Transitioning to the Second Generation – G1 to G2, The Toughest Transfer

Nothing is more critical to both the short and long term success of a family business than the transition between the first (G1) and second (G2) generation. Fewer than half of family companies make it from the first to the second generation. One might think that this generational transition would be easier than successive transfers, but that couldn’t be further from the truth. The first transfer is the toughest, and yet, if done well, it will become the cornerstone for generations to come.

Entrepreneurial founders are typically “type A” personalities. They are strong leaders with high intelligence. They are driven to success -“ so driven that they often neglect their family during the early years, causing future baggage. They treat their business as their “baby,” giving it equal status with their other children and being just as concerned with its well-being and future. Mind you, as the business goes through this growth phase, these matriarchs and patriarchs believe that what is good for the business is good for the family and vice versa. They frequently express -“ formally or not -“ that value to the family and value to the business are one in the same. As success and wealth accumulate, the founders begin the soul searching of what’s next for both the family and the business.

Enter the next generation. They enter the business for a variety of reasons: to remain close to their parents, financial security, fast-track careers, future ownership, family legacy, sibling togetherness or just because it is expected. Regardless of the reasons for entry, once employed, future ownership is assumed, as is ascent to management control. These topics are rarely discussed and even less frequently planned. Parents remain in control until they either willingly give up part of the kingdom or events (like death or disability) require change. Let’s face it: death or disability is less likely than a more normal sequence of events. Consequently, the path of succession becomes a long and winding road.

As time passes, the children are more firmly entrenched in the management of the business and the seniors are semi-retired. Semi-retirement lacks any real definition -“ it seems to mean less work, but not less compensation or less control. This phase is very confusing to everyone. Parents don’t understand why their children don’t accept that they have made this all possible and they will control the purse strings for as long as they like. Middle-aged children have been waiting for a chance to really take over and prove themselves without parental oversight. Employees wonder: who is the boss? Outsiders try to define who makes what decisions only to find that it changes routinely. It is very confusing -“ and still no one wants to come to the table to establish a plan.

The problem is that the stars aren’t aligned and no one is even looking through the telescope. Parents want financial security and what is best for the family. They see that as being accomplished through their life’s work -“ the business. They usually want to remain in control until they feel confident that their goals will be met-¦financial security, family harmony and family legacy. All three are important and the potential failure of any one is just cause to remain in control.

The children don’t necessarily see it that way. They can buy into financial security for Mom and Dad, but not necessarily for the inactive siblings, or to the extent that wealth bypasses them and passes to the grandchildren. Since Cain and Abel, sibling rivalry has existed in most families with more than one child and the children aren’t always as committed as Mom and Dad to family harmony. As for the family legacy, frequently the children find working under the boardroom portrait of Dad is demeaning. That is not to say that they mean any disrespect, only that family legacy to the children is a broader definition than it is to Mom and Dad and goes beyond “honor your mother and father.”

How do you align the stars?
Try focusing the telescope. Some families do this by developing a Vision/Mission Statement whereby the vision is the long range goal and the mission is how to get there. Then they apply decisions to the Vision/Mission Statement to be sure of the fit-¦if it doesn’t fit, they refocus the telescope.

One caveat to this approach is that everyone must buy into the Vision/Mission Statement or the telescope can’t be focused. For example -“ if the real vision is family wealth accumulation, then selling the business might be a better focus than succession. The current CEO (G2) might see that as failure under his or her watch, even though it best meets the vision. Family harmony would suffer and the family legacy would need to find a direction outside of the business. All these issues are exaggerated in a G1 to G2 succession, compared to future transitions where decisions are much more objective because family issues have become diluted.

Even when the stars are aligned there is a control issue. Semi-retired founders seldom give up control over their baby easily or willingly. While they have a great deal to offer, they struggle with how to offer it without being seen as overbearing control freaks. Even if financial security is an issue of the past, founders find it almost impossible to let go of their baby.

Try the following to make the transition easier:

  1. Draft a clear Vision/Mission Statement and gain buy-in from all stakeholders, then focus decision-making on meeting the criteria set forth.
  2. Address family financial security, family harmony and family legacy directly and transparently and include all stakeholders.
  3. Develop retirement activities outside of the business so that the business does not become the retirement activity.
  4. Empower business decision makers with real control and formally evaluate the results.
  5. Separate the importance of family from the value of the business asset.

Businesses should be considered assets that can be bought and sold. They should not be the continental divide between families. The business should be seen as an instrument to help provide family financial security, family harmony and a family legacy.

Richard Segal is the chair of the Family Business Council, a membership organization of family-owned businesses. He can be reached at [email protected].