Making family business work into the next generation

Reprinted with permission from The Hindu Business Line.

Evidence suggests that over 70% of family businesses do not make it to the third generation and fewer still make it to the fourth. Understanding how the 30% managed to survive successfully goes a long way in helping family businesses to preempt failure and transfer a positive legacy to the next generation.

One mantra to live by when dealing with a family business is: The family business must grow faster than the number of family members who aspire to be part of it. Stagnation kills any business and the same holds true for family businesses. Continuous growth coupled with profits and a good cash flow are essential for maintaining the peace in business families and ensure that the business grows faster than the number of members who aspire to be a part of it. Developing a strong, successful brand and scaling to national or global expectations also acts as a motivator for the highly educated younger generations who have a multitude of career options to choose from.

A good thumb rule to follow is to formalize processes when the number of family members already in business and the number of potential entrants to the business increases beyond those visible at a ‘breakfast table meeting’. Family businesses also need to align their purpose, objectives and plans in keeping with the aspirations of both, the incoming younger generation as well as existing members in order to successfully cope with the increasing complexities of running a family business.

An important tool in ensuring a smooth succession is a strong retirement policy. It is often seen that due to the lack of a retirement policy, members of the older generation are unwilling to pass on the business to younger members, leading to frustration and resentment among the younger generation. The older generation also resists ‘letting go’ as they fear losing their monthly income and other employment related benefits that support the lifestyle they are used to. Therefore, a retirement policy that addresses the insecurities of the older generation as well as the aspirations of the younger generation must be put in place. A formalized management structure that clearly defines the roles, functional responsibilities, authority as well as accountability of the family members active in business also helps in a smooth succession, leaving no room for miscommunication.

A solution package with external assistance if necessary, in the form of a ‘partnership pact’ or a ‘government code’ lends process integrity to the family business, helping unite the older and the younger generations.

Succession as a process must not be translated into an over-simplified exercise in which a single family member over-rides other equally capable family members. Almost every member of the younger generation these days is capable of leading a business on his own and it is important to have a succession plan that reflects this. A good succession plan will re-structure the enterprise to harness the leadership skills and potential of competent members of the family and help create new growth opportunities that will further enhance opportunities for progress of other family members as well as the family enterprise as a whole.