Dynastic Planning: A 7-Step Approach to Family Business Succession Planning and Related Conflict Man
Highlights - Preamble
Over the past decade, a great deal has been said and done in the name of family businesses. Unfortunately, not all of it has been in the interest of the Families or their Businesses.
For many, family businesses are an enigma and for others, they are nothing but a statistic and a phenomenon that is destined for failure by the third generation, mainly because (i) at family businesses everything happens behind closed doors. What you see is not what you get; and (ii) a handful of authors have actually worked with families in business. Entry into the inner circle is by invitation only, and very few have been extended such a privilege.
I would agree that family businesses are under pressure, but I take exception to the popular adage: clogs to clogs in three generations.
I find it to be disrespectful to NextGen family business entrepreneurs, and a recognition of failure by their seniors. My experience has shown that today’s NextGen is highly motivated, educated, and focused, and that passing on the mantle is not a fatality. It requires hard work, dedication, and perseverance.
The fact of the matter is that the world as we know it has ceased to exit, and is making room to a new, unstable, and dangerous new world order.
1. For the first time in modern history, seismic shifts are taking place across the globe, simultaneously, and at all levels, be it geopolitical, technological, cultural, societal, legal, and regulatory, to list a few.
2. Most family businesses are going through a generational change, and over the next couple of decades trillions of dollars will pass from one generation to another.
3. People live longer, and NextGen family business entrepreneurs are no longer willing to wait patiently in the shadows for a transfer to take place. They are educated, they gained autonomy, and they are ambitious. They have their own vision, and they seek to pursue their own dreams.
These facts are troubling because in most countries, family businesses are the backbone of the economy and in many, they are the employer of choice.
These findings, while universal, are of particular importance in the Middle East as (i) 50% of the population is below the age of 30 and as a result, (ii) the creation of 50 million jobs over the next 20 years, has become a matter of national security, should we want to avert a remake of 1789.
Governments can no longer subsidize the employment market and take on more fonctionnaires. The task falls on the private sector, and absent a vibrant stock market, the burden lies on the shoulders of family businesses. However, for family businesses to undertake such an endeavor, they need to be around for the long term.
Should family businesses disintegrate, they will jeopardize the social equilibrium currently in existence. Their survival in the hands of the NextGen is a matter of national security. Central banks and governments are called upon to intervene and advocate more forcefully the introduction and implementation of governance at both levels, the family and the business.
When asked why they would rather set up their own businesses, than join the family business, 90% of the NextGen interviewed would site the lack of a comprehensive succession planning as their number one concern.
75% of those, would change their mind, and would join the family business, if these matters are remedied, and proper governance is introduced and implemented.
Unfortunately, 80% of the families interviewed are just waking up to the challenges ahead and have not taken any measures to prepare for the transfer of their Wealth to the NextGen, and of those, 90% do not know where and how to start.
Finally, most of the succession plans we were invited to facilitate had an element of conflict to them.
For this reason, I decided to weigh in and contribute my experience working with families in business for over 20 years.
In the book, I share my approach to family business succession planning, and the 7 Step Methodology™ I have developed to accompany business families throughout their succession planning journey.
In the trenches
In 2017, I celebrated 35 years of practicing law. Twenty of those years were dedicated to serving business families and to protecting their legacy in the hands of future generations.
Over the years, I worked closely alongside over 130 elite families and interacted with hundreds of other families from around the globe, at conferences, seminars, and workshops I was invited to facilitate. Through these families, I had access to a select group of visionaries who built conglomerates, some of them spanning across several continents, and employing hundreds of thousands of individuals. Many were change agents and had the ability, over the years, to influence the course of events and to contribute significantly to the GDP of their respective countries.
I also had access to hundreds of family business owners and NextGen family entrepreneurs, as well as a myriad of professionals working in-house, and third-party service providers serving families in one capacity or another.
This unique experience has afforded me the opportunity to explore the world of family business and to learn and understand the intricacies of how many of them operate.
I am very conscious and aware that the literature, articles and publications tell you that in order to avoid conflict, you must put in place a succession plan, and as such a succession planning exercise is a solution to avoid conflict. So why is it that most of my work included an element of conflict management?
Imbedded within any family, not least families in business, is a past/history. A past that most likely includes a certain element of resentment, regret or blame, an action or inaction, within a family business context. The harbored emotions may well be justified as they may be arising out of particular circumstances, or may be due to perceived thoughts.
In my experience, most conflicts that arise in a family business environment find their origin in a sense of injustice family members may feel towards a given situation. Examples of situations that I have witnessed that have bred such emotions have included:
Failed investments (largely driven by a minority of family members)
Dividend payments that have not met expectations
Remuneration to family member executives deemed to be unwarranted by other family members
Discrimination in the employment of family members (e.g. his son, but not my son)
Incomplete / inaccurate / absent reporting
Lack of acknowledgement / recognition / reward for family members who have contributed to the business
Nature of family businesses
Such emotions often surface when you come to level the playing field so to speak and embark on a succession planning journey. That is not to say that in order to avoid such feuds one should not embark on such a journey, as ultimately, such feelings will surface eventually. Until they surface, they are left to fester and poison family relationships until the pressure becomes too great.
A family business does not exist in a vacuum. It is part of an ecosystem, comprised of a multitude of elements and sub-elements, some tangible, others intangible.
The three primary elements comprising a family business are:
The Family – the people behind the business;
The Business – often the core or original source of money; and
The Family Finances - assets other than the business assets.
Each of the above elements is, in turn, comprised of a myriad of sub-elements. They are all in constant motion, and their ever evolving nature adds to the complexity (from plexus, in Latin, which refers to the interwoven and layered nature of a given object) of family businesses.
Despite their complex and often opposing nature, these elements and sub-elements are kept in check by love, trust, and mutual respect … the three core concepts underlying a successful family relationship.
When devising a governance framework for a Family in Business, one needs to acknowledge the nature and significance of each of these elements and related sub-elements, taken individually and collectively. Should any one of them not be recognized and addressed adequately, the results can be explosive.
Succession planning in a family business context, is where Giving and Taking meet.
It is fundamentally about WHO is transferring WHAT to WHOM.
The transfer of the Wealth (be that a business, an asset, or a legacy) requires two parties: a “Transferor” (i.e. the part giving something - the WHO) and a “Transferee” (i.e. the receiving party – the WHOM).
The WHAT is usually referred to as the family Wealth, both tangible and intangible, including, but not limited to, financial, cultural, intellectual and human capital.
In order for the transfer to take place in an orderly fashion, the following four conditions must be met:
The Transferor must be willing and ready to transfer;
The Transferee must be willing and able to take over;
The Transferor and the Transferee agree the nature of WHAT is being transferred; and
The Transferee has a clear vision and plan to care for, and grow, WHAT is being transferred.
To pass on the Wealth (the WHAT), would require the Founder/Senior family members (the WHO) to engage the WHOM, and determine whether WHOM is willing and ready to take over.
Letting go by either side is often problematic.
During the initial phases, it is customary to see the parties to a Transfer dig in their heels and refuse to compromise. As time passes and as trust sets in, discussions shift from a tug-of-war-like exercise to more of a relay race.
Nothing is more flattering for a Founder of a business than having his NextGen take over, protect and nurture his legacy, and in turn pass it on to future generations.
A succession planning exercise prepares Transferors to ‘let go’, and Transferees to take over the Ownership of the Wealth they are about to receive. Both parties would work collaboratively to ensure success.
In this context, the term Ownership transcends the financial interests in a given business; rather it embraces family Wealth and the legacy beyond.
In order to ensure the NextGen (the WHOM) are conscious of their responsibilities, they need to understand WHAT is it they are going to take over, and ask themselves whether they want it, or not. Should they decide they want it, they would need to determine whether the Transfer shall take place unconditionally, or on the contrary, it shall be conditional.
If conditional, they would need to express clearly their conditions and their aspirations.
Conversely, Transferors will not hand over their Wealth until and unless they are confident that the NextGen are adequately qualified and willing to take it over and to love it and nurture it as they did.
The 7-Step Methodology™
To help with the orderly transfer of Wealth from the WHO to the WHOM, we developed The 7-Step Methodology™. This Methodology has been tried and tested over the course of our twenty plus years within this industry, working successfully alongside over 1,500 family entrepreneurs and an equivalent number of third party executives serving family businesses.
The 7-Step Methodology™ places the Family at the center and empowers its NextGen.
It is based on the following:
Alignment of the Parties; and
Defining a Common Project.
For an Advisor, the primary objectives of a fact-finding exercise are as follows:
Develop and raise the trust level between Advisors and Family members;
Get to know each member of the Family, and understand the wants and needs of each;
Get to know the Business;
Define the objectives and expectations of each of the parties; and
Identify a common denominator to help devise a common platform to engage a dialogue among the Family members.
A fact-finding mission would entail:
Identifying ALL the elements characterizing a given business family;
Understanding each such element, and its influence on the whole; and
Questioning the status quo and searching for the ‘Truth’.
Because in family business, what you see is not necessarily what you get, one would require the right dosage of common sense and critical thinking when searching for and assessing the Truth.
The deeper the search, the more clarity; and the more clarity, the less the likelihood of conflict.
Alignment of the Parties
Alignment, refers to family members engaging in an open and taboo-free dialogue leading to (i) a decision to stay together (or not) and to engage in a common project together (or not), and (ii) agreeing the rules of engagement they are willing to abide by, to ensure the success of this common project, its Stability, Security, and Sustainability on the long-term (referred to as the “Triple S - Insurance policy”, or 3S.)
Succession planning cannot be achieved without the buy-in and the active participation of ALL family members, Seniors and Juniors alike, and their commitment to the success of the exercise.
It is inevitable that during the course of a journey there will be a degree of frustration on the part of some Family members who may be more eager to progress the exercise faster than others. On occasions, some individuals may consider it sensible to step in and “control the process” with the aim of progressing matters. Unfortunately, they will be faced with resistance, as the nature of family business dynamics cannot be reduced to a pre-defined process. It can only evolve organically, at the pace of its slowest member.
Also, in some cases there will be disparities among Family members with differing levels of financial wealth, standards of living, education, and business and financial acumen. Omitting to acknowledge the needs and the wants of any given Family member, would be doing the rest of the Family a disfavor.
Defining a Common Project
The last step in a succession plan is to agree and document the common project the Transferees wish to accomplish together.
Once the Transferees agree to take over the What from the Who, they would need to agree among themselves what they intend to do with said What. They need to agree a roadmap for the future and agree who is going to do what. The role of each, and their expectations.
Finally, they would need to document their agreement and lay out the rules of engagement in writing.
This document is commonly referred to as a family constitution, or charter.
When faced with conflict, many families look for shortcuts; a “standard family charter” and a set of “best practice” rules, they can take home to dictate and “impress” upon their family members.
Many among those fall prey to the hobbyists who promise them the moon, and instead deliver grief and pain.
Contrary to popular belief, in family business, there are no shortcuts, there are no standard templates, or “one-size-fit-all” family charters, and there are no “best practice” rules that apply to “succession planning”.
Also, there is no such thing as a succession plan or family charter (also called family constitution, family protocol, family book etc.) that can be imposed and enforced on a family.
A family charter is nothing but an instrument (preferably a written one) that summarizes the rules of engagement that members of a family who are in business together collectively ascribe to in pursuit a common project.
It is, the culmination of a long journey a family in business embarks on, to decide if (i) all [or part] of its members want to unite around one common project, (the family business), and (ii) if yes, under what conditions.
The exercises leading to the “construction” of a family charter are personal. The more time and effort a family invests in such exercises, the higher the odds that the family will end up with a workable and sustainable family charter.
It is more about the people behind the business, than it is about the business itself, or even the money the business generates.
As a result, one cannot put a timing to succession planning. It grows organically and develops at the pace of the slowest family member. Ideally, the family members would be the ones who write their own family charter.
Because a succession planning journey is fettered with “emotions”, families often choose to distance themselves from the exercise, and prefer to engage the services of a third-party facilitator, whose principal role is to ask the hard questions, and facilitate the dialogue among family members.
Where applicable, a facilitator would sometimes hold the pen on behalf of the family.
Either way, a family charter is written by the Family, for the Family. It must be owned by them and tailor-made to meet their specific needs and circumstances.
This being said, a family charter should not be an end in itself. It is the culmination of a long journey.
The important thing about a succession plan is the journey, the exchange among the people involved and the bond they develop as they evolve.
Experience has shown that passing on a business from one generation to another, in an orderly fashion, requires sacrifice, trust, love, and forgiveness.
Some families choose to do it preemptively; planning in advance. Others, and unfortunately these being the majority do it reactively, when an event forces the process, but the journey cannot be accommodated for.
It is always cheaper (time, money, and effort) to prevent, than to cure. “An ounce of prevention is worth a pound of cure” (Benjamin Franklin)
No journey is complete if the plan agreed remains on paper. To be effective, a succession plan needs to be implemented, and adjusted to fit the needs of the Family and the Business.
Once implementation is completed, results must be monitored. Changes must be tracked and the Family charter revisited and modernized to document such changes and adapt to the new realities facing the Family and the Business. Revisiting a Family Constitution should take place on average every five years.
Also, no successful succession plan will be achieved without enlisting the NextGen.
Conflict is the main cause for the disintegration of family businesses, and the rite of passage is the main danger looming NextGen family entrepreneurs.
Upon taking over from their Seniors, the NextGen will be exposed to tests from a variety of hostile forces, including other family members, competitors, financial institutions, suppliers, government authorities, etc.
The survival of a Family legacy is contingent upon the strength of the bond among Transferees, and after them their NextGen. Their strength will reside only in their unity and unwavering alignment.
This can only be achieved through dialogue and communication, no matter how difficult or intrusive such dialogue on communication may become.
The 7-Step Methodology™ is meant to help start a conversation and avert conflict.
Use it wisely.