Creating 'Mini Me's'

"Teach them what you know or Teach them what they don’t know"

There comes a time when family business owners start to focus on the succession of their businesses and whether the business will be handed over to the next generation, transitioned to management or sold to a third party.

A decision to transition the business to the next generation requires deep thought about their actual capabilities –and often results in internal questioning as to whether the next generation has or can learn the skills required to continue to manage the business that has been created.

As the early baby boomers approach their 70s, many business owners in this category are feeling increased urgency around exploring succession decisions.

New Zealand has one of the highest rates of entrepreneurship per head of population across OECD countries.  On average, these business owners will have been in business approximately 25 years, have 2.2 children now in their thirties and will very likely have a significant amount of their personal capital tied up in the business.

In summary, there are a lot of business owners who have much of their wealth tied up in their business needing to make a decision around what they will do about succession and the future ownership of these businesses.

The importance of this question not only hinges on who will run the businesses in the future but also is intricately tied with the way that these families will plan for distribution of their family wealth to subsequent generations.

Internationally, wealth in many cases is ‘older’, with some family businesses in their sixth or seventh generation of family ownership.  Many families in Europe or the United States have the opportunity to learn from the processes followed by previous generations when considering how they will transition family business and wealth.   Furthermore in many international families, children are born into a family with an expectation that they will enter the family business and are groomed from an early age for this role. 

In New Zealand, the transition of wealth is a new dilemma with a number of family patriarchs and matriarchs carving new ground when they face the varied and complex issues of family business and intergenerational wealth transfer for the first time in their respective families.  These senior family members who have made the wealth are now needing to learn about transitioning and protecting the wealth for future generations.  As many successful New Zealand businesses have been created by the current senior family members, often there has not been any expectation that children will follow on to work in the family business. 

Management or Governance for the Next Generation

Many New Zealand business owners find themselves asking - should the next generation adopt a management or a governance role?

A management role would require the next generation to run the business largely in the same way that the current senior family members have.  Do they attempt to teach their children everything they know in an effort to help the next generation be as successful in managing the business as they have been.  If this path is chosen, the next generation will assume a role as management and have responsibility for the operations, the outcomes and the subsequent success or failure of the business.

An alternative is a governance role where the current and next generation embark on a parallel path of education, to teach the younger family members ‘what they do not know’ about running the business, so that they will know when to ask questions and seek the appropriate assistance and advice as they go forward. 

Value of External Experience

The value of younger family members learning work ethic in an external environment cannot be underestimated, as employers outside the family will often be able to ‘take the rougher edges’ off a young and enthusiastic employee with less friction than family members often can. 

Businesses, as they grow will in almost all cases employ team members from outside the family, who will be required to operate in way that could ordinarily be expected of external employees in a business.  While business founders can often learn on the job and develop human resource policies and protocols as the business grows, external employees will often have less tolerance when the next generation takes over the business without the appropriate awareness of working in a business, exhibiting differential expectations around work ethics and potentially demonstrating a degree of entitlement through their family ownership.

Educating for Governance

For many business owners, the requirement for a formal governance structure has come about as the business has grown.  Many business founders have often learned their governance skills ‘on the job” and held a hybrid position of management and director, where they have made many of the management decisions while also a director of the company. 

When a senior family member considers how the next generation will be educated to govern, it can often be a good decision to appoint one or two experienced independent directors to the board, who are of an age profile that will both gain respect, have experience to contribute to the Board and also have the ability to offer a medium tenure of service to the company. 

It is also important to assess the Directors skillsets to ensure that there are representatives with experience on financial, marketing, recruitment and legal matters, enabling the Board to be an active ‘bounce board’ for management and be in a position to assess the impact of their decisions. 

Impact of External Management in Family Companies

If a decision is made to recruit external management to manage the company, it is necessary to ensure next generations have been involved in the selection process, own the appointment decision, have a rapport with the management appointed and understand the need to allow management to operate without significant direct interference. 

It is also important that management appointed to family businesses understand the family dynamics and are aware of the subtle differences when working for a family owned business.

Factors to Consider

There are a number of factors to consider when thinking through the best way to bring the next generation along the succession journey. 

1.       Do they have the necessary technical training, experience or expertise to run the business?

2.       Do they have the necessary ‘general business experience’ to manage the business?

3.       Do they have the appropriate work ethic and experience to manage the other employees in the business without alienating team members?

4.       Are they entrepreneurial enough?

5.       Do they have the desire?

6.       Can they replicate what you have done?

7.       Can they step back and take a governance role leaving a non-family member to run the business?

8.       Would they take this role if it was not being offered to them? 

9.       Would you employ them into the proposed role if you were not related and they were part of a competitive process?

 

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