For many Australian family businesses, succession planning is usually the ultimate stress test. A sudden exit of the founder or the “leading light” in the business often throws everything into a spin. Only those businesses with high quality governance standards will transition smoothly out of the shock and move seamlessly into the next generation of managers and owners.
The third generation curse
Family businesses usually suffer from the third-generation curse where the subsequent generations squander the value in the family business. Family wealth rarely lasts beyond the third generation and this is mainly due to the fact that they don’t put a succession plan in place. They focus more on the balance sheet when the business is under the stewardship of the founder or leading light but fail to manage the family dynamic which is so critical to the survival of the business. Due to this oversight, some 85% of family businesses will squander the value by the third generation. As families grow bigger, they begin to lose sight of the founder’s vision and many of them may not have the original drive, ambition and the determination of the founders.
Why family businesses fail
Most family businesses that fail are those where the owners are organizing themselves around the family instead of the business. If the business puts family first ahead of business performance and meritocracy, there are high chances that it is going to fail in the not so distant future.
Family businesses that have just recently hit gold also have to grapple with a phenomenon called the sudden wealth syndrome. If a lot of money pours in all of sudden, most people can get quite unhinged. It may look so glamorous but managing a lot of wealth all of a sudden is a quite a burden. However, as you get used to the wealth, the biggest burden that you will grapple with is how to smoothly transition the wealth into the next generation and ensure longevity in the family business. Most of us want “our baby” and legacy to live beyond the grave.
How to Succeed in Family Business Succession Planning
To manage the family dynamics of succession planning, it is prudent to set up a family board that should preferably be chaired by a non-family member. This can create an environment for open conversations and help diffuse some of the family conflicts.
It is also important that the family members embrace the diversity of opinion and individual differences within the family. There will always be difference of opinion both in the family round table and in the management of the business. Sometimes you may have to walk on egg shells but how you succeed in nimbly managing these differences will be key on whether you succeed or doom your succession planning.
Families that are jointly running a business shouldn’t just rely on the intuition and force of personality of the founder or the leading light. It is prudent to have a strong family constitution with solid governance structures. This will not only guide the goals of the family business but also help anchor the business’ operating principles. The family board must understand the purpose of the business and the wealth and the constitution should be allowed to evolve organically over time to meet the needs and values of the family business as it grows.
If you are a patriarch or matriarch running a family business, make open communication part of the business tradition. Sit the family around the dinner table and have a discussion about the business and other issues impacting the family. Talking not only fosters a good relationship between family members but it also helps in orientating and steering them towards the vision of the business.
It is also advisable to think outside the family. Consider bringing outside talent into the business so as to allow you to focus more on the business strategy. Outside management can also short-circuit the decision-making process. The family dynamic is often very complex and family differences often spill over into the business management. An outside talent can contribute to a more harmonious decision-making process.