When Succession Begins for the Family Business In the Beginning!

When does succession begin for the family business?

The question is most relevant in the first generation (G1) to second generation (G2) transfer because it is not only the first generational transfer, but it will set the model for those to come. As the first transfer, no road map has been established; therefore designing a process from scratch becomes the task. When and where does that task begin?

Somewhere along the way someone started a business that grew to a point of needing additional employees. Those employees could be sales/marketing, production, administrative, management or all four often wearing all four hats at the same time. If the founder looked to his family to fill the needs then we have the origin of a family business. It is difficult to pinpoint the exact moment a business crosses over some imaginary line to become a family business, and certainly that line moves depending on who is drawing it.

Some say it is with the first official family employee. Some say it isn’t until there is multigenerational ownership, or an ownership transfer. The classic definition of a family business is that the business is multigenerational, that the family has ownership control and is active in management. It could be publicly traded or privately held as long as the family has control. Certainly there are loads of hybrids, and even the definition of family is a question mark today.

We are trying to pinpoint the beginning of a family business and the classic definition doesn’t really help because by the time that definition is met, the family has been in business together for some time and feels the risks and rewards of being a family business. The point at which the current ownership decides that the business isn’t for sale, but rather will remain a family asset is the best pinpoint. Mind you, no one is really sure when they had that defining thought … perhaps when they started the business, maybe with the first child hired, possibly much later at the generational succession, G1 to G2. More likely the thought took place much earlier at least in the owner’s mind.

That’s when things began to change. The decision making process gets much more complicated in many facets and you don’t even realize what’s happening. You begin to wrestle with all the issues of being parent, employer and possible future business partner. Will your children be interested in your business? Should the business become a kitchen table discussion, or not? You start to wonder which child will be good at what? How will they work together?

One of the largest looming decisions will be the family values that are developed around the business. Is it expected that the children will automatically inherit the business? Or, will it be each child’s own decision how they see life and approach the world? Will that decision be different for different children? Will age, gender, aptitude matter? Will the business always be an employer of last resort, like Robert Frost said, Home is the place where, when you have to go there, they have to take you in. Will all children be treated equally if and when an ownership transfer occurs regardless of their business activity, chosen professions, marriages, etc.?

Some founders take a wait and see approach. They are willing to become a family business, but they want to see if their children are interested, competent and compatible. Not all families are compatible as business associates and partners and that is a huge issue. Incompatibility in a family business often leads to complicated conflicts without much chance of resolution. Family dynamics are a critical infrastructure in any family business…they simply cannot be ignored.

No question that some of these early decisions will have deep implications for the business. It is best to attempt to anticipate the issues associated with being family business and address them before they become conflicts. Then you have to think about how to address the issues you uncover. Should there be discussion among the family, or is it an autocratic decision? Maybe, that’s a moving target as the children mature? If it is a moving target, then how and when should changes occur? Then there is the question of whose decision is it and how will they decide?

I am reminded of a client company where the father groomed the eldest son to be his CEO replacement. The son was capable enough, but he always wanted to be a musician for which he was tremendously talented. In the meantime, daughter (third child) got an MBA and would have been a better choice. The daughter chose to build a great career elsewhere because her older brother was already the CEO in training. Early choices have enormous impact on future outcomes!

We have only touched the surface of the difficult business model we call a family business. Once the decision has been made that this is a family business, then things get much more complicated. Sure there are issues, but there are also wonderful rewards. Families that work together tend to be closer and more supportive. They see much more of each other. They develop a strong camaraderie and share success. When family business works, it is a wonderful institution that brings families together for generations to come. But, that’s not to say it’s for everyone!