The family business and the next generation

We should be wary of generalisations when talking about family businesses.  There is no such thing as a typical family business, just as there is no such thing as a typical business or a typical family.  However, it is possible to identify some common traits and issues which can set the family business apart. 

There are many aphorisms which suggest that most family businesses don’t survive three generations.  International variants on the theme date back centuries – amongst them ‘clogs to clogs’, ‘shirtsleeves to shirtsleeves’ in the US, and in a Spanish proverb ‘first generation trader, second generation gentleman, third generation beggar’. 

Yet the UK’s oldest single-family business can trace its beginnings to the reign of Henry VIII and many others can count their successful history in hundreds of years.

The characteristics of the family dynamic may represent real strength and create unique opportunities. It may also provide significant challenges. How the family business responds to those factors may well determine its success, harmony and longevity.

Why does a business need to have trust?

Establishing and maintaining trust and confidence is vital to any business. The brand inherent in an established family business can engender personal loyalty in customers, who may feel like part of an extended family. 

There can be a feeling of affinity with deeply held principles and ethics demonstrated by the family to their own business.  Where that bond is strongly felt within the family, foundations tend to be stronger. 

Should everyone have the same vision?

When everyone is on the same page, many things fall into place.  It would be wrong however to assume that all family members are always bought into the same common purpose.  What worked for the founder may not work for the wider family or next generation.  The founder’s lifetime commitment and sense of duty to the business is not automatically inherited. 

All too often, family members can shy away from key questions.  What does success look like for the business?  Attitudes and priorities may be different. Is there a shared vision or is there a collection of disparate and competing ideas?  Can those differing views and contributions be reconciled?  Does each family member understand and embrace their role?

Resilience or conflict?

The family relationship provides the potential for continuity and togetherness, and a foundation to weather short-term economic or business challenges. The business can demonstrate real agility and speed of response where there is consensus, and everyone is pulling in the same direction. 

Yet, that same strength may create its own issues. There needs to be a balance between flexibility and good governance.  A long-established mindset and approach will need regular challenge, not to stifle creativity and responsiveness but to ensure clarity and consistency.  The commercial and operational approach to the business may require the introduction of more formal systems and processes, which may feel like going against the grain. 

There should be a level of self-awareness which transcends personalities.  The individual ambitions of the family must be reconciled with the requirements of the business.  Do they have the right complementary skills?  Are the owners open to new ideas and management input?  Will they relinquish control if that is the right thing for the business?

Is your business sale-ready?

There doesn’t need to be any intention to sell the family business to want to make it sale-ready. That thinking can be a valuable end in itself.  It enables owners and management to take a more objective view of the business, by adopting an external perspective which cuts through family dynamics.  If a hypothetical buyer would demand different commercial practices, operational or financial disciplines is that something that the family business can and should embrace?

There may be other consequences – intended or otherwise. Even considering such an approach can open up delicate but helpful conversations.  Is there is consensus that third party ownership is always off the table?

Long-term thinking – the person in the business

Perhaps more than other businesses, there can be an inbuilt perspective beyond the next quarter, based on a shared history and strategy that it is built to last for the enduring benefit of the family.  There is often a common purpose to create a sustainable legacy.  That often translates into forward planning and investment with an eye to the future. 

However, that approach is not always replicated in the family's attitude to planning for individuals and the family.  It is not easy to step away from the business and look at ownership considerations for the future, and personal sensitivities can get in the way.

What about relationships – can it be a burden?

Family members often overlook their relationship with the business.  It can be the glue that holds a family together, but not always. 

Bonds within the family may produce stronger and more effective working relationships and provide real competitive edge.  Yet it can be difficult to separate the two.  Personal challenges become challenges for the business.  Whether the board room conversations continuing at the dinner table is a good thing or not can be affected by personal and commercial difficulties.

The next generation of business owners can be daunted by the expectations which are placed upon them.  There may be an assumption that they see their future in the family business, but increasingly this should not be viewed as an inevitability. Some may view succession as more of a burden than an opportunity. 

What if you wear more than one hat in the business?

A founder of the business who has successfully grown it for decades is wearing several hats, often at the same time and often without realising it. They may be an owner, manager, employee, sibling, parent or grandparent.  From the perspective of the next generation, it becomes all the more important to understand the different roles at play, particularly the often-blurred distinction between ownership and management. 

The passing of ownership and wealth does not necessarily equate to the need for a future owner to perform all, or indeed any, key management functions in the business.  It is critical to examine the needs of the business as against the strengths and perhaps weaknesses of the incumbent and successors.

It's good to talk

All of this points to the need for honest and open conversations.  That will determine whether the essence of the family business can be turned to its advantage or becomes a burden and a distraction.  It may take family members into some difficult territory.  However, the approach of sticking one's head in the sand is rarely an effective strategy.  Unfortunately, we see the problems which arise, perhaps in time of family conflict or on the death of major player in the business, where little or no consideration has been given to the important issues where family intersects with business. 

Sometimes, independent facilitation of those discussions can be critical. One size does not fit all, and the approach needs to adapt to and bring the best out of the family and the business.

We see misunderstandings and wrong assumptions between family members. The next generation may not be born with the same dedication to the business. That may never develop, or it may need to be nurtured over time. 

The key is to harness all that is good about the family connection and make it a differentiator and key commercial advantage.  That is only possible if all concerned properly explore and fully understand where those strengths lie and acknowledge and deal with the personal dynamics which may impact future success.

It’s better to plan

Research consistently tells us that family businesses don’t have effective succession plans in place.  It goes back into the difficult box, or everyone is too caught up in the day to day doing and default to focussing on the business rather than the family in the business.

It is never too soon to plan, but it can certainly be too late.  Even start-up businesses should have an eye to succession and exit strategies. 

Tailored discussions should prompt business owners to consider broader issues regarding everyone's needs and expectations.  This may start with a high level view of the family’s core values and priorities, which may then flow into what is in the best interests of the business.  What is critical is to get a clear understanding of the thinking of all parties, to create transparency.

Tail wagging the dog?

Tax changes announced in the 2024 budget have raised much concern amongst the family business community and for many will bring succession and inheritance discussions higher up the agenda in the coming months and years. Long-held assumptions about the ownership of a business passing to the next generation may be challenged as the monetary implications are considered.

Any review needs an holistic view and expert professional advice.  The family’s plan should have a proper financial understanding and context, but that is rarely the best place to start. When common objectives are identified, a joined-up strategy can give proper weight to all relevant factors. What are the priorities, the non-negotiables?  Does everyone agree?  Are there acceptable compromises?

What if?

It can be extremely rewarding to support a planning exercise and see it through to fruition. Our approach is to pose a number of ‘what if?’ scenarios, which we commonly see arise within family businesses. This will involve proactive planning for desired outcomes but also contingency options if events take an unexpected turn. 

We can unearth questions which may not have been on the radar and help business owners understand and evaluate the options available to them.  It provides a valuable opportunity to achieve a carefully considered consensus. That same level of objectivity may not be possible after a critical business or family event, when tensions may be high and conflicts emerge. 

Joining the dots

Succession for the next generation should start from the big picture, but needs proper communication and structure.  Let’s take post-death planning as an example.  The principal family shareholder needs a properly written Will dealing with their business interests.  But it doesn’t end there.  If it’s part of a joined-up family plan, everyone concerned will understand what is intended well in advance, not be taken by surprise in a ‘reading the Will’ big reveal, so beloved of TV dramas. 

It's also crucial that individuals’ personal affairs are sense-tested against the company’s constitution.  All to often it is discovered too late that the owner’s intentions are thwarted, if for example bequests are not permitted by a company’s Articles of Association or other documents.

The family and the business

The best plan will acknowledge the needs, wishes and strengths of the individuals and the strategic requirements of the business. The overlap between the two is key.  If they can be aligned, the environment will be in place for the family and the business to flourish for future generations.