Managing family business transition: a three-step guide
Succession is a myth. Successful transition is real.
Family businesses have a chance for great success, but they also have a great chance of failure. Family relationships give firms comparative advantages over their rivals, but can also be their undoing. Key transition points — such as the founder’s exit, the entry of second generation family members, or scaling up with private equity involvement — all have the potential to turn a good thing bad. And the figures don’t lie: 70% of family businesses fail during their second generation. So how do firms and investors maximise their chance of success? Answer: by applying a three-step plan to find existing vulnerabilities and turn them into strengths. These steps follow a medical model: 1) assess; 2) diagnose; 3) intervene.
1. Assess: First, we need to understand the ‘DNA’ of the family business and its ‘gene politics’. What is the relationship between family and firm? Who is the founder, and what is his or her style of leadership? What are the key values and principles of the company, and how have they evolved over time? A clinical approach is needed to map these human factors, with in-depth interviewing of key personnel, family history-taking and psychological profiling essential. This will tell us what’s there right now, and how it developed. External consultants are best placed to assess features like the love-hate bond between founder and offspring (IBM), sibling rivalries (Adidas) and divergent visions of company identity (Gucci). Outsiders can see the bigger picture in complex family situations.
2. Diagnose: Second, we label what needs to change. What are the toxic personality traits and pathologies, including in the relationship between founder and firm? Where are the fault lines that will deepen and split when crisis hits? We need to find ways to mitigate risks, redirect and strengthen, turning liabilities into assets. Could such an assessment have avoided the near-destruction of Guinness brewing in the 1970s by unqualified, unsuitable family members?
We also need to decide what does not change. What aspects of this unique family culture do we want to keep in the company? We must distil the ‘essence’ of each family business — its socio-emotional wealth — to ensure it remains embedded in the firm post-transition. When LVMH took over Château d’Yquem wines, it removed the aristocratic family members from the board but retained their brand of 400-year winemaking heritage.
3. Intervene: Third, we set out a blueprint for change. We may have diagnosed the pathologies, but it would be a mistake to think we can alter the personality of, for example, a founder. Instead, we need to change the structures around them to a) maintain their unique advantages; and b) minimise the potential harm of problem issues; while c) maximising the ability to scale and thrive. This includes encouraging new thinking in areas where previously a founder may never have been challenged, such as product innovation or decision-making systems.
Most commonly, a founder will need to relinquish some control of their firm. Many assume that this means a single second-generation family member taking the reins. But succession is a myth. Instead, most family businesses will need transition: splitting up the multiple roles of the founder and distributing them among family and non-family employees best qualified for the task. Some family members may need to have their roles formalised. This might entail redistribution of resources, which could meet with resistance or provoke conflict.
Specialisation and professionalisation pave the way for a meritocracy in the firm. Employees need defined roles, appropriate training, regular performance reviews, and rewards (bonuses, promotion) for effort and success. Clarity and structure here will avoid the nepotism associated with dictatorship. But the firm’s unique family factors (e.g. values, identity) should be maintained and communicated throughout the company. They will also need to be reflected in the corporate social responsibility plan for environmental and philanthropic activity that is expected today.
This three-step model can be applied to all family businesses, though the precise formula for intervention will differ in each case, because every family has its own unique chemistry. Such large-scale change can be traumatic and will require careful management. Ideally, intervention will take place before a crisis hits: death, divorce, conflict, failure. Once the damage had been done, it may already be too late. The better a family business prepares for transition, the greater its chance of being in the minority that survive, and of entering the elite group that thrives.
- Click here to read about success of family firms.
- Click here to read about failure of family firms.
- More background reading on family businesses can be found here.
Co-authored with Dr Chris Merritt