Want your business to last? Make sure the next generation is ready to take over.
By Richard Kalfayan Jr.Passing control in a family business can be fraught with all the challenges that families and businesses face separately. Indeed, no business is insulated from the vagaries and hazards inherent in every market. As the owner of a family business, you may be confident in your own ability to keep your business on top. But how confident are you in its success after you’re gone? Proper transition planning is as critical for the business as detailed estate planning is for your family, because retirement—or the inevitable—guarantees that, at some point in the not-so-distant future, someone else will be in charge.
With careful thought and planning, however, the torch can be passed and carried by many successive generations.
Developing a mission statement for the business is your first step. This statement covers your business’s values, as well as the family’s—providing a vision for the next generation of company leadership. Drafting a mission statement will enhance communication and understanding throughout the family and keep everyone on the same page. Think of it as a quasi ‘Family Constitution.’
Importantly, this process requires you to identify the values you hold most dear. Many clients, for example, want their children—the future leaders of the family business—to be well-educated and philanthropically-minded members of the community. Many clients are determined to help their children become successful, but are concerned about fostering an air of entitlement. The mission statement, or Family Constitution, can go a long way toward allaying these fears.
A comprehensive mission statement should incorporate the objectives and expectations of every family member. In families with multiple children, business owners need to nurture a family dynamic that makes sense. Determine if your children want to actively participate in the family business or pursue outside opportunities. Perhaps you want your children to possess their own real-world experience before coming into the business. Or perhaps you wish to first groom one or more of them to be your successor. Detailed communication with the family is vital before any planning takes place.
The focus should then turn to education. Family businesses need to put a premium on education for the next generation. That doesn’t necessarily mean formal education, such as a college or business school (though some families make this a requirement). It can simply mean close familiarity with the family business, ensuring that children know the intricacies of the company, its products, its clients and its place in the community.
Given a successful business plan, an introduction to the values and mission of the business, and a strategy for maintaining the family dynamic, the next generations of leaders should be well-equipped to take the reins. The final question, therefore, is when to let go. This is where a specific, forward-looking governance plan comes in.
Adult children, even with education, are likely used to (if not expecting) their parents to continue making decisions about the company. The parents, who are likewise used to being in charge, may also be reluctant to relinquish control. The actual transition then can be tricky. A transitional approach will enhance the governance of the business and assuage many concerns, while representing the interests of all owners.
Another way to develop the next generation in the area of governance is to establish structures, such as family councils or advisory boards. These can help formalize decision-making processes and give adult children (i.e. the next generation) a framework for replicating the types of decisions their parents made when growing the business. Encouraging risk-taking, while emphasizing its correlation to return, is an important lesson in growing the next generation of owners.
Ensuring that your business lasts requires much more than a great business model. Don’t make the mistake of spending so much time and energy building your business that you overlook planning for its future. Make sure you keep great management all in the family.
Editor’s Note: Richard Kalfayan is the Managing Director and New Jersey Market Investment Team Leader, J.P. Morgan Private Bank. This article is intended for informational purposes only; it is not intended as an offer for any specific product or service. The article contains the views of a J.P. Morgan employee, which may differ from the views of J.P. Morgan Chase & Co., its affiliates and employees. The views and strategies described may not be appropriate for everyone. Certain information was obtained from sources we believe are reliable, but we cannot verify the accuracy of the content and we accept no responsibility for any direct or consequential losses arising from its use. For specific guidance on how this information should be applied to your situation, you should consult a qualified professional.