7.

Transfer

Plan for the Transition to the Next Generation

In the beautiful opening scene of The Lion King, newborn Simba, the presumptive heir to the throne, is held aloft to all the animals of the African savanna, and they bow in reverence. “A king’s time as ruler rises and falls like the sun,” Simba’s father, Mufasa, later explains. “One day, Simba, the sun will set on my time here, and will rise with you as the new king.” The idea that the father can transfer power to Simba is a premise the tale explores.

Many family business owners seem to have this idea in mind as they consider exercising their right to transfer their ownership to the next generation. One clear successor will head the business, the ownership group, and the family; others will defer unquestionably to the heir; and respect across the generations and family branches will be freely given. The “circle of life” will continue. But as Simba finds out when his father unexpectedly dies and his uncle steps in to rule, transitions are usually far more complex.

With this right comes the burden of many complex and difficult decisions. What do you want to do with the assets you worked so hard to build? How do you let go? What roles should the next generation play? How should you develop the members of the next generation into those roles? Are their relationships strong enough to work through decisions together?

In this chapter, we will consider the decision of how (and whether) to transfer your business. We will advise you on creating a continuity plan that integrates how your family business will pass down assets, hand off roles, and develop capabilities in the next generation. Though the current owners will make the final calls, the process requires cross-generational collaboration. Everyone needs to understand how this transition will work. Family empires are consolidated or squandered in the transfer of power to younger generations. We can’t state this strongly enough: a planned transition is far better for both the business and the family.

The right to transfer: 2G or not 2G?

The transfer of power has long been seen as one of the most emotionally fascinating challenges faced by family businesses. For generations, classic literature (think Shakespeare) and popular television shows have been built around the intrigue of backstabbing, power grabbing, and jockeying for heir-apparent positioning. Most family businesses are born out of the crucible of this decision. At some point, the founder faces a critical choice—whether to pass down the business to the children, thereby transforming the enterprise from a founder-led company to a family business. Or, to paraphrase Shakespeare (using the shorthand for the next generation), “2G or not 2G, that is the question.”

As an owner, whether part of the first or twenty-first generation, you get to decide who owns it after you. You can exercise your transfer right in three main ways: sell the business, divide it, or transition it as a whole to the next generation. The importance of this decision continues well beyond the founder. Actions taken by each generation shape the family and business for decades.

Sell to an outsider

In many ways, when you are ready to let go of your business the easiest decision is to sell it to an outside investor. You may have good reasons to sell. Perhaps your firm’s competitive position makes the future look bleak as a stand-alone business. You may have received a once-in-a-lifetime offer that’s too good to refuse. You may have too much conflict in the owner group. Your next generation may have no interest in owning the business together. Or maybe you are just tired of the work. If so, you should seriously consider a sale.

If you opt to go down the sale path, be aware that many advisers—bankers, lawyers, others—are not neutral. They may encourage you to sell and some may understate its downsides, because the sale event is when many advisers make most of their fees. Also, since many sales fail to happen, you should continue running the business as if you will always own it. Keep your sales discussions restricted to the Owner and Board Rooms. And don’t distract the management team unnecessarily. You want the business to stay healthy in the process of a sale, especially if it ends up falling through.

But the promise of the postsale life may not match the reality. You might imagine a rewarding but quiet retirement with few if any financial stresses after being paid for a lifetime of hard work. The reality, however, is often more nuanced. We know numerous owners who rue what the buyer did to their life’s work—fired valued employees, changed the business strategy, altered its culture, and even closed it down. Sellers often struggle with their identity and what they are going to do with their time. “I sold my identity with my company” is a common refrain we hear. The wealth, once out of the company and in a more liquid form such as cash, tradable stocks, and bonds, is easier to spend and possibly waste. There are good reasons to take this path, but do so with your eyes wide open.

Divide among next-generation members

The second form of transfer is to divide the business itself among the members of the next generation. There are many ways to do this. But however you do it, dividing ownership among your children ensures that there is no shared family business to pass down. Instead, each branch charts its own course.

Take Robert “Bob” Jenkins, who purchased ABC Pest Control in Texas in 1965. When it was time to retire, he contemplated selling it. His three twenty-something sons, Bobby, Raleigh, and Dennis, changed his mind and offered to buy it from him, providing him the income he needed in retirement and giving themselves the chance to build on the platform he had created. Rather than having them own the company together, he decided to split it up, parsing the state of Texas into three regions. Each brother created his own company and sold services under the ABC brand, but only in their territory. An actual map (kept by their mother) demarcates the turf of the three brothers, and one of the core family values is “Thou shalt not cross into thy brother’s territory.” Splitting the company has worked out well for the brothers, each of whom has grown his own business but supported his brothers and shared some resources along the way. They have incredibly close relationships, which they attribute in part to their separation from each other.

Partitioning a business can be a good way to minimize conflict, but it is not without downsides. For one, the effort and resources expended to split the business could otherwise be used to grow the company. Additionally, this approach hard to replicate when ownership changes. For example, if Bobby and his brothers do pass the company down to their children the way Bob Senior did, even a state as big as Texas can only be divided so many times before a company lacks the scale to be viable—if not in the next generation, then in the one that follows. Finally, even if the division is equal at the start and the family works well together across divisions, problems can eventually creep in as divisions grow in different ways: “You’ve got the good territory,” “Dad gave you the growth business,” and so on.

Transfer the entire business

The last option is to transfer the entire business down to the next generation. You may have already decided to make this transition as a matter of course, but the decision should be deliberate, taking the alternatives into account.

As the owners, you control not only the decision whether to transfer (and to whom) but also the process. Most obviously, you choose where the assets go, what vehicles are used (trusts, sales, gifts, and so on), and when they are passed down. But because ownership also brings with it the power to select the leadership of the Four Rooms (directly or indirectly), you also can shape how various roles are handed off. And given your influence not only as an owner, but as a parent, an aunt, an uncle, or a grandparent, how you handle this transition will also determine how well the next generation develops the capabilities required to succeed you, both as individuals and while working together as a group.

The essential elements of successful continuity planning

Even with good intentions, many owners find it difficult to plan their own eventual transition from the business that has become part of their identity (see the box “Five paths to a failed transition”). But delaying or poorly planning your transition can wreak havoc on the business in the long run. A BCG study of more than two hundred Indian family businesses found a “28-percentage-point differential in market capitalization growth between companies that had planned transitions and those that had not.” The study concludes, “An enormous amount of value is destroyed by unplanned transitions, with potentially catastrophic consequences for the business.” 1 And when businesses fail to transition, families often lose their cohesion as well

Maintaining family ownership requires making decisions that will reverberate for years to come and that are based on imperfect information about the future (e.g., which of the next generation will be the most qualified to lead the business?). These decisions are steeped in meaning, connecting to issues of fairness (do I treat my children equally?) and identity (what do I do after I have exited from my life’s work?).

Five paths to a failed transition

While there is no correct way to make the transition from one generation to the next, we have seen five main approaches that are likely to fail. If you identify with one—or more—of these scenarios, you are likely to be headed off the continuity cliff.

A problem patriarch or matriarch

This type of leader can’t let go. They rule all aspects of their family business with an iron fist. Their hardball behavior, which led to their business success, is applied to the next generation, which finds it impossible to thrive under an iron-fisted senior leader.

Because of this oppressive behavior, the members of the next generation are incapable of leading the business or are so hurt by their previous experiences that they have no interest in continuing the business. Often, after the domineering leader leaves, they sell the business.

The one-size-fits-all fallacy

Governance, roles, and processes that worked brilliantly in one generation can be a disaster in the next. Even with good intentions, the senior generation can set the younger generation up for failure by maintaining rigid leadership roles without allowing the younger group to consider their own approach to leadership. Each generation brings different interests and skills to leadership—and the business itself may need different leadership skills. It’s a mistake to assume that what worked for one generation will be right for the next generation, too.

Ruling from the grave

Owners can set the rules by which the next generation will work and own the business together, often through formal vehicles like trusts or through handed-down cultural expectations. The goal is often to protect what you have created and to help the next generation avoid mistakes. However, these formal approaches often backfire. Ruling from the grave removes the autonomy of the next generation to chart its own course and to respond to changing circumstances. Trusts are very difficult to undo, and even cultural expectations are hard to shift.

The chosen one

Many families have a cultural tradition that even when ownership is shared, the eldest male is put in charge of the family business. Sometimes, this person is given a greater ownership stake in the company (or all of it), and sometimes the power comes from being tapped on the shoulder by the previous generation. This tradition can help avoid battles over succession, since everyone knows their role at a young age. But more often than not, we have found that designating a successor at birth causes more problems than benefits. Even if it’s not spoken aloud, everyone will recognize that the chosen successor may not be the best candidate for the job—that this person simply has the luck of being born first. This approach also places great pressure on the chosen one. Meanwhile, the rest of the family often feels disengaged and resentful.

All for none, none for all

When the current owners disagree on priorities, the individuals often want to compete with each other rather than collaborate. One way this competition happens is succession by attrition. For example, a “last one standing” provision in a shareholder agreement states that if, say, a company has three shareholders and one dies, then the two remaining shareholders must buy the shares from the surviving spouse at a discounted price. If a second shareholder dies, then, again the remaining shareholder is the buyer. The last person standing now probably owns all of the business, but because the business is likely to be heavily indebted, the last person will probably need to sell, too.

To make a good transition, you need a continuity plan that maps out the path from the current generation of ownership to the next. Picture each generation on opposite sides of a canyon. If you just keep going along as you were, you will go right off the cliff. You need to build a bridge across. That bridge consists of three main elements: transferring assets, shifting roles, and developing capabilities. Let’s examine each element in detail.

Assets

As you make your asset transfer plans, you need to revisit your family business type, align ownership with each person’s interests, and make effective use of tax-planning tools.

Reaffirm or revisit your ownership type

We have already introduced the four main types of family ownership. Your type is at the center of continuity planning, because it defines much of what is permitted in a transfer. The owners can decide to move from one family business type to another. Such flexibility makes sense when personal interests or business context require something different. But the switch from one business type to another is not always so smooth. There are two common issues that can hamper generational transitions: a set and a stuck type.

THE SET TYPES. Some forms of ownership have strong inertia or legal conditions that are extremely difficult to change and thus cannot be adapted to meet different needs or wishes of the next generation. For example, franchisees such as Caterpillar and Toyota dealerships are often directed by the franchisor to, in effect, have a Sole Owner or a Concentrated type of ownership. The franchisor company wants to know that one person is in charge and accountable for important business decisions. A move away from that structure would risk the loss of the franchise. Alternatively, your trust structure may create a Distributed type, with the trust dictating that all family members become equal owners (more on the implications of trusts later).

Even when the family ownership type is set, you can optimize for it, emphasizing the importance of role handoff and capability development. For example, some Caterpillar dealerships, eventually needing to find the single successor, start working to identify and foster leadership talent in their family when the next-generation members are early teenagers. Family businesses set in a Distributed type, on the other hand, can work to build a strong Family Room, as the unity of a growing family will be key for their generational transitions.

THE STUCK TYPES. Though there may not be the same kind of formal restrictions that a set type has, a family ownership type can become stuck when owners disagree and therefore can’t prepare for a generational transition. A stuck type is analogous to a tug-of-war with equal strength on both sides of the rope—nothing moves. In a family business we work with, one owner advocated for keeping its Partnership type into the next generation. Another owner viewed a Distributed type as a necessary ethical decision so that all eight of his children could benefit equally as owners, and a third owner refused to address the topic until the patriarch had passed away. While the three owners clung to their disparate views, the next generation began pursuing careers and interests outside the family business. This stalemate is likely to mean that the business will not pass to the next generation—an ending that none of the current owners want. If you find yourself in that situation, explore the alternatives and their implications with your co-owners.

Even when your type seems set or stuck, you can usually shift it with the agreement of all owners. You may find common ground through conversations—as Megan’s family in chapter 3 eventually did by shifting from a Partnership to a Concentrated type—or you may decide that you need to go your separate ways.

Align ownership with interests

We described earlier how owners can divide up their assets among their children according to the recipients’ degree of interest in the business, with some children inheriting shares and others receiving outside assets. The same approach can be applied to the business ownership: you can base how you divide ownership of the company on the different interests of the next generation.

Many owners want to maintain power until late in life, but there are benefits to distributing the economic value of your assets before you formally hand over the reins. You might start this distribution either to begin engaging the next generation in ownership or to gain tax benefits (more on that in a moment). One way to initiate this distribution is to pass down economic interests to the next generation while still retaining voting control. Some family businesses split their ownership into voting and nonvoting shares, then pass down to the next generation more of the financial benefits of ownership (via nonvoting shares) while keeping control in the current generation through voting shares until later.

Others take the opposite approach. When the current owners are ready to pass the risk and equity appreciation down to the next generation but want to maintain a source of income to fund retirement, ensure a spouse is taken care of, or donate to charity, you can adopt a “cash up, equity down,” approach. The current owners structure the transfer so that they receive money over time while passing down ownership. The transfer is accomplished in a variety of ways, such as pulling out the real estate from the company, arranging directors’ fees for being on the board, or having preferred shares behave more like bonds. In some countries, such as Argentina and Chile, this idea is legally defined as usufructo (in English, usufruct), the legal right of owners to enjoy the financial benefits of ownership while ceding control.

Cash up, equity down approaches are especially useful when the owners have prioritized growth and control over liquidity. They will have created a lot of value on paper without having taken much money out of the business over the years. When they’re near the time to consider retiring, they may value liquidity more than they value illiquid assets. Meanwhile, the next generation may have a longer-term view, focusing on capital appreciation rather than current income.

Many other scenarios are found in practice. Owners should move away from the idea of an asset transfer as all-or-nothing and instead look for ways to meet the variety of interests within and across generations.

Understand tax-planning tools

The details of tax planning lie outside the scope of this book. But note that for a successful transfer of assets, you will need to understand the full suite of transfer tools, which include trusts, wills, gifts, life insurance, director’s compensation, and dividend policy. Taxes are, of course, a significant issue for all businesses, but the role that taxes play in a transfer cannot be underestimated. As one of our clients once quipped, “Please don’t sit in that seat. Our biggest partner, Uncle Sam, always sits there.” The joke alludes to a very real issue: taxes—estate taxes, gift taxes, income taxes, and dividend taxes—greatly affect asset transfer. Unfortunately, the two certainties in life—death and taxes—often happen together. Without proper planning, your heirs may not have the liquidity to pay the taxes that come with the transfer. A number of family businesses have had to go public, liquidate assets, or sell the enterprise entirely, because they neglected to do effective tax planning.

Laws governing such transfer taxes vary greatly by country, and they change over time. In 2020, for example, Brazil had an 8 percent ceiling on inheritance and gift taxes and zero dividend taxes. The country doesn’t recognize trusts. In the same year, the United States, on the other hand, levied an estate tax of around 40 percent at the federal level (above that year’s approximately $11 million exemption per person), a tax on dividends that can be lower than the tax on ordinary income, and a sophisticated set of options for trusts. While estate planning is essential in both countries, the plans themselves couldn’t be more different.

In jurisdictions that permit trusts, a core transfer decision is whether to own the assets directly or in trusts. Most large family businesses in these countries are owned by trusts. If you move an asset to a trust, you no longer own it; the trust is the owner. Trusts and direct ownership have significant pros and cons.

Direct ownership has three main advantages:

  • Simplicity of ownership structure
  • Clarity of control (as opposed to trustees, beneficiaries, etc.)
  • Sense of “psychological ownership” created by a direct connection between owners and assets

Trusts also have three main advantages:

  • Tax efficiency
  • Privacy
  • Protection of assets from family members, creditors, and others

Trusts come in dozens of complex forms. You will hear specialists talk in such technical and jargon-laden terms as grantor retained annuity trusts, intentionally defective grantor trusts, and generation-skipping trusts. Moving your assets to ownership by trusts will have a profound impact on your transfer taxes and how you can practice your ownership rights. Talk with your legal counsel about your options and the implications. Tax planning is vital but should not drive the bus. We have seen too many ownership structures that are tax-efficient but nearly impossible to govern or change. One family we worked with set up a generation-skipping trust designed to protect the third generation from tax consequences of a transfer of the business. The trust did indeed help with that goal. But it also triggered a strange dynamic between the third and fourth generations of this family. The third generation didn’t directly own the family business; the children did. Avoid the temptation to set up rigid rules that will end up preventing the next generation from nurturing and growing the business you care so much about. It’s possible to break a trust, but doing so can both be prohibitively expensive and trigger unwanted attention from the tax authorities. Tread carefully. The box “The Pritzker family: the unintended consequences of an overstructured transition” illustrates some of the challenges that can arise from even good intentions.

The Pritzker family: the unintended consequences of an overstructured transition

To see the unintended consequences of overstructuring a transition, consider the Pritzker family, which built one of America’s largest business empires, including the Hyatt hotel chain. Jay Pritzker, leader of the third generation, and his brother Robert gathered their family together in 1995. During that meeting, Jay and Robert handed out a two-page document that described their plans for the next generation. It detailed the intricate web of trusts that had been created to hold the family’s assets, which were “not intended for and should not be viewed as a source of individual wealth.”a The document spelled out when family members would receive distributions, with an annual stipend after college graduation, and specified that “lump-sum distributions were to be made on the occasion of major life events.” Otherwise, the rest of the assets were to be used to reinvest in the family’s companies and continue the family’s tradition of philanthropy. In the letter, the next generation was told that this plan was to continue into the future, as “the family trusts were not to be broken up until the law governing trust perpetuities required it, which one source suggested might not be until 2042.” The letter also clarified the succession plan for the companies, placing leadership in the hands of a “triumvirate” of three family members. It was undoubtedly a thorough and tax-efficient plan.

But the plan didn’t last for long. Mere months after Jay’s passing in 1999, the conflict began. Six fourth-generation cousins who were not part of the triumvirate questioned whether the “structure of our family enterprise needs to be updated,” as the “growing clan developed divergent interests.”b When that suggestion was rebuffed, legal proceedings began. Among them was a lawsuit filed against the triumvirate, claiming that “those running the business and controlling the family’s vast network of trusts took ‘disproportionate compensation or investment opportunities’ for their work; improperly allocated trust investments and managed them imprudently; diverted assets away from beneficiaries; and failed to disclose material information.” Several years later, the family settled on a plan to liquidate its holdings over the next decade, agreeing to “split their $15 billion business empire evenly among 11 cousins.” Regardless of how you assess the final outcome, the tribulations to reach it were painful.

The estate-planning rules in the United States are making this type of transfer easier, allowing for the formation of dynasty trusts that provide the grantor exceptional and long-lasting power, removing nearly all decision rights from the living family members in perpetuity. Carefully consider the long-term negative consequences of such estate-planning tools. Ruling from the grave removes the autonomy of the next generation to chart its own course and to respond to changing circumstances. In our experience, too much specificity in transition planning jeopardizes family ownership over the long haul.

a. John C. Bogle, ed., The Best Business Stories of the Year, 2004 edition (Vintage, 2014).

b. Jodi Wilgoren and Jeff Bailey, “Records Expose Schism in Chicago Family,” New York Times, January 11, 2006, www.nytimes.com/2006/01/11/us/records-expose-schism-in-chicago-family.html

Roles

A brilliant asset transfer plan is worth little if you don’t carefully manage the handoff of roles from one generation to the next. A good succession is often described as the passing of the baton in a relay race. This helpful metaphor points to three aspects of the process—preparing the person currently holding the baton, selecting who will take it, and orchestrating the handoff.

We will focus on succession for family business CEOs and other senior business leaders. These roles are often the most challenging ones to transition, because of their position in the center of family, business, and owner relationships. However, the same approaches can be applied to passing the baton in leadership roles across the Four Rooms (e.g., owner council, family council, board of directors). Avoid the temptation to focus solely on who gets to take over running the company. In a family business, there are many possible and important leadership roles for the next generation to assume.

Preparing the current leader

Gracefully shifting your powerful roles is a profound act of leadership, but the transition isn’t easy. As a current-generation leader, you may know that the transition to the next generation is the right thing to do, but you just can’t seem to let go. Handing over power is also an act of deep loss at a time when your life is surrounded by loss. You wonder how to let go, how your identity is (too) closely tied to the business, and how to face your own mortality. You may be feeling pushed by an impatient younger generation.

But you can handle a transition with grace if it’s thoughtfully planned and supported. Amid the sacrifice of stepping away, the senior generation needs to build an attractive place to land. As a wise client once told us, “You must retire to, not from, something.”

Well-prepared leaders create a glide path, a five- to ten-year plan to move away from the business. Table 7-1 notes some elements of a successful glide path.

Don’t expect to execute your glide path on your own. This is a major life change. You will need the support of peers such as an advisory board, a single trusted adviser, or a coach. And your spouse’s involvement and encouragement are essential. When a founder was struggling to limit his glide path to less than fifteen years, his spouse said in no uncertain terms: “You will retire in five years, so we have some time together. You have had two spouses for forty years—the company and me. I want you alone before it’s too late.” That helped spur him to take his retirement planning seriously, and he and his spouse created a happy postretirement life together.

TABLE 7-1

Selecting successors

One of the most challenging, and potentially contentious, aspects of a leadership transition is deciding who is most qualified to take the reins. Choosing your successor—without damaging the family—may be even more difficult than planning your own transition. There is no one right way to pick your successor, but we offer some suggestions to help you navigate this decision:

Orchestrating the handoff

The last aspect of the succession process is to make the passing of the baton as smooth as possible. Many resources are already available on this topic, so we will only highlight a few points that are critical to a family business.

First, prepare the organization for the transition. It’s easy to underestimate the extent to which the entire company is built around a particular leader. When the next leader takes over, it can be difficult to fit into the surroundings. In one family business we worked with, the next-generation leader struggled to take over from his father. The father was the classic conqueror, engaged directly in nearly every decision. The son’s style was different—he was more of a leader through delegating and managing. The organization was not set up for that kind of leadership. Several of the executive team members, for example, were trusted longtime employees who had failed to grow and keep up with the skills needed for the business now. The previous leader valued their loyalty and had filled in their deficiencies by going around them to their subordinates. Also, the previous leader had such a strong instinct for the business that he operated by gut feel. Consequently, there was little data available to monitor performance. The founder approved every major outlay of money and based measures of financial success on whether the company checking account increased at the end of the year. With no financial metrics, the son struggled to get a handle on how to improve company performance.

Many of the successor’s initial struggles could have been avoided if the company had paid more attention to getting the organization ready for this change. For example, the founder could have helped to gracefully exit employees who could no longer meet their job requirements before his son took over. Hiring a CFO to produce comprehensive financial statements would also have made a real difference.

The handoff is also an important time to revisit your Four Rooms to make sure none are missing or messy. We worked with one leader who, knowing that power would soon be shifting to the next generation, created a heavy-hitting board that included two of his daughters while he also prepared and gradually transferred responsibility to his son. Family owners often construct their first board to anticipate their CEO transition. Owners should select board members or advisers who can talk eye-to-eye with the powerful family CEO about the need for an orderly transition. Especially when considering a family successor, the board needs to assess whether the organization would welcome a new family CEO or whether the appointment would be viewed as nepotism gone bad. The full system has to work in concert.

Second, set up structured communication around the handover of leadership. In a public-company transition, the retiring CEO often leaves the company entirely after a year as chairperson. In a family business, the departure is much more likely to be a multistep process than a single event. Typically such transitions happen over several years, in deliberate stages. Both generations of leaders (departing and succeeding) should plan for routine communication about the business, even if the departing leader has no official role. Since the departing leader will certainly want to know how the business is doing and most likely will still have sources of information about the business, the next generation probably can’t shut them out even if it wanted to. Departing leaders can still play active roles in the Owner Room or Board Room, for example. And of course, they’re still part of the family and will no doubt have opinions and expertise to share over family dinners and holidays. A better approach than ad hoc involvement is to establish a regular schedule of meetings during and after the transition. This way, you can keep the departing leader updated and get the benefit of their wisdom. Those sessions can gradually become less frequent and fade away as they are no longer needed.

Third, plan for the transition of key relationships. Part of what makes a family business valuable is the trusted relationships you build over time with customers, suppliers, industry associations, and so on. With all the moving parts of a succession, businesses can easily lose sight of the importance of ensuring that those relationships remain solid. We have seen many family businesses focus on the value of preserving key relationships years before the transition takes place, for example, by fostering a connection between the next generations of their family and their business partners’ family.

Fourth, start the transition early. The time for psychological preparation is critical. The CEO is likely to need many years to adjust to the idea that they will not be the main actor. The company and the family will, too. Although every company should always have its CEO’s successor clearly established, companies often fail to do so. If your family CEO is older than seventy with no transition plan, you are playing with fire. One seasoned board member’s first question to a recently promoted CEO is, “Congratulations on your promotion to CEO! Now, who’s your successor?”

Finally, celebrate the transition. The handoff of roles is an emotional moment. Make sure you take the time to thank those who have been critical to the success of the business. At one family business, the eighty-year-old consigliere, who had helped both the current and the next generation succeed, was thrown a surprise birthday party with all the owners attending and toasting his contributions to the family and the business. Smaller acts of appreciation are also helpful.

Capabilities

In planning your generational transition, you should remind yourself (and the next generation) that family businesses require all kinds of leadership to have continuity of ownership in the long term. Many family members can have meaningful leadership roles, even if they don’t become the next CEO. Within the Four Rooms are many crucial roles, such as owner council member or head of the family council. Except in very small first-generation family businesses, there are typically more roles than qualified and interested family members. For your business to thrive, you will need to become a family talent development machine. That also means being as inclusive as you can, especially when it comes to gender. Family businesses that exclude women from leadership roles are not only missing out on talent, they are putting their survival at risk if there are no qualified male successors. We have seen a number of family businesses that have fallen apart due to their decision to exclude women from the succession conversation.

Leading organizations often “hire for attitude; train for skills.”2 We offer a variation on this advice for how great business families prepare their next generation for an eventual transition: “Raise with good attitude; train for skills.” If you’ve done the work to raise your children well and educate them about the business, their future wealth, and family values, you have given them a solid foundation on which to build their skills and become strong leaders in the future.

Shape the next generation of leadership with an early effort to engage them and prepare them for their future roles in all Four Rooms. Three core elements help build capabilities in your successors.

Strive to create professional owners

Requiring conscientious work, family ownership should be anything but passive. Even family members who go to business school will learn little about what it means to be a family owner. Approach family ownership as a profession—a paid occupation that, to do it well, requires lifelong training and development across a range of knowledge and skills. While most development programs focus on their next generation, current generation owners will also need to build an entirely new set of skills to transfer the business to the next generation. We’ve seen many structured programs to help develop family members into family owners. Topics typically include:

  • Business ownership skills and concepts (e.g., financial statements, legal structures such as trusts, tax laws)
  • Family business principles and practices (e.g., Four-Room governance)
  • Knowledge of the family assets (e.g., shareholder agreements, key managers, business strategy, industry dynamics)
  • Family history and values (e.g., family constitution or protocol)
  • Personal leadership competencies (e.g., conflict management, group dynamics, personal finance)

One way to get started on this path is to attend a family business executive education program together, such as Families in Business at Harvard Business School, Leading the Family Business at IMD, Enterprising Families at Columbia Business School, and Governing Family Enterprises at Kellogg Business School.

Construct pathways into the rooms

Family businesses will often put in place policies for working in the business (see chapter 10) but stop there. That leaves unaddressed the pathways into other leadership roles, such as board members and family or owner council roles. Owners should clarify the path toward those roles and provide support along the way. For example, we work with several family businesses that have created board trainee programs. Next-generation family members are invited to participate, and those who are interested receive training on what it means to be a good board member. They also have the opportunity to observe board meetings for some period. A similar concept can apply to businesses without such formal governance. Consider using internships or family meetings to build knowledge of the business. Look for opportunities outside the business, such as joining a nonprofit board, to build the skills the next generation will need.

Create opportunities for collaboration

In addition to building their skills as individuals, members of the next generation need to develop their ability to work with each other. These important relationships should not be left to chance. Just as you can build the assets of a business or create trusts to transfer them, you should have a strategy to build the next generation’s relationships in your continuity plan. Create spaces where they practice making decisions together early on and with lower stakes. For example, some families have set aside some portion of their philanthropic budget and ask the next generation to collectively decide where to donate it. We have seen similar efforts aimed at having the younger family members make investment decisions. Whatever mistakes they make will generally be more than compensated for by the benefit of their learning how to collaborate.

How to set continuity planning in motion

In many cases, the biggest hurdle to continuity planning is getting started. Between pressures of the critical issues of today, the need to confront highly sensitive subjects connected to mortality and identity, and the requirement to engage a kind of cross-generational conversation, starting continuity planning may feel wholly uncomfortable. Here’s how to give your planning the momentum it needs:

Treat your transition like the multiparty negotiation that it is. The tendency, often out of respect, is to make this all about the current owners. If you are part of the senior generation, you may have the formal power, but you cannot achieve your objective of continuity without the buy-in of others. If you are in the next generation, don’t forget your power to walk away or wait it out. If you are a nonfamily employee, remember that you have influence through the trust you have accumulated and the ability to vote with your feet. The more that the continuity plan becomes a discussion and less like an ultimatum, the more successful it will be. Make sure that your plan addresses the core concerns of each party. Look for consensus solutions that everyone can live with, even if it is not their first choice.

Put it on the agenda with a deadline. Discussions about continuity planning will usually get delayed unless they have dedicated time. If you have established an owner council, set aside time to have updates and discussions on your plan. Or consider forming a continuity planning taskforce that meets once a quarter or twice a year. Boards often play similar roles, as they have an explicit mandate regarding CEO succession. Some sophisticated family boards have also urged owner groups to prepare for owner succession.

Consider working backward. Many current owners are comfortable with the existing setup and are resistant to change. If that’s the case, we have found it valuable to avoid making immediate changes. Instead, start by asking members of the next generation to define how they will work together when it’s their turn. That way, they are preparing themselves to work together without immediately changing (or threatening) the status quo. They should discuss how will they make decisions, structure the business, define success, and so on. If nothing else, doing so creates clarity for what will happen in the future. In parallel, ask the senior generation how they envision the future, say, fifteen years out, when they have stepped back. Then work backward to think through what needs to happen to get there. This approach can make the transition seem less threatening than would starting with what the senior generation has to give up today. These processes, especially when the senior generation is included in them, can open up incremental changes toward the next generation’s plan.

Remember that transition is a process, not an event. In addition to steps forward, you will also take steps backward or to the side. As you develop and implement your plan, look for concrete markers of progress, such as a revised shareholder agreement or a new governance structure. And adapt to the changes around you. As events unfold—for example, a next-generation member shows unexpected leadership capabilities, or some tax laws change—new possibilities arise.

A healthy transition is much more comprehensive than a Simba succession plan. It takes a lot of work to make a thoughtful and successful transfer of your kingdom.

Summing up

■The right to transfer gives you the freedom to determine the future of the family business. You can choose to sell it, divide it, or transfer it to the next generation. Make this choice explicitly, thinking through the alternatives and their implications.

■If you want to transfer the business, you need a continuity plan to manage the complexity of the change. That plan consists of three main elements:

−Passing down your assets: Will you keep the same type of ownership or change it? Will you transfer ownership all at once or in pieces? What tools will you use to minimize taxes?

−Handing off roles: How will you create the glide path necessary for the current leaders to be ready to let go? How will you select successors in a way that feels fair? How will you ensure a smooth passing of the baton?

−Developing next-generation capabilities: What skills does each person need, whether they work in the business or not? How will you help them to find the role or roles for which they are best suited? How will you create opportunities for them to learn how to collaborate with each other?

■Although the final decisions usually lie with the current owners, a transition can’t happen without cross-generational collaboration. If you get stuck, consider working backward by starting with what things will look like when the next generation is in charge.

■Remember that an unplanned transition is extremely risky. Although it’s not easy to talk about, find a way to get the process started early, and maintain momentum.