Transitioning the Family Business from one generation to another

Family businesses are not only “the backbone of the Indian economy,” but also tend to perform better than nonfamily companies during economic crises. But what happens when the founders decide to retire and hand over the reins to a new generation? For many family businesses, that involves one of the most complex processes and generates the most challenges.

The following are the eight most important aspects in the generational transition of a family business, according to several experts.

1. Business plan

The transition from one generation to the next must be thoroughly planned. “The family must meet to define where the company is now and where it wants to go in the future: the technology it will need, what will be the capital requirements, and what type of human resources will be needed, among other subjects

2. Real commitment

The new generation must never think that their place in the company is guaranteed because they are part of the family. Working for a family business must be an opportunity, and the owners must be very clear about the employment conditions of their children — from benefits to performance policies — to avoid giving the rest of the employees the wrong perception,

3. Corporate governance structure

Every Family Business must have a professional management system. Establishing a board of directors composed of industry experts from outside the family will lead to better decisions. A small business that cannot afford to have a board of directors with paid professionals can have a board of advisers made up of relatives and other members of family business who are closely associated with them.

5. Preparation

The generation taking over must receive the training required to take control. The generation giving up ownership needs a plan that clearly defines the conditions of their exit, and whether, for example, they will remain as advisers or keep a position with specific duties. The time needed to make sure all parts are ready for a successful transition is between five and 10 years.

6. Management first, then ownership

Transferring the company to the next generation is not only a matter of naming the children as owners. The first step is transferring the management of the company and ensuring that the new generation is trained to lead the business. “When the new leadership is strengthened and it is shown that they are competent, then the property transition process can begin. If needed, professional managers can be hired until the relatives are ready to take over complete control of the business.

7. Resolution of conflicts

All families have problems and conflicts to be resolved. It is vital to remove interpersonal conflicts from the day-to-day operations of the business and to define ways for the family to resolve differences. Conflicts not only can destroy the family, but also the business. It is fundamental to have a family Charter, a document that governs how relatives behave inside the business and within the family, and “how conflicts are resolved among family members.”

8. Key documents

The generational change process includes documents that family businesses should pay attention to.

Family pact: Establishes the terms and restrictions for a family member to be able to transfer their shares of stock. It also establishes the rules to join and leave the company, how conflicts will be resolved, educational requirements, and compensation and promotion policies.

Will: Specifies what will happen with the stock if a shareholder dies.

Code of conduct: Establishes the rules of behavior for family members within the company and information-confidentiality matters.

3 Pitfalls to Avoid

Once the business has been transferred successfully, here are three more tips to make sure everything continues running smoothly. Try to avoid:

1. Not respecting the family hierarchy.

Every family has a hierarchical order, and not respecting this order inside the company will cause friction. If someone feels they are being disrespected or not being heard, it’s a recipe for resentment and conflict. A certain level of mutual respect and a feeling of collaboration are essential. Leveraging each person’s strengths, including management capabilities, for the business’ greater good needs to continually be top-of-mind.

2. Not having enough flexibility.

Members of the family, especially the younger ones, need freedom to experiment with their own projects, even if other relatives do not agree. If the project fails, it is a learning experience that the individual will remember for a very long time. If the project is a success, it’s a win-win for the individual and the business.

3. Not celebrating victories.

Owning a company with your family is a blessing. Make sure to take time to celebrate the wins and to learn from the losses. This is vital to maintaining morale and a general positive feeling toward the business. A family that celebrates and supports one another creates a culture that fosters dedication and success.

– Dr. N. Krishnan

Family Business Advisor to multi generation family business across India – Developing Road map for family business, Next generation development, Transition and Succession planning, Family Guideline and constitution writing and Facilitating Family & Business Councils. You can give feedback or post your queries to krishnan.n@sadashivaconsulting.in

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