Johan Lambrecht is professor at EHSAL Business School in Brussels and director of the Research Centre for Entrepreneurship, EHSAL-KU Brussels.
Transfer of the family business is a continuing process. One can hire specialists to deal with financial and fiscal-legal regulations but Johan Lambrecht explains why the soft elements of the process must be addressed and fostered by the family
Many articles on family businesses open with the assertion that fewer than 30% of family businesses are passed on to the second generation and that only 10% of them make it to the third generation. The average life of a family business is 24 years, which coincides with the number of years that the founder remains at the company´s helm. After those 24 years, the business may continue to exist, but it loses its family character. It is often said that a family business goes to the dogs in three generations, an observation which is expressed quite baldly in some countries. In Mexico, for example, one says: father-entrepreneur, son-playboy and grandson-beggar. These findings have spurred many researchers and consultants to study the succession of family businesses. Even today one still gets the impression that family businesses and succession are a pair of Siamese twins. The classic discourse with respect to succession draws attention to a timely succession plan, that should start 3–5 years before the transfer of the business, in which all the financial, fiscal-legal and emotional issues are resolved. Planning appears to be the magic formula for succession in the family business. But a new breeze has begun to blow in the research on family businesses. Several researchers have highlighted the fact that no connection actually exists between planning and successful succession in the family business.
So how do some families succeed in allowing companies to pass down to following generations while others fail?
Preparation of the entry
Business families make it clear that the gateway to the family business cannot be entered with seven-league boots. Indeed, there are six stepping stones to the transfer of the family business.
The first is interpreneurship. This means the transfer of professional knowledge, management values, entrepreneurial characteristics and the soul of the family business to following generations. For the transfer of professional knowledge we can distinguish three life stages of the child on the way to the family business. Up to age 11 the company is a playground. From age 11-15, possible successors perform light activities in the family business (during weekends and holidays). From 15-17 they do more serious work, learning the secrets of the product and the tricks of the trade. With interpreneurship, it is important that the child not be a slave of the company and that the transferring generation does not transmit the stress from the company to the family. Otherwise the young family members will experience the family business as a yoke which they will later want to shake off. In other words, the transferring generation must display enthusiasm. Management values are transferred via the upbringing, where the mother often plays the major role. The family values of 'honesty, partnership and restraint' punctuate the commercial policy. Hard work and perseverance are entrepreneurial characteristics which are central in childrearing. Symbols such as the family home, portraits, names, and so on are conduits for the soul of the family business. They forge the relationship between the family and the business and between the different generations.
Studies form the second stepping stone. Most successors earn an advanced degree before their full-time entry into the family business. In a number of practical cases the studies are oriented towards the sector of the family business. In other practical cases, potential successors are free in their choice of a discipline. Often the diploma is a condition for ever being able to work in the family business.
Internal education for family members at a young age is the third stepping stone. They learn about the figures of the company, the future and values during organised training sessions and by attending board meetings. Along with learning about the conduct of the family and the business, this formal internal education seeks to identify the brighter ones and allow directors to become familiar with potential future managers. The mentor can be either a family member or a non-family member.
The fourth stepping stone is the acquisition of outside work experience in other companies, whether or not abroad. Along with knowledge and worldly wisdom, the successors gain self-confidence.
With the official start in the business we have arrived at the fifth stepping stone. Therein we distinguish between 'beginning at the bottom rung' and 'freedom for and by the successor'. Before the succeeding generation holds a management position, it generally passes through the various departments in the company. Successors must prove themselves, win the confidence of the employees, and discover the company, the sector and the customers. After all, leadership by the succeeding generation means the acquisition of credibility. Both transferors and successors underscore the importance of freedom for the new generation upon the official start in the family business. Successors must receive from transferors the necessary breathing and manoeuvring room in order to learn from their mistakes, to give innovative impulses and in order to discover who best assumes which responsibilities. Freedom by the successor entails that they take the responsibility, have respect for the previous generations, ask advice to the transferor, and understand that the past denotes the foundations and a lead.
Stepping stone six relates to the written planning and agreements. Thus there must be an eye for measures in the event of doomsday scenarios, such as the death or resignation of a family member. In such cases, written plans may not be an absolute guarantee for a successful transfer, but poor planning can prove costly for the company and the family. It can happen that, for the sake of family peace as it were, a taboo rests upon the timely written regulation of the transfer. The agreements which are left unmade will nevertheless return like a boomerang.
For the sake of financial independence, most families wish to keep the ownership of the company in their own hands. Because of the many sacrifices made for the business, loss of ownership would be emotionally intolerable for them. Yet there are families for which the possession of shares is not written in stone. In one practical case the family no longer owns the company, but the son and the daughter do constitute the top management. Through market conditions (internationalisation of the sector and imminent elimination by several big players) the family saw itself obliged to gradually abandon the ownership. It is important to note that they did so in the interest of the company. In all practical cases where the family still holds the ownership of the company, only the active family members are shareholders. In this way they wish to avoid that inactive family members would simply collect dividends and thus profit from the work of the active family members. Concerning the time of transfer of ownership, in most of the practical cases the successors are co-shareholders at the time of their official entry into the business. In this way, the family business immediately becomes a part of the successors. The gradual expansion of the shares package serves to motivate them.
In most of the practical cases, the day-to-day management is in the hands of the family. In a number of practical cases, the day-to-day management is shared with outside managers. Sometimes these outsiders remain until the new generation is ready to run the family business. Some business families make a clear distinction between transfer of ownership and management. They certainly want the ownership transfer, but make the transfer of the day-to-day management dependent on the ability of the succeeding generation. When the day-to-day management remains in the hands of several family members, the business families find a clear delineation of responsibilities necessary. Often this is done functionally (commercial, technical, etc.). In delineating responsibilities, one must make sure that open communication dominates and that all family members are on the same page. Otherwise there is a risk of seeing separate little kingdoms develop.
Outsiders on the board of directors are rare. It is primarily the transferring generation which is very reticent about outside directors, because they supposedly have insufficient knowledge of the sector. The younger generation is more open with regard to the idea of outside directors, because they can counter business blindness and can promote cross-fertilisation with knowledge from other sectors.
Role of the transferor
Where the acquisition of credibility is identified with leadership by the succeeding generation, for the transferring generation leadership means the ability to let go. Transferors who are masters in the art of letting go significantly increase the chance of a successful transfer. Successors describe these masters as 'Buddy' or 'Big Manitu'. They give an enormous amount of freedom, confidence and the chance to discover and cultivate their own responsibilities, and to learn from their mistakes. Successors indicate that by receiving room they in turn learn to give room, which already smoothes the path to a following successful transfer. However, if the successors were always held tightly in the transferors' grip, they can act out destructively when they suddenly gain their freedom. Some don't even recoil from dragging the company down with them.
With regard to the role of the transferor, we still have to discuss the wife/mother. She often plays a leading role in the transition drama, even when she is not active in the family business, as guardian of the family values, adviser of her husband, binding agent between the family members themselves and between the family and the business. Sometimes the wife can nevertheless put a negative stamp on the family business. That will be the case when she only has an eye for the family interests (she then acts as mother) and is blind for the business interests.
From the results of the practical cases we can derive the principle of sound governance on which a family dynasty is based: the understanding that the individual belongs to the family which belongs to the company. That principle reflects sound governance in a family business, and not so much the inclusion of outside directors on the board. The latter is more of a debate about form rather than content.
Transfer of the family business to the following generations is in fact a lifelong, continuing process. Planning, whereby the financial and fiscal-legal issues are dealt with, is an intrinsic part of that process. Consequently, planning is a necessary but not sufficient condition. Moreover, one can hire specialists to work out this financial and fiscal-legal regulation. The other, soft elements of the transfer process – interpreneurship, freedom, values, outside experience, upbringing, education – must nevertheless in the first instance be addressed and fostered by the family. Only then can the business family become and remain a family dynasty.