The Generation Game

Succession has been as much a crisis for family businesses as it has been for monarchies throughout history. Given family enterprises like Beretta, Loacker, Marriott and Walmart make up around 90% of businesses around the world, succession really matters. Alfredo De Massis explores what’s involved in a smooth handover.

The fact is that just 30% of family businesses survive the first transition period of finding a successor within the family to keep the organisation going. That’s bad enough, but only 12% survive between the second and third generations in the family, and 4% when it comes to the third and fourth generations.

We need a better understanding and model for what makes for a successful transition across generations, not only for the sake of firms and families, but also all the other networks of business linked into these enterprises. Around half of UK employment, and half of its economic activity, is dependent on family-run firms. When they work - for example, in Germany, where family business has traditionally been a genuine foundation of the economy – these types of business are sustainable and resilient in ways that publicly owned organisations struggle to replicate.

In other countries, the problem is more pressing. In Italy for example, almost half of its entrepreneurs are over 60, meaning a sizeable bunch of family businesses will be dealing with the intra-family succession within the next ten years.

In Europe in recent years there’s been a trend among policymakers looking to boost their countries’ economies to focus policy and funding on supporting start-ups, because they think the best way to create new jobs is by creating new companies. While sustaining startups is absolutely important, we know they comprise only a minority of the firms in any given economy and that a low percentage of start-ups will survive more than five years. What about attention and support for existing family firms, so prevalent and with such potential for ongoing growth and stability - if the issue of succession can be overcome?

Reasons for Break-ups

From my research and experience as an executive coach and a management consultant on this issue, there are three basic causes of problems: all the potential family successors decline the leadership opportunity; dominant leaders reject all the potential family successors; or they decide against continuing, even if there are acceptable and willing family successors, because the business is not believed to be financially viable or rewarding. Working beneath these situations are important factors around individual abilities, conflict and rivalries, financial position, business performance and practices. It's also necessary to be wary of the headline figures on failed transitions. Not all family firms want to continue so, for example, if only 50% of family controlled firms intended to pursue intra-family succession, then the fact that 30% of family firms achieve it suggests a 'success' rate of 60%.

One factor which hasn’t had the attention it’s deserved is the attitude toward intra-family succession of the ‘incumbent’ leader, the existing head of the family firm. Does it matter how much control they have, and how much are they influenced by the state of the business, and the traits of the family itself? We gathered the insights and experiences from 274 incumbents at Italian firms with a child or children who they could potentially pass the business on to. 81% are male, aged on average 52 with two children. They own over half the company shares (53%), which have been in family ownership for 36.5 years, and have annual sales of between EUR 1 million and EUR 500 million. Most are in manufacturing and wholesale or retail, but there were also representatives from construction, architecture, engineering and agriculture.

One of the most surprising findings is that better economic performance isn’t necessarily a good thing for succession within the family. Higher firm financial value leads to owners looking to the immediate benefits of selling the business over the long-term rewards from intra-family succession. Longer duration of ownership, through professionalisation, may well contribute to this situation by making the higher value business more liquid.

It’s not just a rational decision. One of the strongest factors in the decision over succession within the family is around emotional attachment, the extent to which the incumbent feels they have a personal stake in what the business has done and does, what it means to people. The more children the incumbent has, the more likely they appear to be concerned about providing jobs and financial security for the next generation. Attitudes toward intra-family succession are affected negatively, though, by the number of family shareholders. This supports the argument that more dispersed ownership may lead to increased conflict and family disharmony causing incumbents’ attitudes to be more negative.

How to keep it in the family

There’s likely to be cultural differences in terms of incumbents and their attitudes toward succession in their business, but overall the factors are general, and most importantly the research flags the need for awareness of the issues. What is the head of the family firm thinking - where are they in terms of their views on succession within the family? There needs to be early and ongoing groundwork and a sensitive exploration of attitudes that keeps stakeholders involved.

A lack of ‘legitimacy’ is another issue. There needs to be an intended programme of support to develop an ongoing sense of legitimacy among the younger members of a family business. Ways of doing this include ensuring they always gain substantial and notable experience outside of the firm, more formalisation of explicit and objective criteria for career upgrades and appointments - so there are no easy ways up - and for the involvement of unbiased third parties in the committees in charge of assessment and rewards, and to be part of selection processes generally. Overall, it is good practice to define and effectively communicate the rights and obligations of family and non-family members in the family firm.

More open-eyed support from policymakers for family firms in general would have an economic and social impact. Family firms, especially if they have already survived for a number of generations, are often much more embedded in their communities than others. So if you create measures to support them it’s also an indirect way of providing benefits to the wider community and society. The distinctive traits that characterise a family firm need to be taken into account. Family involvement causes family businesses to have unique organisational goals, structures and resources that eventually create distinctive management challenges for owners and managers, requiring distinctive managerial practices and support initiatives in order to achieve success.

Family business-friendly policies would address growth, because very often family businesses don’t want to grow even though they are able to. They are unwilling because they are often driven by non-economic goals, such as creating a family dynasty and providing some form of altruism to family members, keeping harmony in the family, of course also keeping the business in the hands of the family. These can provide barriers to their willingness to grow.

Another issue is the paradox around innovation. While family firms have greater levels of discretion because of the personal control involved, lower levels of formality and bureaucracy, long-term investment horizons, and more alignment between owners and managers, means they are also less willing to innovate. That’s usually accounted for in terms of risk aversion, a hesitancy to share control with non-family managers, a commitment to traditional product lines, and a desire to minimise the need for external financing. So a superior ability but a lower willingness to engage in innovation; a cycle that policy has the potential to break with more incentives.

Reducing bureaucracy in general would clearly be a start. Reducing taxes that kick in during successions and damage businesses would also help. But there is also a huge need to act on the “softer” aspects of family firms’ strategy and implementation processes, for instance on the relationships among different groups of individuals and the related communication processes. Also there could be help to encourage family firms to professionalise, for example voucher scheme, adding non-family professionals onto boards, or to bring in temporary managers who could help them grow and develop.

Alfredo De Massis is Professor of Entrepreneurship & Family Business at Free University of Bozen-Bolzano and Lancaster University Management School. In September 2015, Family Capital ranked him among the world’s top 25 star professors for family business. He is a Global Board Member of the STEP Project for Family Enterprising at Babson College, USA, engaging over 200 leading scholars and 85 enterprising families from 45 countries.