One of the first things to note on next-generation leadership and preparation is that they actually do need to be prepared though (they may not “know how”), and they cannot do it alone. In fact, some of the most critical development pieces need to be facilitated and led by the current leadership (often the founder).
This brings a challenge, since most founders – while superb at running the business – are not necessarily equipped or experienced with developing next-generation leadership, especially if the coming leader(s) are from within the family, which brings its own issues. A few of the top enablers of effective transition to succeeding
- gaining relevant experience outside the family enterprise;
- getting clarity on the rules and terms for next-generation leaders coming into the business; and
- ensuring the successors have a firm grasp on financial concepts and reporting.
The subject of successors having experience outside the family firm is one where there is a good amount of consensus. Most successors themselves intuitively understand that their credibility as leaders of the family business will be boosted by having “earned their stripes” elsewhere, where the family influence does not affect that experience.
Not only does good experience outside the family enterprise add to successor credibility, but it also adds their experience and perspective in ways that cannot be gained working inside the firm. This external perspective is valuable when they come back into the firm and add value by bringing a more “objective” viewpoint on the family enterprise.
A second way to effectively prepare for a transition to the next generation is getting good clarity on the rules, terms, and conditions for that generation coming into the business. For many families, the kids have worked in the business off and on for years, doing odd jobs and summer work while in school, without much thought about any specific “rules” for when employment in the business becomes more permanent and intentional.
Topics that should be discussed and decided include things like: compensation (is it market based or otherwise?), role definition (is it a well-defined, existing role, or a vaguely understood and new position?), what perks and benefits – if any – does the new family member get upon entry to the business (same as the rest of the workforce, or are there special considerations?), are certain roles in the business reserved for family, what is the reporting requirement for family members inside the business (to other family members?), and what about performance requirements/reviews (is the same standard and process used for family members as other employees?).
Having the conversation before the new family member starts (or as soon as possible after) and getting agreement on the ground rules creates clarity for all, sets expectations correctly, reduces friction in the family and workplace, and increases trust and communications inside the family.
Finally, ensuring a level of financial literacy for family members entering the business is very important if they are to understand how the business works, what its drivers are, and gain an appreciation for how much effort it takes to earn a dollar as a business.
Courses in financial literacy are easy to find (check out the local community college or university’s faculty of extension, who often offer a course in “finance for non-financial managers”).
The intent is not to make anyone an accountant, but rather to ensure they have enough understanding in this crucial area that they are able to grasp what the most important numbers are to watch, why those numbers are important and where they come from (for example, the most important expense numbers and how they are derived; how revenue results are built (price, volume, and so on).
While there are many other things we encourage families to spend time on, such as successor training inside the company, assessing successors, ownership parameters, and exit planning for founders, paying attention to the three successor preparation topics above provide a solid foundation for next-generation leaders coming into the business and create a trajectory for transitional success over time.