Date posted: October 13, 2016

Handing over a family business from one generation to the next can be a point of pride. Unfortunately, it can also be a source of conflict. How can family businesses maintain a smooth transition of power and responsibility?

Running a family business is no mean feat. Turning it over from one generation to the next is another challenge altogether. Unfortunately, it’s one that can result in conflict.

Each generation of a family business carries different priorities when it comes to ownership, governance, management and future strategy. When priorities aren’t aligned, or come into direct opposition, it can threaten the stability of the business – and the family.

According to Dominic Pelligana, Partner, KPMG Enterprise, who is actively involved with Family Business Australia, managing the different expectations of each generation is ‘crucial’ to ensure a smooth transition and a prosperous outlook.

“Successful family businesses may feel that their challenges are unique to them and their family dynamic,” Pelligana says. “In fact, most are normal and predictable and are solved by considering independent and experienced perspectives.”

The challenge of the first generation
The founding member of a family business may not think of their venture as a ‘family’ enterprise. They simply start a business and support the family.

“From a family perspective, the first generation puts an emphasis on the business, and the family is there to help serve the business. The priority is to keep them close to the business, and they often live on premises or nearby.”

The founding generation has a strong vision for what they want for the business. Subsequent generations often look back to the founder to determine what strategies they should pursue based on their values.

The first shift in power
The most difficult and important transition is the first to second generation, and there are a number of reasons for this. These include:

  • Businesses started by entrepreneurs are successful because they can exploit gaps in the market by being very nimble. They can make quick decisions and take risks unburdened by internal bureaucracy.
  • Generation two usually wants to implement more formal structures and management to grow and scale up. This can be at odds with the first generation’s natural leadership and management style.
  • In this scenario, tension between the entrepreneur and management can be exacerbated when it is parent and child – not to mention if it transfers to a partnership of siblings.

“The focus in the second generation is more about what keeps the family together as a team,” Pelligana says.

Expanding the family circle
Adding a third generation brings the need for even more improvements. This will be time for a sophisticated analysis of resources, the establishment of leadership succession plans, and a detailed shareholder relations plan.

However, Pelligana says the third generation also have challenges – particularly in that some family members may want to join the business, but lack experience. Other family members may feel pressured to join, worried if they are not personally involved day-to-day, they will not be recognised and could lose their financial share.

“By the third generation, you might have a consortium of cousins who are involved in the business. How do you give the family members the freedom to pursue what they want to do?”

What are the solutions?
It is clear there are two main problem areas: the handing over of responsibilities from the first to the second generation, and then again from the second to the third.

Pelligana says to counter this, family businesses need to build common and shared values – informed by the first generation – and have a Family Constitution to embed them.

“Sometimes, family members think the business is there to serve them, as opposed to them serving the business,” he says. “Creating a set of values and a Family Constitution can stop that from happening.”

When it comes to the second generation passing to the third, building a board of directors and a Family Council is recommended.

Additionally, setting clear expectations for involvement is vital. Some members may not want to be involved in management, but want a seat on the board. This is common in large businesses such as BMW or Samsung, which still have some form of family control.

“Part of these pre-agreed rules could involve the next generation gaining outside work experience at other successful businesses before joining the family business,” Pelligana says.

Managing generational shifts in family business is an important and delicate process. Successful family businesses recognise this – and start planning early.

This article has been provided by KPMG and the advice is designed to be general in nature.