For a family owned business, the need to secure its future and pass assets onto the next generation is a crucial part of the long-term strategy. But with many family fortunes fading within three generations, are business owners setting the right example and inspiring their successor to become the wealth creators of tomorrow?
Often, a fruitful wealth creator is succeeded by a line of wealth managers. Although keen to protect the prosperity of the business, they can lack the same dynamics as the original business owner which can hinder family business moving forward. Taking over the reins of the family business should not be an automatic rite of passage for the next generation and ultimately, it is entrepreneurial talent – sparked by passion – that needs to be recognised, developed and nurtured through the right mentor.
So, what steps should companies follow to overcome these issues and ensure a business’ successors are ready to lead it to future success?
6 steps to develop the next generation of wealth creators
Communication
A wealth creator must be confident in communicating their goals and objectives for the future of the business to the next generation. By ensuring the best people are in place to carry out a time-specific strategy with a clear purpose, the wheels of change can be put in motion.
A document succession plan
A succession plan should be made (reviewed and updated) at least five years in advance and crucially be communicated to the intended successors as soon as possible. During these discussions it is important to establish whether the intended successor(s) are keen to take over the company, as promoting the wrong person to a key position could put the family business at risk. The more time an owner-manager dedicates to developing the next generation, the more quickly they will be able to identify and remedy any potential areas of risk including skills sets and gaps in business knowledge.
Collaboration is key
Within a family business, it is inevitable that the lines between private and professional job roles and responsibilities can become blurred, which if unaddressed can dilute the structural integrity of the business. Regular review meetings are invaluable to discuss what is going well, monitor expectations, and facilitate forward planning as a team. The outcomes of these discussions can then be measured against financial and non-financial KPIs to check that all parties are working towards the same goal.
Support without undermining
Unfortunately, it is all too common for families to switch from a ‘wealth creation’ mind-set to a management/preservation mind-set from which the second and third generations can struggle to recover from.
Motivation and support can aid companies to bridge the gap between generations, however, this needs to be instigated by the business owner. Usually well-placed to see the potential in their successors, they can assess which role they would be best suited to and encourage them to develop their skills in a way that drives business value while adopting a strategic approach through goal setting should help pave the way for the future of the company.
Introducing financial rewards or opportunities for progression through the company will ensure that the next generation are playing to their strengths, but business owners need to be clear on the terms of these agreements and ensure they meet their objectives.
Most family businesses do not work in isolation and as well as the core team, there will inevitably be clients, suppliers, and other stakeholders to consider. Introducing the next generation to these key individuals in good time is important so that they can begin to cultivate their own relationships in preparation for taking ownership.
Evolution not revolution
For a business to thrive, there needs to be an understanding, and an acceptance, of change. Meeting regularly to communicate and reaffirm those objectives will help to prevent complacency from potential successors.
When the time comes, a business owner must be bold enough to let the business go, but committing to a time frame for handover can be difficult. In order to smooth out the handover period, it is common for the founder to move to a chairman role and should not interfere with the successor’s establishment period. During this time, the structure of the business may need changing and a successor may struggle to make these alterations under the eye of the previous business owner, so giving them autonomy is key.
Invest in good advice
A third party can help provide the skills and expertise to create a neutral, controlled environment for having any difficult conversations.
Whilst tensions can run high where finances are concerned, failure to address these early could result in larger problems in the future. Therefore, agreements should be made to separate the wealth between generations, not only to protect the wealth of entrepreneurs but also to drive incentives for profit generation from successors.
To thrive or survive?
In our experience, when entrepreneurial talent is not developed, the family forgoes an important wealth creation opportunity which can restrict the potential for the next generation to out-perform their predecessors. For a family business to thrive into future generations, having a clear strategy, timeframe, and trust in the next generation is key in order to disprove the prophecy of three generations.
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