6 Tips for Transitioning Your Family Business to the Next Generation
By: Lew Jaffe
If you’re running a family business, then you’ve likely heard of the dreaded “third-generation rule.” While experts continue to debate whether this is a general trend or a self-fulfilling prophecy, the reality is, transitioning between generations can be a challenging process both mentally and emotionally.
As an executive coach here at CEO Coaching International, I work with family businesses all the time. According to the U.S. Census Bureau, 90% of all businesses in the U.S. are designated as “family-owned,” so you’re not the only one to struggle with the question of legacy. Here are six tips for transitioning your business to the next generation:
1. Separate “family” and “business” for the time being
The first question I ask any family business is: Are you a family business, or a business owned by a family?
That’s a BIG mindset shift.
For many clients, this is an a-ha moment. The idea of a “family business” makes sense at a certain size and scale, but as you look toward the next generation, you have to evaluate if that model still makes sense. Alternatively, you may want to dial back the “family” aspect and focus more on the “business” aspect.
Either way, as you move forward with a succession plan, you need to separate the family and business components of your business for the time being. Create two different governance groups:
- Family Business Council: This governance group deals with the “family” types of questions. Why does sibling A get more shares than sibling B? Which sibling should be CEO and which should be CFO? What kind of dividends do we pay sibling C, who doesn’t want to be a part of the business at all?
- Organizational Alignment Council: This governance group deals with what the organization needs to look like to be successful in the future. What is the definition of success for the business? What action steps need to be taken to get there?
It’s impossible to fully compartmentalize these issues in a family business, but as much as possible, try to separate them. The more you can make decisions in a logical, dispassionate way, the more likely your business will survive the transition.
2. Define what success looks like
From there, you can start to think about success and work backward. What do you want your legacy to be? When I talk to my clients, it’s easy to tell they love the business and want their children to feel the same. More than anything, they want their kids to be successful … but they can’t always articulate what that means.
Again, separate the family and the business aspects for a minute. For any leadership transition, you need to create a set of success metrics for the business. This doesn’t necessarily mean growth — it could mean maintaining the status quo. But both you and the incoming executives need to be on the same page as to what the transition should look like.
Then, the family aspect. What does success look like there? Do you really want to control it from the grave? Or do you really want to make sure the business exists two or three generations from now? Wouldn’t that be a great gift to give to your kids, that they love the business? Not that they have to come to work but they get to come to work. That sounds like success to me.
3. Communication is everything
Once you’ve agreed on what success looks like, keep those communication channels open.
I worked with a client that was struggling with the transition from one generation to the next. One of their big arguments? The new generation held an all-hands meeting and brought in pizza for the team. The parents worried that this created a dangerous precedent (and were also upset they weren’t invited.)
Taking a step back for a minute, you have to ask yourself: Is it worth having a meltdown over $60 worth of pizza for team-building? Probably not. But what this shows is that communication between generations, both before, during, and after the transition, can go a long way to smoothing these disagreements before they happen. Before you get worked up about something, remember: Is this your pizza? Or is it something worth standing your ground on?
4. Give multiple siblings a chance to find their path
One of the most common thorny scenarios is dealing with multiple family members who all want to be a part of running the company. From an outside perspective, it may be obvious which sibling is best suited as one executive position or another. But you need to give them a chance to find their path.
First, make sure your children actually want to be a part of the business. You may be making an assumption, or they may want to please you. But if that business desire (and acumen) isn’t there, the business will fail. It’s much better to make an exit than to watch the business fall apart in your golden years because your kids thought they “should” take on the family business. Have that hard conversation, and be open to hearing “no.”
Then, what I often do with my clients is map out what different executive leadership roles look like. It’s not about who is older or who has spent more time already at the company. What are the skill sets of a successful CEO? Effective CEOs focus on five things: Vision, Cash, Getting the Right People in the Right Jobs, Key Relationships, and Learning. Have them reflect on these tasks and the skills they would need to be successful.
One client I worked with had two children both interested in running the company. We mapped out the different skill sets of the executive team, and it became obvious to both of them where their strengths were. One was much better at telling the story and the big picture and the other was much better at putting out the fires with employees and working with people. So while they decided to be Co-CEOs, it became easier to understand who was doing what, and what was going to keep the business going.
5. Stop “helping”
Often, I find the older generation wants to leave the business, but isn’t ready to fully retire. That can create a lot of tension as the newer generation looks to establish themselves as leaders. They may have a different way of doing things as they get started.
Be honest with yourself here. You might be “just trying to help,” but that’s not what’s going to set your kids up for success. What happens if you finally take that four-week cruise you’ve been dreaming of and you don’t have cell service? If you fix every problem for your kids even after you’ve handed them control, then they won’t know what to do when they’re on their own.
Start with a set of small guardrails over a period of time. For example, for one of my clients, we set a monetary amount of $1,000 that the new generation could make any decisions without consulting the old guard. What that does is say to them, “Hey, we trust you to learn and to make mistakes.” But what it also does is encourage trust both ways. For this same client, even with the $1,000, the new generation still brought up their plans at team meetings. We’re up to $10,000 now and soon the kids will be on their own.
Most of all, keep an open mind. Few business decisions can’t be turned into 90-day test drives. When it’s time to hand over the keys, you’ll have more peace of mind.
6. Get a coach
If all of this sounds complicated, it’s because it is. Transitioning the business from one generation to another is a stress test, and one that not every family business passes. If you need help navigating this change, reach out to me or one of the other coaches here at CEO Coaching International. Executive coaches can add consistency for your team and help you find your path forward.
About CEO Coaching International
CEO Coaching International works with CEOs and their leadership teams to achieve extraordinary results quarter after quarter, year after year. Known globally for its success in coaching growth-focused entrepreneurs to meaningful exits, CEO Coaching International has coached more than 1,000 CEOs and entrepreneurs in more than 60 countries and 45 industries. The coaches at CEO Coaching International are former CEOs, presidents, or executives who have made BIG happen. The firm’s coaches have led double-digit sales and profit growth in businesses ranging in size from startups to over $10 billion, and many are founders that have led their companies through successful eight, nine, and ten-figure exits. Companies working with CEO Coaching International for two years or more have experienced an average EBITDA CAGR of 67.8% during their time as a client, nearly four times the U.S. average and a revenue CAGR of 25.5%, more than twice the U.S. average.