He wasn’t talking about family business succession, but Leo Tolstoy said, “All happy families are alike; each unhappy family is unhappy in its own way.” That’s known as the Anna Karenina principle. It applies to succession planning in family business as well as statistical significance tests, failed domestication of animals, ecological risk assessments, and losing sports teams.
After studying numerous generational transitions, it appears that successful transitions exhibit consistent traits. When studying failures, we see that they lack enough gravitas, in too few of the traits, to achieve meaningful success.
Here are the things successful family businesses do to stay a family business across generations.
One is not better than the other, but you need to be honest about the choice and develop family governance practices based on this choice. It is going to happen de facto if not de jure.
If family comes first, business performance may fall short of its full potential, but that is often the price of family harmony. If business comes first, family relationships are likely to be more distant, and there is a greater likelihood of selling the business sooner.
Working in the business and having ownership in the business are two different constructs. Effective family governance will establish guidelines for employment and compensation separate from the benefits of ownership. Feelings of entitlement should be tamped down quickly.
The two elements of ownership are economics and control. Successful family businesses often have two classes of stock — voting and non-voting. When parents consider their estate plan, they may want to make the money equal between their children. Sometimes this means directing voting stock to the kids actively working in the business and non-voting stock to the non-working children.
A true-up mechanism may be needed as well. True-up means the successor receives payment if the family business finances are worse than when the agreement was made. The family can negotiate the “mechanism” in place stating the conditions, including payment amount, source of funds, etc.
Doing what is fair does not always mean treating everyone equally. Compensation, title, perquisites, and opportunities can be major sources of tension, disagreement, and conflict. The best way to deal with this, as proven again and again, is open and honest communication. For compensation, start with market norms to manage expectations. After all, they need to understand market forces if they want to be part of the leadership.
This is for the kids’ benefit. They will learn about the world and get a sense of who they are. They will come to understand the workplace, and start to mature while assessing their skills and interests. Why not do that on someone else’s dime?
If they are going to experience failure, it is better to do it outside the family business. Then, they can recover and learn from their mistakes before entering the business.
Importantly, they need to voluntarily decide to join the family business after experiencing another job. Choosing to leave a position to join the family business allows them to value the opportunity.
It is difficult to succeed if you don’t really understand the details of the business. Few people become successful CEOs without understanding all facets of the enterprise. Without thorough preparation and experience, the kids are poorly equipped to lead. This is a critical thought when you’re planning family business succession.
They may be the boss and own the business, but that doesn’t mean people will want to put forth their best effort. It is easy to confuse power and control with leadership. Those three things tend to be disconnected in the real world.
Family business succession is inevitable. At some point, if you want the kids to be successful, take off the training wheels and let them run the business. Show non-family members that the kids have authority to make decisions and to suffer the consequences. The best thing may be for parents to take a long vacation and not call the office.
Family businesses have been in existence since cave dwellers hunted together. Fortunately, businesses have evolved tremendously since then and are the core of our economy. These concepts are a rubric for planning, managing, and evaluating a succession process.
[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can listen to at your leisure and each includes a comprehensive customer PowerPoint about the topic):
©2022. DailyDACTM, LLC d/b/a/ Financial PoiseTM. This article is subject to the disclaimers found here. ]
Bruce Werner is the Managing Director of Kona Advisors LLC, which provides advisory services to owners and investors of private and family-owned companies. With exceptional experience in finance, strategy, M&A, governance, and succession planning, Kona Advisors creates practical solutions to the most challenging corporate problems. Mr. Werner is an experienced Corporate Director, leading businesses through…
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