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Carving your own path after taking on the family business

Family Business
Family governance
Succession planning
Family business

Carving your own path after taking on the family business

Oct 26, 2020

How can the second generation (or beyond) balance the expectations of their family with the desire to pursue personal passions and leave their own mark?

In times gone by it was presumed the next generation would be involved in the family business in some shape or form, whether as an employee, a manager or ultimately as an owner. But what happens when the next generation is hesitant or unwilling to take on the family business? Or has their own ideas about how it should be positioned for the future? Or just wants to pursue their own path and not be involved in the family business at all?

Merging business and family life can be complicated. About 30 per cent of family businesses survive into the second generation, 12 per cent into the third generation, and only 3 per cent into the fourth generation or beyond.1

Russell Prior, Regional Head of Family Governance and Family Enterprise Succession, EMEA at HSBC Private Banking, acknowledges that there are several factors that lead the next generation to struggle when thinking about becoming involved in the family business.

"We see a lot of reluctance among the next generation; we see quite a lot of doubt. Some feel that they don't want to lead the same lifestyle as their parents; others have feelings that they may not be good enough to succeed their parents, or don't want to seem underqualified to non-family member employees. Others feel obligated to take the business on, fear disappointing their parents or are concerned about pushing them out before they're ready. And of course there are those that just want to go their own way, and not be involved at all," he says.

Open communication and effective succession planning can resolve mismatches in expectations, priorities and goals between generations.

In today's global world, cultural and generational differences within families are increasingly common and can present further challenges. Individualism gained from living abroad, cultural norms picked up in other countries and even multicultural marriages can be seen as broadening horizons, or alternatively as adding complexity.

"Those family power dynamics can have nothing to do with the business and wealth transition but play into the common communication issues around this," Prior says.

Crystallising values and long-term goals

Research has found that 60 per cent of the breakdowns in transferring wealth was because of issues with trust and communication; 25 per cent was down to heirs being unprepared; and 10 per cent was because there was a lack of purpose for the family's wealth.2

The researchers concluded that without common values, a common mission and authentic trust, few families stay together in the long term. While money and 'things' are transitory, the values that a family holds are paramount.

Communication around the family business's values and long-term goals can engage the next generation family member, even if they have their own ambitions about where the business should be heading. What is the business going to do and achieve? What are the core activities that will create value and align with the family values? Can new business directions be sought while continuing with the existing ones?

Alongside clarity of business purpose and strategy, a family governance blueprint for collective decision-making can help here, along with conflict resolution and stewardship of the family's resources. Indeed, governance policies and structures will support the evolution of the business. After all, succession planning is a process, not an event.

Choosing the right path

It can seem as though ever greater numbers of next generation family members do not want to be involved at all. Generation Y (those born between 1980 and 1994), for example, are more likely to have gone to university, are more technologically savvy and may have personal aspirations they want to fulfil.

But even this situation presents opportunities. The family wealth could be used to diversify the family business, providing an outlet for the next generation to operate a new venture under the corporate umbrella. Or perhaps an existing role in the family business could be adapted to interest the next generation family member and match their skills. And if the next generation family member spends time working away from the family business, they will have the chance to develop unique expertise they can later bring back in.

Key to exploring those options is open-mindedness, open communication and effective succession planning. Ideally, succession plans will cover estate planning, ownership and voting rights, and should also form the basis for a career development plan to help the next generation understand how they might move to the head of business in five to 10 years' time.

Getting support when it's needed

A family leader who is unable to let go can also make it difficult for the next generation to make their decision about whether to get involved with the family business. It can be helpful to identify whether it is status or control that is driving the outgoing leader not to let go.

Family leaders who are holding on in order to retain status can still represent the business during important occasions, or become Chair or President rather than CEO; or they can focus on leadership of the family rather than leadership of the business.

If the reluctance is more about relinquishing control, then discussion is required to ascertain what they feel worried about, perhaps followed by the creation of a phased transition plan – maybe management first, then ownership and finally decision-making.

Faced with this, it's important for the next generation to have someone to talk to – particularly as they might not be comfortable offloading their concerns to family members. Independent advice can take many forms, Prior notes, be that as an objective facilitator for difficult discussions, setting boundaries and formalising family governance, or building a coaching and development plan for the next generation.

And then there's the issue of how the subject is broached between the generations. Sometimes things are too close to home for both sides to make an objective assessment, particularly as the senior generation is more likely to be making all of the decisions. Building objectivity into the process and depersonalising it can be difficult when it involves family.

At a glance: advice for the next generation

  • Communication and trust are key
  • Stay true to the business and family values: this will help guide you as you set your course for the business
  • Discuss succession plans soonest: this should include career development planning to address any concerns about lifestyle, feelings of inadequacy or concerns about nepotism. Think about what you bring as well as what you might get in return. Try to look at the issues from both sides, but don't shy away from uncomfortable discussions
  • Explore all your options: think about your passion and personal goals as well as how you can best contribute to the business and find a balance between your ambitions and perspectives of your family
  • Set boundaries: keep discussions professional and put appropriate governance structures in place with clearly defined roles and authority
  • Ask for support: many family businesses face similar challenges. Independent advisers can bring objectivity to address your feelings and concerns

Early conversations to explore boundaries and understand family members' interests and expectations are key to sustaining the family legacy. HSBC Private Banking can help you navigate and find ways to realise your ambitions, expand your horizon and make your mark. For more information on how we can support you, please contact us or your Relationship Manager.

Reference:

1 Family Business in Transition, Family Business Institute, 2016
2 Bridging the Generations: What families need to know before transferring wealth to heirs, The Williams Group, 2016

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