed decision making by family
membersisessentialforsuccess
INTERGENERATIONALTRANSITION
Difficulties
Lackoftransitionplanning
Lackofviabilityofthebusiness
Littledesireonthepartoftheownertotransferthefirm
Reluctanceoftheoffspringstojointhefirm
Difficultiesinchoosingasuccessor
Challengesinchoosingasuccessor
Fearofdeath
Reluctancetoletgo
Identifyingtherightqualitiesandtheperson
Personallossofidentity
Fearoflosingworkactivity
Feelingofjealousy/rivalrytowardsthesuccessor

Structurestofacilitatetransition