For a family business to make a good transition to the next generation, an effective continuity plan is essential, say the authors of the HBR Family Business Handbook – and this entails becoming a family talent development machine
In the beautiful opening scene of The Lion King, newborn Simba, the presumptive heir to the throne, is held aloft to all the animals of the African savanna, and they bow in reverence. ‘A king’s time as ruler rises and falls like the sun,’ Simba’s father, Mufasa, later explains. ‘One day, Simba, the sun will set on my time here, and will rise with you as the new king.’ The idea that the father can transfer power to Simba is a premise the tale explores.
Many family business owners seem to have this idea in mind as they consider exercising their right to transfer their ownership to the next generation. One clear successor will head the business, the ownership group, and the family; others will defer unquestionably to the heir; and respect across the generations and family branches will be freely given. The ‘circle of life’ will continue. But as Simba finds out when his father unexpectedly dies and his uncle steps in to rule, transitions are usually far more complex.
As an owner, you have the right to determine whether to transfer your family business to the next generation. With that right comes the burden of many complex and difficult decisions. What do you want to do with the assets you worked so hard to build? How do you let go? What roles should the next generation play? How should you develop the members of the next generation into those roles? Are their relationships strong enough to work through decisions together?
The transfer of power has long been seen as one of most emotionally fascinating challenges faced by family businesses. For generations, popular television shows have been built around the intrigue of backstabbing and power grabbing by the next generation, which jockeys for heir-apparent positioning. Most family businesses are born out of the crucible of this decision.
At some point, the founder faces a critical choice – whether to pass down the business to the children, thereby transforming the enterprise from a founder-led company to a family business. Or, to use the shorthand of ‘2G’ for the next generation and to paraphrase Shakespeare: ‘2G or not 2G, that is the question.’
As an owner, whether part of the first or 21st generation, you get to decide who owns it after you. You can exercise your transfer right in three main ways: sell the business, divide it, or transitionit as a whole to the next generation. The importance of this decision continues well beyond the founder. Actions taken by each generation shape the family and business for decades.
The essential elements of successful continuity planning
Even with good intentions, many owners find it difficult to plan their own eventual transition from the business that has become part of their identity. But delaying or poorly planning your transition can wreak havoc on the business (and the family) in the long run.
A BCG study of more than 200 Indian family businesses found a ‘28-percentage-point differential in market capitalisation growth between companies that had planned transitions and those that had not’. The study concludes: ‘An enormous amount of value is destroyed by unplanned transitions, with potentially catastrophic consequences for the business.’
Maintaining family ownership over the years is a complicated endeavour. It requires making decisions that will reverberate for years to come and that are based on imperfect information about the future (for example, which of the next generation will be the most qualified to lead the business?). These decisions are steeped in meaning, connecting to issues of fairness (do I treat my children equally?) and identity (what do I do after I have exited from my life’s work?).
To make a good transition, you need a continuity planthat maps out the path from the current generation of ownership to the next. Picture each generation on opposite sides of a canyon. If you just keep going along as you were, you will go right off the cliff. You need to build a bridge across. That bridge consists of three main elements: transferring assets, shifting roles, and developing capabilities.
1. Assets: as you make your asset transfer plans, you need to revisit your family business type, align ownership with each person’s interests, and make effective use of tax-planning tools.
2. Roles: a brilliant asset transfer plan is worth little if you don’t carefully manage the handoff of roles from one generation to the next. A good succession is often described as the passing of the baton in a relay race. This helpful metaphor points to three aspects of the process – preparing the person currently holding the baton, selecting who will take it, and orchestrating the handoff.
3. Capabilities: avoid the temptation to focus solely on who gets to take over running the company. In a family business, there are many possible and important leadership roles for the next generation to assume. For your business to thrive, you will need to become a family talent development machine which means educating family members about ownership, constructing pathways to leadership roles, and creating opportunities for collaboration among members of the next generation.
Getting started
In many cases, the biggest hurdle to continuity planning is getting started. Between pressures of the critical issues of today, the need to confront highly sensitive subjects connected to mortality and identity, and the requirement to engage a kind of cross-generational conversation, starting continuity planning may feel wholly uncomfortable.
A healthy transition is much more comprehensive than a Simba succession plan. It takes a lot of work to make a thoughtful and successful transfer of your kingdom.
This is an edited extract from The Harvard Business Review Family Business Handbook by Josh Baron and Rob Lachenauer (Harvard Business Review, 2021).
Josh Baron is a Co-Founder and Partner at BanyanGlobal Family Business Advisors. He is also an Adjunct Associate Professor at Columbia Business School.
Rob Lachenauer is Co-Founder, Partner, and CEO at BanyanGlobal Family Business Advisors.
