Family-owned businesses have the deck stacked against them when it comes to generational transitions. Many do not make it to the second generation and only the really good ones continue beyond that. The complexities of family and finance make it difficult to transition successfully.
This is especially true when a company is making its first generational transition; it is very difficult to replace the founder of the business. A founder is a unique individual. Where others see risk, they see opportunity. Where most would give up, they forge ahead. They often risk everything to achieve their goal. The intensity of these experiences leaves scars. They also equip the founder with a sixth sense – an innate ability to know what to do in their business. Some call it gut feel.
Ironically, the founder’s hard won knowledge and expertise that drove the company’s success also represent the difficulty in replacing them. They can become so enmeshed in the business that they are not providing hands-on opportunities for the next generation to learn and grow. The succeeding generation can attend the best universities, but they cannot learn the unique nuances and details of the business the way the founder knows them. You just cannot simulate what it is like to have everything on the line.
On the other hand, the next generation’s chances of success improve by putting more structure in place to compensate for the loss of the founder. A founder stepping down leaves a big hole to fill, but companies can address the gap by doing a few important things:
- Find a way for the founder to stay involved and actively seek their council. This can be as formal as becoming chairman of the board or as informal as having coffee once a month. Either way, tap into the founder’s experience if they are willing to participate.
- Form a board. Second generation leaders often have more formal education than their parents but they do not have the same tacit knowledge of the business. One way to compensate is by creating a board of directors. While founders often do not use boards, they can be very helpful to second generation leaders by offering insight and guidance with critical business decisions.
- Upgrade outside advisors. While the founder probably made many decisions without consulting their advisors, next generation leaders often need more input. It is not uncommon to seek new advisors who can meet the evolving needs of the business and provide guidance on issues that are more complex than the founder may have faced.
To succeed in a generational transition, it is important to identify the founder’s unique attributes and compensate by adding a more formal structure around how the business is run and decisions are made.
We believe that a founder is irreplaceable. However, that does not mean the business comes to an end when the founder moves on. It does mean that the business needs to adopt a new approach.
Taking a smart approach to this transition will help to ensure that the business continues to succeed for generations to come.
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