At the end of the 20th century, Boston College’s Social Welfare Research Institute released a report suggesting the greatest transfer of wealth in the history of the world would take place between the early 2000s and 2052.
That study inspired me to think about a different kind of transfer. The transfer of knowledge and leadership—one generation to another—in corporations, nonprofits and family-owned businesses.
The transition is the result of demographic metabolism: Every generation gives way to the generations that follow. It can be constructive or destructive, depending on how it is managed.
In the case of a family business, demographic metabolism can lead to future success or failure, which explains why less than a third of all family businesses successfully transition from the first to the second generation and a mere 13% survive from second to third generation.
The discussion about transitioning to the next-generation leadership of family-owned businesses is heating up in periodicals, case studies and surveys as Baby Boomers, the largest age cohort prior to millennials, opt for semiretirement or retirement.
In a recent Family Enterprise USA survey, 89% of family business owners responded yes to this question: “Do you think that passing ownership on to the next generation is important to the sustainability of your business over generations and the creation of more jobs?”
As is the case with many organizational challenges, there can be a gap between what people think and how they behave.
A great example is a joint study by the Family Business Alliance and Family Business Survey, which reported the average age of the leader in a family-owned business is 60.2 years old and less than half of those expecting to retire in three years have selected a successor. On one hand, there is agreement about the need to pass ownership to a new generation; on the other hand, there is reluctance to develop a formal plan of action.
I carefully use the term “reluctance,” knowing one’s mind could go to reasons like, “I don’t think my daughter is ready to take over.” I suggest that the reluctance to formalize a plan is not always clear to the founder/owner.
The Formal Plan?
HPG Executive Recruiting is a successful small family-owned Orange County search firm specializing in healthcare placements and executive leadership for hospitals, universities and companies across the country. Founder and President Gary Hamm and two of his children work in the company. He believes his children are incredibly competent and ready to lead the company. He enjoys a great relationship with them, they want to lead the company and he is 100% committed to turning his business over to them. He has already shifted much of client relations to them. When I asked him if there was a formal succession plan, he said they talk about it frequently. Then he paused, smiled and added, “You know what? That is a good question. I need to think about that.”
Richard Watts, founder and president of Family Business Office, a 39-year-old Orange County firm, suggests that the business transition conversation begins by seeking clarity on what you are trying to accomplish:
• Retention of wealth
• Preserving pride in the company
• Providing the heart’s desire of the children He cautions, “Unless you are clear about your intentions, you are sentencing your kids to the family business.”
Kicking the Can Down the Road
Family dynamics play a huge role in kicking the transition conversation can down the road.
I was intrigued by a large bank’s invitation to work with families transitioning their businesses to the next generation. Upon my introduction, many of the founders/owners were surprised to learn my expertise was not in finance or law, but generational diversity. A common theme in early conversation was, “My children are different from other people in their generation because I raised them.”
It only took posing one question to the successor generation to give the parent founder/owners pause: “If given the opportunity to change one thing about the business, what would it be?”
Next-generation owner responses ranged from technology to people to processes to strategy–the ideas were frequently met with suspicion, skepticism or defensiveness.
One founder/owner said to his daughter, “I don’t even know who you are anymore.”
The more you invite the next generation into decision making, the less surprised you will be by their ideas and the more you will know about their ability to lead the business.
There are innumerable reasons why committing to a transition plan is a difficult task. Here are a few common ones I have encountered:
• It is hard for both owners and children to talk about mortality;
• People are living longer and, as a result, put off the discussion;
• Successors are perceived as lacking experience or not being ready;
• Founders/owners do not have an identity outside of their work;
• There is a lack of support from trusted non-family leaders in the business
A 2018 Global Family Business Survey found that only 15% of family-owned businesses had a formal succession plan in place. It is important to identify where the reluctance comes from and address it with the next generation because demographic metabolism is real.
Editor’s Note: Dr. Chip Espinoza, Vanguard University’s interim provost and dean of strategy and innovation, is an expert on generational diversity in the workplace. He consults and keynotes internationally on how to create environments in which managers and young professionals can thrive. Espinoza was named a Top 15 Global Thought Leader on the Future of Work by the Economic Times.