Cultivating the Next Generation Family Business Leaders

Henry Hutcheson | Family Business USA

Succession planning is the most important change a family business will undergo. Trying to pass the family business from one generation to the next is fraught with risk. Who will run the business? How will the current generation phase out? Can the next generation work well together? Successful family businesses are those that recognize there is risk, put forth effort, instill good communication habits, and begin working early on a plan for succession.

For owners, wading into the waters of evaluating the next generation is perhaps the biggest landmine they will face when looking at succession. Every business owner would love to see their life’s work continue within the family. However, the next generation is not always interested or, frankly, capable. Probing into this area can be awkward. Owners need to balance grooming with allowing the next generation to grow and use their unique talents.

Starting early is best. When the kids are young, bring them to work when you can in order to familiarize them with the business. Even better, if there are some odd jobs that need to be performed, get them engaged. At 14, I worked the summer assembling photo layouts in the back room at the Olan Mills plant. (Those of you old enough may recall those little oval cut-outs with the picture behind it.) It was rather boring work, but it was real work, and I had the opportunity to learn the ropes from some experienced employees – and make a little money.

Having exposure to business early on can whet the appetite of the next generation to join the family business and foster an interest in growing the business. It also can engender a sense of ownership, which in turn helps create a sense of responsibility and independence.

Once the child is old enough, a conversation needs to be had regarding their potential for joining the business. This conversation can take many flavors, but most of all it needs to be honest and unbiased. Express to your child that the family owns a business, and as such, the thought of him or her coming into the business has probably crossed the minds of child and parents alike.

You should state, “At this point it is too early to know whether or not the business needs you. But it would be wonderful if, at some time in the future, you were interested in joining and had the necessary capabilities. No one is forcing you into the business. You need to determine for yourself what your passion is in life, and discover what your talents are.”

Most importantly, make it understood that this is a live and on-going conversation: at some point the family may need to have the next generation join the business immediately; at some other point the next generation may declare that they are not really interested; and at yet another point the owner may determine that perhaps the family business is not a good fit for the child. Promise each other to keep the lines of communication open as time goes by. Quarterly family meetings are a great way to accomplish this.

Two critical grooming factors are the type of work and the amount of compensation. It is of utmost importance that the next generation is not allowed the easy path. They need to start at the bottom, do real work, and be moved up based on their merits. Not only will this prepare them to lead in the future, it will help them gain respect from the employees, customers, and suppliers. At the same time, they should be compensated at the going market rate and not overpaid. It is very easy for the next generation to gain a sense of “entitlement” if these actions are not taken.

It is of utmost importance that the next generation is not allowed the easy path. They need to start at the bottom, do real work, and be moved up based on their merits.

The highest correlated factor of next-generation success is the next generation spending significant time working outside the family business. While the gaining of practical experience is good, the important part is allowing the next generation to find out who they really are and gain a sense of independence. Since we don’t always have the luxury of letting the next generation work outside the business, there are other ways to accomplish this. The best way is to assign a major task to be accomplished and give lots of room for them to work on it – don’t be a helicopter boss! Most importantly, don’t have the child report directly to the parent, but rather a senior manager. I had a client with a strategic need to start a new, ancillary business. Instead of assigning a team, the man assigned his son to develop a plan, borrow the necessary money, and implement the project. The son was soon running a small but growing business. He had developed all the skills required to run the main business, and the transition occurred soon thereafter.

Another classic method of grooming is mentoring. The purpose of mentoring is not to teach the next generation textbook answers to running the business, but rather answers that are in-between the lines. Unfortunately, the best mentoring typically does not come from a parent. The best place to start is with one of three people: a senior manager at the business, someone else connected to the industry that you don’t compete with, or an older, local business owner. When deciding on a mentor, ask yourself; what type of management system and philosophy do they use as mentor? How do they evaluate people? What metrics do they key on and why?

Another great method of mentoring is having an interim CEO. This is not always an option of course, but if the current generation wants to leave before the next generation is ready, then hiring an expert CEO for a set number of years can provide very good grooming.

Four Final Critical Points for Grooming:

1)  Be sure the next generation has adequate financial knowledge and training. Business is about making a profit, thus understanding financial data is fundamental to success.

2)  Get anonymous 360-degree employee feedback. You may not like what you hear, but it is important to know.

3) Instill emotional intelligence; it is not all about being smart or working hard. It is also about being able to connect with other people.

4) Develop good communication skills: know which mode of communication to use, and when; be clear and concise; be comfortable speaking one-on-one, or to groups; and be a great listener.

If you start early, keep the lines of communication open, let your kids experience the business, and make them earn their way to the top, they will be prepared to successfully carry on the family business in the next generation.

Henry Hutcheson is the founder of Family Business USA, a consulting firm in Chapel Hill, NC that is dedicated to preserving wealth and maintaining family harmony. He comes from his own family business, Olan Mills Portrait Studios. He may be reached at henry@familybusinessusa.com or 919-741-1943.