Laying the Foundation for Successful Leadership Change in a Family Business

Most family businesses don’t make it beyond the second generation. Even fewer reach the third generation of ownership. Why is that?

It is usually the desire or hope that leadership of the family business will be handed off to another member of the family, whether in the current leader’s generation or to someone from one of the following generations. As much as one generation would like to hand leadership of the business off to another family member, whether a current or a next-generation family member, the following critical questions are often not adequately considered:

• Does anyone in the family want to be a part of this business?
• Is anyone within the current or following generations equipped to lead the business?
• If other family members do want to lead the company, but have different visions for it and the leadership role, how will those be resolved for a successful transition?

The Role of Communication in Family Business Transitions

To begin to understand why many family business transitions fail, let’s think about this concept as it pertains to our own lives. Take estate planning, for example.

In many cases, estate planning is mostly discussed in broad detail, if at all. One parent might go so far as to arrange for their children to follow a specific set of instructions in the event they are not around anymore. Still, without a formalized approach to solidify their wishes, there is a lot of room for error, disputes, and irreparable damage to the family unit.

Open and regular conversations can lead to much-needed clarification. This logic applies to family business succession planning just as much as it does to estate planning. So, what is the best way to begin these conversations?

Seeking Consensus

You might be tempted to bring all parties together simultaneously, but be cautious about rushing into that too soon. Start with a series of one-on-one discussions with various family members to get their take on a general outline of events for the succession planning. Note that as the process begins, the more family members you can engage in these one-on-one conversations, the better. Otherwise, you will meet resistance later on from those who were left out. Once the current leadership has made a decision, ensure all involved parties are clear about the timeline and next steps.

Frank discussions around succession planning, particularly around sensitive topics like buy-outs, can help avoid conflict in the future. One person from the current or next generation of leadership may have other ideas for the business. Another might be blunt and call the ideas of the current generation idiotic. This delivery isn’t ideal, and the parties should strive to keep the conversation even and respectful. However, the discussion is the focus of this exercise, and thoughts and opinions should be aired.

At the end of the day, a family business should follow these basic guidelines to ensure open and clear communication around succession planning:

• Write down a set of rules that creates a succession plan. These rules should include issues such as who has input, what the schedule is for discussion and review, and what happens when, inevitably, there are conflicting ideas.
• Talk about said set of rules, and as appropriate, make changes.
• Make sure that the set of rules has a means for everybody in the family to talk about how to change said set of rules.

Asking for Input

What does the communication actually look like? In some families, a meeting or a conference call may be the way to communicate, but in others, you may need to gather people in person. These conversations should not be purely financial conversations. They should address issues like the conditions for employing a family member or the company’s social impact.

Now, let’s say the family wants to meet quarterly. Below is an example of how the quarterly meetings might be designed:

Q1 Meeting

• Review of last year’s results
• Review of the current succession plan
• Update on any social causes the business may have an interest in
• Other pressing business

Q2 Meeting

• A brief report on the business
• Discussion of the company’s social mission (if any)

Q3 Meeting

• A brief report on the business and any social missions.
• A review of current and next-generation leadership: Where are they in their development? What do we need to do to get them up to speed?

Q4 Meeting

Taking everyone’s perspective into account, the final quarterly meeting is about setting high-level objectives regarding the coming year’s discussions. In quarter four, it is not just about answers but about asking questions:

• What are the different things we should be focusing on as we look at next year and three to five years beyond?
• What are the things we’re focusing on now that we should be discarding in the following years?

The agenda and particular topics may evolve to some degree, but, above all, you need to have a stated process for these meetings and what will be covered. You want people at the table who have a clear understanding of roles, mission, and authority. Without this clarity, you may be unprepared for a family business leadership transition within the current generation or to the next and trapped in an endless loop of family business doom.

The Family Referee

In between, and often during, these quarterly meetings, there can be a need for a highly objective, non-family member to step in and steer the communication forward. That person can not only evaluate the communication but also identify additional areas that need discussion while remaining accessible to all in the family.

There may also be a need for an unbiased party who aims to understand each family member’s motivations, as well as the ‘big picture’ of where the business and family want and need to go.

A priority for the family is to ensure that it remains a family. The secondary priority is for the family business to not only survive but hopefully, thrive. To help beat the odds, a once-a-year family assembly may not be enough. In the wake of sudden news, it takes something far more frequent than annual communication in order to move at the speed of life and of business to provide a quick response.

[Editors’ Note: To learn more about this subject watch The Very Basics: Forming the Business, a free on-demand webinar.

This article was originally published on April 30, 2021 and updated on October 16, 2024.]

©2026. DailyDAC^TM, LLC d/b/a/ Financial Poise^TM. This article is subject to the disclaimers found here.