And finally, the last piece of the puzzle and another extremely important set of expectations: those of the current generation. How do they see their evolving role? What about the succession process? And how can they help with that other crucial element of the professionalising agenda: professionalising the family?
Those taking over family firms have probably always worried about the succession process – one of our critical success factors – about how their parents will adapt, and how they themselves will measure up. As the adjacent chart shows, many of these concerns have not changed a great deal since our last Next Gen Survey in 2014. Next gens are still concerned about managing the succession process successfully, and about finding the best way to ensure that their parents still feel involved and able to contribute, but also make the transition they need to make to a more passive role.
I want to contribute to our family business – it’s good to feel you’re part of your family history. But it’s very difficult too, because if you go into the family firm you have to adapt to existing ways of doing things, and respect your relations’ judgment. For example, I think we should be doing much more with digital, but my family don’t see digital as a threat to our business in the long and medium term, which makes embracing innovation very hard.
Even if I took over immediately, I would still have the prior generation chirping in the background.
We have been looking at lots of new areas and directions we'd like to go in, [but] there’s a reluctance to do things at all or as quickly as I would like to.
I am not asked for my opinion. I am told how things should be done. If I have a different idea, it is generally discarded in favour of the status quo, or the way the current managing generation feels things should be done. It's not that my ideas are not accepted, it is that they are not heard in the first place.
There are undoubtedly some in the current generation who find it hard to let go – what we’ve referred to in the past as ‘sticky baton’ syndrome. In our experience, this is often combined with a reluctance to even discuss the process or timing of succession, which can cause friction in the family, and uncertainty in the business, and that’s not good for either. We’ve worked extensively with family firms, helping them bridge this communications gap, and develop robust plans for the succession process. The key is to remember that succession is a process not an event: the next gen need to be fully prepared to take over, with their parents’ support, and after the formal handover the parents can continue to offer help and guidance, as long as they accept they’re no longer making the decisions. In his book, Next Generation Success, Harvard Professor John Davis emphasises how important it is for the current generation to ‘let go in time’: “While the preparation of the next generation is not entirely in your control, it depends significantly on your actions. Whether you are a parent, an elder in your family, or a leader of your enterprise, it is your obligation to help prepare the next generation… If you resist this, or poorly plan and execute the next generation’s development, the results will probably be poor”.1 There’s more good advice on this in Juliette Johnson’s ‘ten golden rules’.
Dominik von Au, Managing Director of the INTES Academy for Family Business and Director of PwC Germany, observes that of all the challenges a family-run business has to confront, the challenge of succession is the biggest and most important. But it is also at the heart of what being a family business means: “Is there anything better than the confidence of knowing that your dream for the business is shared by your own family and is carried on with the same passion?” But succession can also be the moment when that dream fails. Many a great business person fails in the attempt to perpetuate his or her life’s work. A shortage of skills, a lack of determination, insufficient preparation, and conflicts within the family – there are lots of reasons why succession can fail, and if it does, it can take the whole business down with it.”
The Australian business Slattery Asset Advisory and Auctions is a good example of the value of managing the succession process properly, and over as long a period as possible. As Tim Slattery, one of the founder’s sons, says, “I think the greatest gift dad ever gave us was being willing to hand over the business at that comparatively early stage. Unlike some other family firms I’ve seen, where the transition has failed because the founder of the business wasn’t actually prepared to let go.” There are six Slattery children, and three are now involved in the business directly. To avoid tensions between the siblings, the next stage in the process was to engage an independent valuer to come up with a fair market value for the business: “We thought that was essential – as a family business everyone is naturally emotionally invested in the business and it is important that issues such as inheritance, whilst it may be distasteful, are addressed and no one is left feeling there was any favour shown.” You can read the rest of the story here.
The challenge [with succession] is establishing how much the business is worth, so everyone gets a fair deal, including our parents - with a private business, valuations can be tricky to pin down. The most important thing is to avoid having money issues rip the family apart.
There is one stand-out figure in the adjacent chart, and that’s the rise in the number of next gens who are concerned about the difficulties of managing family politics and disputes (up 16% from 2014). This is clearly a big issue, and often reflects the ‘communications gap’ we’ve discussed before. In many cases, this is being exacerbated by a difference in communication styles between the current generation and the more digital-savvy next gens. All family firms need robust family governance frameworks to address issues like succession, but this is even more important in families where there’s a risk that issues aren’t being raised, and expectations on both sides aren’t being conveyed. As María Sanchíz, Family Business Leader, PwC Spain, observes, “Some family businesses have struggled during the financial crisis, and there can be very different visions of the future between the current generation and the next one, especially in relation to new markets, and new products and services, and how to finance growth.”
We talked extensively about this family governance in the 2014 PwC Family Business Survey2, and we observed then that even though many businesses had made progress professionalising the firm, most still hadn’t got to grips with the need to professionalise the family. And this is understandable, because it’s usually much harder and it’s a highly emotive subject. Family governance is the focal point of the ongoing tension between personal and professional, and in older family firms the number of family members can be very extensive, and many of them may have no direct role in the business, and little knowledge of its issues and needs. That concern was a key factor in the approach taken by Tim Slattery and his brothers: “The three of us who were taking the business forward felt it was important to have a clear distinction between those of us working in it, and the others who weren’t. Otherwise there’s a risk that those outside won’t be as committed to the firm’s strategy as those who developed it”
As the number of family members and in-laws grows, the risk of misunderstanding and conflict is clearly immense. This is why it’s vital that next gens see the wider family as a stakeholder group too. In fact, they could be the single most important stakeholder group of all, and need managing with the same degree of care as any other. Mary Nicoliello from PwC Brazil observes, “The family can either be the greatest asset or the greatest point of weakness for family businesses. In recent years, business-owning families have increasingly seen the value of family governance to ensure family cohesion, and build a shared understanding of family values.”
What the last bar on the Taking over the business: Plans and expectations chart may be telling us – and it’s a concern if this is true – is that the professionalisation of the business is actually increasing the risk of conflict within the family, by creating wider gaps between those who work in the firm and those who don’t, and heightening the potential for tension as outsiders are brought in to take executive and board roles. As Stuart Morley, Family Business and Wealth Leader from PwC Australia acknowledges, "the alignment of family, business and ownership is critical. The most successful families have a good balance between professional management, responsible professional ownership, and a healthy family dynamic. Communication is absolutely vital in ensuring alignment."
Financing expansion is challenging. Many board members would oppose it as they are focused on their dividends and this would reduce the money available for that. Not all of them are keen on re-investing into the company.
Facing up to the challenge of family governance is vital, because family businesses generally fail for family reasons, not business reasons: in other words, family friction can bring an otherwise viable venture to the point of collapse. Professionalising the family is about establishing accountabilities and responsibilities, and ensuring regular, transparent communications. It’s also about learning to be good owners and shareholders as well as – or even instead of – good managers. In short, the transition from ‘family business’ to ‘business family’. In this context we found it fascinating to hear from Pilar Martínez-Cosentino about the ‘Cosentino approach’, which other family firms could use as a model: “We have a plan for the fourth generation, and it’s not just for those who want to work in the business, it’s for all of them. It’s about what it means to be a ‘Cosentino’ – the sort of people we are. People who know different languages, who are culturally sensitive; who are aware how lucky they are, and feel a responsibility to give something back. And if they do want to join the business, they will have to meet specific criteria, and be prepared to work hard once they get here. That’s the Cosentino approach in action.”
1 John A. Davis, The next generation success (Cambridge Family Enterprise Press, 2014)
2 Up close and professional: The family factor, PwC, 2014