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The courage to choose wisely: Why the succession decision may be a defining moment in your family business

By Andrea Calabro

Choosing the right leader at the right time will be one of the most critical decisions you can make to secure the continued success of your business. Rarely has continuity and succession planning been more important, given the recent challenges faced by family businesses throughout the world.

Also, given the increasingly multigenerational environment, it was important to gain a deeper understanding of today’s family business dynamics and the impact that different generations are having on their businesses and succession plans. The collaboration between KPMG Private Enterprise and the Successful Transgenerational Entrepreneurship Practices (STEP) Project Global Consortium has delivered many of those insights through the real-world experiences of family business leaders.

These leaders have proposed six key considerations that influence their decision about choosing the right successor to lead the family business when the time is right for the current leader to step aside.

Tom McGinness is Global Leader, Family Business, KPMG Private EnterpriseExpecting the unexpected

Several family business leaders reported a new appreciation for succession planning after unexpectedly having to assume the reins of their family business. As a consequence, they are making sure that contingency and succession plans are in place to protect their families and businesses for future generations.

Added to this is the uncertainty that almost every business throughout the world is facing today, making contingency and continuity planning even more important. In too many instances, however, family businesses don’t have detailed contingency plans, with specific guidance as to who will take control and keep their businesses running. As a consequence, the next generation often feels morally obligated to take up the business reins—even if they don’t want to—or don’t have the skills and experience that they feel they need in order to be successful.

There are certain situations where the norms of national cultures can make continuity planning and considerations for an unexpected succession event difficult, however. In many Eastern societies, for example, it isn’t acceptable to talk about the health of the elderly. Since those topics are taboo, it is very difficult for family businesses to consider what will happen should an emergency succession be necessary.

However, it only requires one case of an unexpected event and an unplanned succession for families to make sure they are prepared to respond quickly in the future.

Taking a disciplined approach

Handing the family business over to a new leader, new management or a new owner is all-encompassing. It isn’t exclusively about the selection and development of successors. It is equally about protecting the business brand and reputation, and retaining knowledge to make sure that the business is sustainable for years to come. It is also one of the most challenging experiences facing any leader, and most particularly an entrepreneur who has built a family business from the ground up.

Family businesses with well-established contingency and succession plans take into account the readiness and developmental needs of family members who are the most likely successors. Often this includes an educational foundation, complemented by direct business experience gained at various ages and stages in the family members’ lives.

To facilitate this process and minimise the intra-family conflicts that sometimes arise during succession planning deliberations, family businesses are turning increasingly to external parties to guide and manage the process. External parties provide an independent point of view to facilitate productive discussions among family members and guide them through well-tested frameworks and processes to produce a personalised succession solution.

While this type of disciplined planning is commonly accepted, a surprising insight emerged from conversations with family chief executives. It appears that, even when the selection of a successor is considered to be important, family businesses that are led by members of the silent generation (born between 1925-1945) or the baby boomer generation (born between 1946-1964) have not yet devised a succession plan.

This is concerning. It is not only a potential impediment to the smooth transition and continuity of the business; it is also a disservice to the successor who is ultimately required to assume the leadership role.

Many current-generation successors have learned important lessons from their own succession experiences and are making every effort to make sure that more thorough processes are in place for the next generation.

Giving next gen a voice

Millennial generation leaders are having an increasingly important voice in the future direction of their family businesses and who will be chosen as a successor. They are being given more space at the management table to address increasingly complex issues and opportunities, such as the accelerated digitisation of business processes that are emerging globally.

These next-gen successors can bring a fresh perspective that may transform some aspects of the family business, and potentially uncover previously unexplored opportunities that may redefine its identity down the road.

Many from the millennial generation also come with a different outlook and business philosophy from their predecessors as they seek greater personal freedom and a better balance between life and work. Family business leaders may need to be prepared to accept that the emotional attachment to the business may not be as deep for next-gen successors as it has been with first-generation entrepreneurs whose life and business have often been deeply intertwined.

In reality, the next generation’s interest in the business and their personal capability will often have a direct effect on current leaders’ decisions to retain the business or choose an exit strategy or to retain a non-family member to lead it forward. They recognise the significance and importance of the next generation’s willingness to take the lead and to be committed to the business’ success. They may determine that an exit strategy or non-family leadership are the best options if the willingness and commitment are not apparent among future generations of family members.

Considering the options

Family business leaders in the study were clear that choosing the right successor will, indeed, be their most important legacy and a moment of personal pride. It will be built upon an important historical foundation, deep family values, a passion for what the business does and what it stands for, and the impact it has on people and society. The continuity of the family business and preserving its family identity depends on it.

The research suggests that the desire to keep the business within the family is highest when the current leader has offspring. Without children, family chief executives are more inclined to sell the business and enjoy the financial rewards of their exit. This may be a reflection of the principle that having children can increase a leader’s desire to pursue ‘socioemotional wealth’ for the family—the emotional value that the family derives from owning and managing a business (1).

Regardless of the family’s intent, however, succession to the next generation is not a given, and potential successors have many choices outside the family enterprise.

A decision to sell the business can also be influenced by the expectation of potential conflicts that might occur among family members when the business moves to the cousin consortium stage. In cases when the business reins could be handed to a third generation that includes several cousins who are responsible for the management and operations of the business, a “pruning of the family tree” might be necessary. In cases such as this, the business is often bought out and owned by a single nuclear family—as opposed to the extended family of cousins—or it’s sold to an external party.

When a family business leader fails to engage successfully with the next generation, or if the right successor cannot be found, or if the family council is unable to be organised effectively, a pragmatic alternative decision may have to be made to recruit the best non-family executive possible, while maintaining the interactive connections between the business and the family. Such a situation might require strengthening the capability and participation of the ownership group to reflect the ‘familiness’ of the business alongside a non-family executive who shares the family’s values.

Choosing wisely and courageously

While it takes courage to invite next-gen family members with new ideas to lead the family business forward, it also takes courage to break through traditional norms and practices. The policies and practices of different nations, for example, can play a major role in the selection process.

The cultural differences described by study participants are important succession planning factors. The use of the “primogeniture” rule for succession—choosing the first-born child to lead the family business—was one of particular interest. In non-Western collectivist cultures, such as that in Peru, family chief executives confirmed that the primogeniture rule still holds. It is isn’t easy to resist the norms and make an alternate choice.

Similarly, it can be a difficult choice for family business leaders to skip a generation or select a non-family member as a successor if they are not confident that their next generation family members have the capabilities or passion to drive the business forward.

Efforts to engage next-gen family members are becoming increasingly diverse. From the family’s role in managing the core business, to the potential ownership of company shares, membership on the board and active roles in the family’s philanthropic projects are all meaningful considerations for choosing a successor. They may be require an entirely new framework for defining family business succession and the selection of future successors.

Deciding when to pass the baton

The succession plan is in place. How then do family leaders decide when it’s the right time to retire fully—or partially—or to assume a new role in the family business?

It was somewhat surprising to learn that 53% of the family business leaders in the study do not have a formal retirement plan, making the path uncertain for their potential successors and for the future of the family business.

For those who do have a retirement plan, the research shows that family business leaders whose primary objective is to enjoy life and achieve financial security for the family plan to retire fully from business management. Some even consider selling their businesses outright (2). This insight is surprising, because it is in stark contrast to the traditional thinking that family business founders rarely leave their businesses because they derive so much fulfilment and personal identity from it.

From the same research, leaders who continue to be passionate about their work, rarely think of retirement, and look for alternative ways to stay involved in the family business. Some don’t have a planned retirement age at all, or they remain partially involved in the business through board membership or an advisory role.

Looking down the road at the retirement plans of millennial leaders, a different picture of retirement may be revealed. Next-gen business leaders are highly educated and they’re motivated to deliver, however, they are not likely going to lead in the same way as their predecessors. They are more focused on achieving work/life balance, for one thing, and they plan to retire prior to their 50th birthday—not their 70th, 80th or 90th.

When considering the future leadership of the family business, understanding the likely timespan for this next generation of leaders will be as important as their needs and expectations. If millennial leaders are planning to retire much earlier than those before them, early succession planning will become even more critical.

Leaders who continue to be passionate about their work in the family business, often aren’t actively making retirement plans.

Family business leaders whose primary objective is to enjoy life and achieve financial security for the family are more likely to retire from their business completely and may even consider selling the business outright if it provides the family with the financial support they may need.

Millennials may plan to retire much earlier than previous generations if they perceive that their work in the family business is stressful or is making them miss out on life.

Visit the “Empowering the future of family business” page to read "The courage to choose wisely" and to learn about the family businesses who contributed to the article, in their family business profiles. If you have any questions or wish to discuss this article further, please reach out to familybusiness@kpmg.com or andrea@thestepproject.org.

1 Gomez-Mejía, L R , Haynes, K T, Nunez-Nickel, M, Jacobson, K J, & Moyano-Fuentes, J (2007). Socioemotional wealth and business risks in family-controlled firms: Evidence from Spanish olive oil mills. Administrative Science Quarterly, 52(1), 106-137.

2 Akhter, N, Sieger, P, & Chirico, F (2016). If we can't have it, then no one should: Shutting down versus selling in family business portfolios. Strategic Entrepreneurship Journal, 10(4), 371-394.

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