The incestuous triangle of succession - Managing the Future in a Family business

Family-owned businesses are unique entities where the lines between personal and professional relationships often blur. With family members serving as shareholders, executives, and board members, succession management becomes particularly challenging.

I’ve noticed this more recently working with the team at Vega supporting businesses navigate the minefield of securing commercial finance.

So much in fact I thought it would be useful to develop a framework for describing and addressing the challenges faced by family-owned businesses in succession planning in the interests of accelerating the process developing business and funding solutions.

Understanding the Unique Challenges

Emotional Ties and Family Dynamics

Building a successful business is hard work and often acheived through unique combinations of timing, luck, hard work and relationships associated with specific individuals.

So when it comes to handing the business over to other family members to manage there are layers of complexity and challenge not present in a normal/non family business.

Balancing Family and Business Interests

Making effective business decisions as a challenge at the best of times for all organisations but when the interest of Shareholders also crosses into personal and family lives and relationships establishing a decision making framework can have layers of additional complexity.

Governance and Decision-Making

When you’re board is largely comprised of family members establishing Balanced contributions from directors based on the collective knowledge and expertise versus their position and the family hierarchy is difficult.

Similarly, when there is a board consisting of family and independent members, but FAMILY directors are conjoined to specific shareholder interests much of the benefit of the governance structure can be lost.

External Executives and CEOs

When a CEO finds themselves leading a family owned business with family members also working as employees / executives a new level of relationship management skills is often required to drive successful outcomes.

Often family members agree to “rules of engagement” when it comes to decision making and not mixing their roles as executives / shareholders / directors only to change the rules on an ad hoc basis and marginalising the investment and trust placed in external talent / leadership.

Strategies for Effective Succession Management

Develop a Clear Succession Plan with a realistic timeframe

Discussing and documenting all of the concerns and desires of all family members when it comes to roles within the business and the criteria / profiles sought for non family executives is the first step in maintaining a structured approach to succession planning.

There’s a reason HBO’s Succession hits home with many in the business world as the series highlights all of the challenges associated with family business management and future planning.

A lack of transparency / honesty around what and who family members really want running the business, head strong senior family members and shareholders playing games with relatives and non family executives to maintain their power base or extend their tenure at the top well byond the currency of their skills and suitability

These are all common scenarios across the globe when it comes to family business giving the show’s creators a plethora of content to entice and engage viewers.

Addressing these in an open and upfront way as possible recognising that there will be requirements for transition of leadership by nature of human life expiration and planning for this as well as unexpected events that may delay or bring plans forward lower the risk of negatively impacting the value of a business through uncertainty and sub optimal management.

Establishing Formal Governance Structures

Boards are not for every business. Especially where there are a small number of shareholders that are related or one shareholder.

This does not however remove the importance for a roles within a business structure that maintains a high level oversight of the strategy and performance of an organisation and it’s management and it’s optimisation of shareholder value.

This is particlualry important to an increasing number of business funders as they have experienced too many times the demise of business borrowers who did not maintain effective governance and were unable to repay their lending.

Professional Development and Mentorship

The number of family owned businesses in Australasia going through leadership transitions within the family is at an all time high largely due to the number of “baby boomers” who built successful businesses and are reaching the end of their working / natural lives.

In many situations the “ideal” family candidates to takeover are either unwilling to do so or have recognised or unrecognised weaknesses in their skills and experience.

Much of this type of issue can be addressed through transparency / frank conversations, long term planning and the identification of quality, relevant professional development and mentorship that will enhance the weaknesses.

Balancing Family and Business Priorities

Many businesses have survived for generations based on the strength of character and determination of their leaders in addition to business skills and this is more prevalent in family owned business.

Effectively differentiating between family versus business priorities and performance requirements is increasingly important as the pace of change and new matrix of risks overtake character and determination.

Agreeing the delineations and differences is a process well worth investing in to ensure that decisions are made based on the trading conditions ahead and realistic expectations of the resources required to execute.

This is a prominent issue around funding especially where family requirements for dividends outweigh capital requirements for growth and risk protection / investment within the business.

External Advisors and Mediators

Good advisors and trusted independent connections are always useful for enhancing decision making but only when they are able to clearly understand the state of the business and the approach to the division of roles in a family business and how conflict / compromise will be managed when the lines blur between shareholders, directors and executives.

Agreeing that advisors views will be heard by all family members in the context of their intentions to support the growth of the business versus a particular family member’s opinion is a critical requirement for getting the best value from that advice.

Supporting Non-Family Executives

Clear Mandates and Support

Before commencing any recruitment process for a non-family member in an executive role it’s highly recommended that all family stakeholders align on the purpose of the role in terms of business success and value creation for all and the need for a supportive, bi directional environment to have any chance of getting the best out of an external hire.

Communicating this to candidates and exploring their perspectives on how they see and would handle a family business governance and reporting environment is one area that is well worth digging deeply into during the selection process.

Integrating into the Family Culture

By nature of involving humans, any business has a culture. This is less clear when it comes to an organisation successfully recognising and articulating the elements of that culture.

Gaining this understanding of culture in a family business to a level which can be conveyed to an incoming external CEO / Senior Executive will almost certainly require assistance from advisors / trusted external connections.

Conflict Resolution Mechanisms

So often overlooked in all types of business are the development and execution of effective mechanisms to highlight problems with performance / role expectations / conflict which deliver the highest prospects of resolving issues quickly and with minimal reduction in business value.

I would recommend this down to specific scenarios of which there are some classics that can easily be created and discussed before they occur - such as:

The CEO not meeting the expectations set during their selection / onboarding or vice versa

The market materially changing at such a level that requires a different CEO skillset

Family / Shareholder dynamics shifting to a point where there is a material impact on the agreed strategy - e.g acqusition or decision to liquidate and disburse funds to shareholders / cease trading

There are more but the main point is the development of a “playbook” as to the principles and process that will be adhered to to address them when they occur is highly reccomended right at the beginning of a new appointment / business relationship.

Conclusion

Succession management in family-owned businesses presents unique challenges that require careful planning, clear communication, and the involvement of all stakeholders.

By establishing formal governance structures, investing in professional development, and seeking external advice, family businesses can navigate these complexities and ensure a smooth transition to the next generation.

Effective succession planning not only secures the future of the business but also strengthens family bonds, paving the way for continued success and growth.

For non-family executives, clear mandates, cultural sensitivity, and robust support systems are essential to overcoming challenges and contributing positively to the business.