How Family Business Owners Should Bring the Next Generation into the Company

“Go find your passion,’’ Henry directed his children when they reached their late teens and early twenties. “Find your interests outside our family business and pursue them.’’ As inspiring as those words may have been, Henry, the patriarch of a successful automotive parts business, wasn’t simply freeing his children to follow their dreams. He was requiring it.

Having watched too many other family businesses bring kids into the company early on and “damage’’ them, in his words, Henry was afraid of doing the same thing with his children, somehow coddling them or making life too easy. He was a big believer that the best development possible is “getting your butt kicked” as you learned the ropes outside your family business. So he watched with pride as each of his children found their own career path — one as a lawyer, one an artist, and the other a successful banker.

Henry, however, had never given much thought to the roles his children would play in their large, multigenerational family business in their thirties, forties, and beyond. It was as though he had thought through his coaching for only the first half of a football game. In the “second half,” he found that his earlier advice needed to be reversed. He had to find a way for his now older and successful children to be attracted back to the family business — a place they’d been explicitly excluded from. That step, it turns out, is much harder and at least as important.

Henry knew that family businesses last across generations only if they have engaged owners. Even Henry’s best independent, non-family board members lacked the long-term perspective that great owners instinctively have. “I never treat a rental car like one I own,” Henry would say. But even though his children may someday “own’’ the car, it wasn’t yet obvious to Henry how to develop their talents within the business — and how to make sure they all found their highest and best use. “What role can my artist daughter possibly have in our family business?” Henry pondered. “And my sons have a fierce sibling rivalry.”

Planning the transition, so that your next generation can find their own path in the world and then successfully boomerang back into roles in the family business, is critical to the future of the family business you’ve worked so hard to build and perpetuate.

In our experience advising family businesses, we have found that five elements successfully guide the next generation back into the family business. Here’s how to get it right:

Help the next generation find their right roles. Too often, owners focus on only one role for their next generation: the future CEO. But that’s too narrow a view. Multiple roles, beyond the CEO, are essential to effective ownership — roles that cannot be outsourced. They include being on the board, running the family office, running the “owner room’’ (see below), leading the family foundation, and leading the family council.

Get the group dynamic right. In our experience, it’s essential to manage how the next-generation owners work together and communicate. As they enter the system, they will carry baggage from childhood, be in different places in their careers, and likely have different relationships with the family business. Set time aside for them to get to know each other again in this new environment and get to know their roles as owners — without you in the room. Have them discuss their interests and the breadth of their life’s commitments (personal, nuclear family, broad family, career, and role in family business).

Help them find their collective voice. As the next generation eventually become owners, their board of directors will ask them what they as owners want from the business: Growth? Dividends? A sale? Show them that if they individually ask for conflicting goals from the board, their power as owners will dissipate. Appoint a current board member to work with them to find their collective voice as owners. Ask them to discuss their trade-off of five potentially conflicting owner interests: maximizing long-term business value, short-term dividends, philanthropic efforts, family employment, and family harmony.

Create a next-generation development program. Leading business families develop programs to help the next generation become both good owners and potential future leaders. In our experience, these programs focus on five key objectives: business ownership skills and competencies, family business principles and practices, knowledge of the family business’s assets, understanding the family history and values, and developing personal leadership competencies. Typically the family’s ownership council would lead this program, drawing on outside experts and non-family executives to support the education.

Give them room to operate. Top business families work in a mental model of four distinct “rooms’’ — the owner room, the family room, the manager room, and the board room. Make sure all owners understand the rules of each room and how to recognize what room they are in at any given time. Then, over time, challenge them to “furnish’’ each room with people and decision processes that will eventually work best for their generation. That won’t happen overnight — a healthy furnishing’ process may take five to 10 years to get right.

When you set up a proper strategy for integrating your adult children into the business, you may be pleasantly surprised by how their experiences outside the business have prepared them to thrive. The goal is not only to help the next generation develop concrete leadership skills, but also to develop psychological ownership of the business. You never know, the artist daughter might just surprise you with her best work yet — as an owner.

First Published: 24 Jul, 2018. Harvard Business Review