Danai Pathomvanich
Oct 7, 2015
Hatton Capital’s Danai Pathomvanich looks at how family businesses successfully transition into succeeding generations.
Owners of traditional family businesses should consider institutionalizing their businesses well in advance of any business transitions.
Numerous studies have shown that only few family businesses survive intergenerational transitions.
Phrases such as shirtsleeve to shirtsleeves in three generations or rice paddy to rice paddy in three generations are commonly used to describe the long-term instability of entrepreneurial family businesses.
In our experience, founders planning transition often struggle with identifying their duties and responsibilities for specific roles, particularly as owners and board members.
Identifying transition roles and principals
Company and family-business owners should identify the tasks within each role that they would like to transition and then begin identifying who could succeed them in each of those areas.
Properly identifying family members or employees that have expressed interest and also assessing their necessary expertise is critical. Deciding how expertise can be successfully augmented is also a key transition-success element.
If children are involved, future conflicts can be prevented by helping them understand their future roles: the duties and responsibilities of their roles, and how their roles fit into the overall system.
The owner-managers then must carefully assess how the new roles would work together and how decisions will ultimately be decided.
Preparing the next generation
Most successful family wealth transitions, including family business transitions, are backed by comprehensive and workable plans that help next generation family members become responsible, educated, competent and confident with how to handle the assets.
These plans include creating and implementing appropriate strategies to build financial literacy, impart experience and knowledge, and developing financial self-confidence; that we consider as three core foundations of successful wealth stewardship.
Communicating with the family
Keeping secret what is going to be done with family business is also of no benefit.
A continuous, open family discussion often helps identify concerns or conflicts that can be addressed. Parents should also express their feelings and intentions early, especially to set realistic expectations.
For many family members, the business becomes part of their identity and some may feel tied to the business because it is their only work experience. Others believe the business is a birthright, the place where they belong.
In some cases, family members involved in the business may feel left out and may not understand why certain decisions are made.
Perhaps most critically, family spouses, who may or may not be involved in the business, but may be uncomfortable with the way the business dominates the family and impact relationships should also be appropriately addressed.
Strong company vision – strong team
Families working together to achieve a company’s vision become a very strong team.
We want to ensure that everyone has some level of understanding and appreciation for the business, and that they’ve been able to share perspectives and learn what’s going on in the business.
In their best seller “Preparing heirs: five steps to a successful transition of family wealth and values”, Roy Williams and Vic Preisser said a primary failure for any family transition is trust.
They suggested trust building structures such as regular family meetings and periodic financial reporting so that everyone has access to objective data about the business provides opportunities to share thoughts, and assure everyone’s opinions will be heard and considered.
“Very often a transitioning founder’s chief concern is how to orchestrate the conveyance of a successful business while, at the same time, keeping peace in the family.”
Anticipating and addressing conflicts
It is not uncommon for normal family conflicts to spill over into business interests.
These conflicts are often not handled professionally or avoided all together, resulting in misunderstandings, hurt or anger that may be detrimental to the business.
Family businesses must learn appropriate strategies for handling conflicts, so that they don’t become negative forces.
Outside of formal meetings, strategies like establishing and sticking to clear policies and procedures can help avoid the appearance of favoritism or nepotism.
A formal succession plan can also reduce friction by allowing all involved to understand how the business will be governed long term.
