How do you find and prepare the right successor in the next generation for your Family Business? You choose a successor leader of the family who has earned the trust and respect of the other family members.
Why do Family Businesses fail from one generation to the next?
At my first family office meeting with the P. Family, I asked them what they thought were the main reasons for a business family to fail from one generation to the next? I explained that the two most common reasons are: lack of communication and unprepared heirs.
Lack of Communication
Mrs. P. and the adult children agreed that better communication was a top family priority. Mr. P., a renowned speaker and writer, was taken aback by this revelation, and was determined to address it. I then recommended that the family have a weekly meeting on Zoom from wherever they were located at the agreed-upon time of Wednesday’s at 12:00 noon. The weekly agenda would have two topics: the family and the business.
The next day Mrs. P. wrote to me with many thanks for creating a framework for the family to have better communication.
Sometimes the simplest suggestion can resonate and have the most lasting impact.
Unprepared Successor and Heirs
At the second meeting of the P. Family, we considered the issue of how to prepare the successor and the heirs. For a family to preserve its wealth it must, like any business enterprise, create wealth, particularly in the form of the family’s human and intellectual capital, while exercising excellence in its stewardship of the financial capital.
We discussed how human capital can be enhanced through the following practices:
- Dignity of Meaningful Work: this is important for an individual’s sense of self-worth; and the family can assist each family member in finding the work that most enhances that person’s pursuit of happiness. All such work is of equal value to the family and to the growth or the family’s human capital, regardless of its financial reward.
- Highest Educational Standard: such a goal ensures that every family member understands, at the highest educational standard possible for that individual, the workings of the family governance system and his/her role in it.
- Without intellectual capital and with all the money in the world, undereducated family members will not make enough good decisions over a long period of time to outnumber their bad decisions. There is a need to provide a forum and support for educating family members in their own personal development, but also to be responsible owners of family assets and possibly the family enterprise. Intellectual skills are necessary, such as how to read a balance sheet, understand key elements of the legal structure and relevant agreements governing the family assets and family enterprise, how to be an effective board member, and how to ask the right questions of executives running the enterprise.
What makes a succesfull business family?
We also discussed the characteristics of successful business families:
- Meaningful connection to each other;
- Meaningful connection to the business;
- Functioning governance structure;
- Trusted and respected family leader; and
- Appropriate engagement with family, shareholders and business.
As the meetings with the P. Family continued, it became clear that Mr. P. was handing over more and more responsibility to his daughter, M., to run the family business, as his health was deteriorating. Unfortunately, this was a case of a father’s unconditional love blinding him to his daughter’s lack of education, inadequate preparation and incompetence. As M. took over more of the business, she terminated the senior advisors that Mr. P. had hired in favour of her own peers, whom she could control.
In her pursuit of the wrong God in furtherance of ambition, without the counterbalance of prioritizing the management of threats and the protection of assets, M. put the family’s business and legacy at risk.
Eventually, the family business failed.
Fortunately, Mr. P. had set aside surplus investments which now provided the family with the wherewithal to persevere without the family business.
Lessons to take away:
- sometimes the simplest solution, such as a weekly family Zoom meeting, can resonate and have lasting impact;
- choose a successor leader of the family who has earned the trust and respect of the other family members; and
- a critical issue for families to consider is the extent to which members of the younger generation are meant to be owners of assets or custodians/stewards of assets for future generations. In the P. Family, M. styled herself the owner and not the custodian/steward, which proved to be the undoing of the family business.
As a tax lawyer at Gardiner Roberts LLP and a partner in the complementary family office of Omega WealthGuard Inc., I have helped successful families remove obstacles to preserving wealth and harmony. I work with the family to identify how to leave a legacy and preserve values for succeeding generations. With my background in law, I start with asset protection, tax and estate planning. However, over the years these services have expanded to include leadership development, strategic planning, organizational development, effective decision making, governance structures, family dynamics, business savvy, experiential education, coaching and so on.