Many entrepreneurs generate an enormous amount of wealth that they wish to pass on to their children and grandchildren. They are not a family business yet, but they want to become one. They want to see the wealth used wisely, and that their business and investments continue to add value. But the mindset that led to their success often undermines how open they are to the changes needed to continue working into the second generation. It’s the Next Generation Dilemma: How Future Generations Preserve the Founder’s Legacy And the Continue to build a thriving family business?
Business founders often fall into common traps that prevent their continued success:
- They become so confident in their superpowers that they stop listening to others.
- They feel that they are the only ones who know how to run the business, so they are not ready to step down or give up.
- They expect continued growth and do not expect significant change.
- They want to find a successor like them, who will run the business as they did.
- They are looking for advisors, CEOs, and even family members who don’t challenge them.
- They want their children to repeat their “make it their own” journey.
- They assume that preparing for the future is to carry on with things as they were, because, after all, they’ve been a huge success.
This poses a major problem for the people of the next generation, who often see the need for major changes in business. While the elderly were growing their business, the younger generation often learned, traveled, worked for other businesses, discovered new opportunities and possibilities, and took active steps to prepare themselves for entry into the field. They have a lot to offer, but the founder’s behavior can be frustrating and can lead them to feel that their voice is not being taken seriously. When they clearly see the need for innovation, how do they overcome the avoidance and indecision of the elderly?
For example, a family she worked with developed a huge real estate portfolio under the leadership of her 80-year-old entrepreneurial father. Four of his seven sons, in their forties and fifties, worked for the company, but didn’t feel they could talk about new directions, while others worked elsewhere, sometimes in related fields. They knew work and their relationships needed work. They wanted to meet to consider how they would work together after their father passed away, but he gave them the message that they shouldn’t. Were they children who should obey their strong and successful father? They decided to meet anyway and informed their father. They’ve thought about business renewal, new acquisitions, how much cash they want in their lives, environmental concerns, and the impact their buildings have on their small town. They were content to wait for their father to pass, but wanted to prepare for major changes they felt were necessary in how they went about the business.
I interviewed an older and younger family member from 100 large global family businesses that flourished over their third generations, and asked them, “What did you do to overcome these founding tendencies? How did you set the business on a new path?” Only growth, so they had to think about whether it was time to sell the old business or start new ones. The seniors might not have been willing, willing, or able to do this, but it had to happen. Success across generations depends on first overcoming this obstacle.
How can they achieve this? These successful companies had a unique resource – a resource not found in non-family businesses: their rising generation. This generation—who grew up under the founder and expects to inherit ownership and leadership—often does not have formal authority, but they do have moral strength and influence. They usually find ways to get ahead and convince adults and family to change.
When I asked which families were responsible for the most significant changes, they reported that two-thirds of the changes arose from members of the rising generations, who initiated and had the support of their parents. Many families report that a major shift in their family culture occurred in the second or third generation, moving from success in a single business to a multi-faceted collaboration that includes diversification, major innovation, and corporate redefinition. Usually, the family continued as a joint entity, but the business itself took a completely different form. This massive transformation did not come from above, but rather came largely at the beginning of the younger generation.
To maintain a long-term family enterprise, having a founder who is building a large business is obviously only the first step. Successful families need a second transformation, when second and third generation redefine business and develop new opportunities. Unlike the founding generation, their reality is that they need to collaborate and develop a structure to work together to seek and develop multiple opportunities. Often the founder does not fully understand the challenges that come with doing so, so successive generations need to either have the support of the first generation of owners or develop on their own to prepare for their succession.
My research has found that the rising generation usually doesn’t wait for permission. They took the lead. After all, this wasn’t a problem for the founder, but his: how could they carry on the legacy they had inherited? They got together and worked, and managed big changes. As millennials or members of Generation Z, they grew up in a digital and connected world, and received an education that was much more comprehensive than older adults. They have looked to the future and share concerns about what needs to change in their business, and how the family can work together to bring about the changes they see as necessary.
Three structural innovations, in particular, have made it possible to shift from simply continuing what was successful in the past, to preparing and looking forward to how to meet the challenges of the future:
Active involvement with business.
The new generation must be informed and involved in the business. If they expect to become owners, whether they work for the company or not, they must be prepared to exercise control as responsible owners. This starts with sharing information, but sharing must be active, and communication must be a two-way street. The process of transition and change cannot proceed unless everyone is informed of what is happening. As potential owners, they want more than financial information; They want to know the looming values, policies, practices, strategic goals, capabilities, and threats.
Active learning can take many forms: Young family members, although not ready to join the board as full members, may be invited to be board observers. This is like an apprenticeship, where they can meet and learn from family and non-family board members and learn about the challenges of their old businesses and other joint ventures. Other families create what they call a “micro board” that meets regularly with senior executives to learn about current business challenges. One of the junior board members takes on a current problem each year and produces a report with their recommendations to address it. Many of their ideas became major innovations. These opportunities provided a way for young family members to suggest the ESG and sustainability values they felt needed to be included in the business.
Guidance and development programmes, with clear standards for governance roles.
To become leaders, young family members must develop their abilities. The family should invest in its development and provide them with opportunities to use their learning. In the example above, young family members were encouraged to develop their skills through training, assessment, and educational programs paid by the family. Owning a successful business, and the inheritance of the family’s accompanying fortune, brought huge responsibilities that made it wise for each family member to develop business skills and consider a role in family governance; They cannot be passive bystanders.
Business and family management roles are clearly defined, as are qualifications and selection methods. Family members were invited to prepare to take on these roles, and the family had a clear plan for introducing the next generation. All this was part of an active family-based education and development program.
Create a family bank.
Family businesses often have investment funds, and many of the young family members I interviewed were able to participate in portfolio building decisions, for example, to reflect ESG values. Also, there was a process for family members to present business ideas, and even their own projects, to the family. As some families sold their old businesses and became investment families, the younger generation was tasked with taking the family into new investment opportunities. In some families, the older generation tended to the old business, while the younger generation became socially invested. This opportunity was provided with appropriate checks and balances, and often included counselors outside the family to help ensure the success of the effort. Young family members could access the family fortune for entrepreneurial ideas, but they were also responsible for how it was used.
As old businesses and the pioneering leadership of the founding generation give way to a new generation, they are entering a transition from a single leader with a thriving business to a new era where there are many related family owners, often needing to create a path to reconsider the type of business they operate In it, the goals that must be developed, and how they will do it. The second transition is usually carried out by the individuals of the second and third generations, who become entrepreneurs and pioneers in their own right. Their leadership is less obvious than that of the founder, but it is no less important.
The development of family wealth does not happen only by circumstance or by imitation of the success of the founding generation. Each new generation of the business family must reinvent itself, and the reinvention is carried out by a capable, committed and collaborative group of rising generation owners. The older generation should prepare them, and then trust them to continue the legacy in their own way. When they are ready to become leaders, family wealth can continue to grow across generations.