Succession planning: when to hand over the family business to the next generation

Family businesses are passed down from generation to generation – but the dilemma is when to pass on the responsibility and control.

The firm PwC studied 200 next generation family members in 21 countries expecting to take over the family business in a publication called Bridging the Gap: Handing over the Family Business to the Next Generation (The Financial, finchannel, April 21, 2014). The issues examined included: how family firms are planning the handover, how the next generation views the handover, and the challenges faced by family businesses in implementing the handover – the succession.

From the study, two “gaps” became apparent: (1) the credibility gap; and (2) the communication gap. The credibility gap is the transition from a trusted name to the maintenance of the reputation during the handover, while the communication gap is the crack or chasm that can open between parents and children in talking about succession. PwC looked at the effect of global changes, such as demographic shifts as family members travel, study, and live elsewhere; the world “becoming smaller” in which businesses are trying to go global while retaining a sense of local traditions; urbanisation; climate change and the pressure to “go green” and environmentally friendly; and the ever-changing communication technologies.

The study revealed that there were more concerns when it was the “first generation” handover of a family business. Families that had already handed down generation after generation had been through a number of challenges and were less concerned about problems that might arise for the firm’s continuation. The children of first generation handover families were less enthusiastic about the prospect – 20% said they were not looking forward to running the family business.

Of the next generation, 89% said they wanted to “do something significant and special” with the family business when they take over – to give it their own stamp – and 80% said that they had big ideas for the firm for change and growth. Some wanted to launch new products or ventures, or make changes to where and how the business was run. Others wanted to invest in new technologies and explore new approaches, especially with regard to social media, said the PwC report.

Some of the next generation (14%) have studied for a business degree in preparation for the handover, and 34% have taken training courses in succession management. They want to implement more rigorous processes, especially related to finances and budgeting. They want clearer roles and responsibilities and have these documented and disseminated. And they want to upgrade their IT systems to introduce digital technology.

For credibility, 88% of the next generation said that the family name might be a disadvantage rather than an advantage, and said that they would have to work harder than their parents to “prove themselves.” And 59% said that gaining the respect of their co-workers would be their single biggest challenge.

Promotion to CEO was not expected to be automatically handed down from one generation to the next. The report revealed that of the 73% that said they were looking forward to taking over the business, only 35% thought it was a definite or foregone conclusion, and 29% thought it only “fairly likely.” Therefore some were looking for experience outside the family firm. Only 7% had gone straight into the family business from school (as their parents or grandparents typically did), and 31% went to university first, while 46% had worked for another company before taking a role in the family business.

With regard to the generation that were already running the business and looking to hand it over, the report revealed that there was a tendency for many to overestimate how well they operated the business. In addition, they underestimated how well their children could take over – their capacity and capabilities.

Current family business members thought their children were not sufficiently entrepreneurial and were not prepared to put in the long hours needed to build a successful business.

The phenomenon of the current generation underestimating what the next generation could do, and the next generation overestimating what they want to do, is called the “sticky baton” by the PwC report. This could lead to the firm being handed over to the current generation “in principle and in theory” but still with the parents maintaining control, which might cause frustration with the “impulsive and impatient” next generation family members.

The survey revealed that 87% of the next generation think that their parents have confidence in their abilities and 91% would value their parents’ continued input. However, 64% think the parents would find it tough to let go control of their business.

The report concluded that the firms that manage succession well are those that plan many years ahead – ideally 5-7 years in advance – and include “sensible conversations that address roles, responsibilities, and timings.”