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The 21st Century Dilemma: Preparing the Next Generation for Succession

Family businesses did especially well in riding the rising tide.  Family businesses were the particular beneficiaries of three decades of favorable global economics. Propelled by fast growth in the emerging world, the share of family businesses in the global Fortune 500 grew from 15% in 2005 to 19% in 2013.  Five years ago, founders or their families owned 60% of emerging-market companies with sales of $1 billion or more. By 2025, an additional 4,000 companies may join the list.  Family-owned businesses would represent 40% of the world’s large enterprise.

However, despite the growing power and influence of family businesses, executives and investors have a poor understanding of the unique attributes providing the edge.  It is difficult to parse the DNA of family businesses. It is a complex mix of family, management, and wealth creation, all overlaid with a rolling ownership dynamic that claims all but 30% of them.  This 30% is claimed by the 3rd generation.

The number one worry of family owners is the challenge of developing the next generation as motivated and responsible shareholders.   Addressing this concern is critical to the long-term sustainability of family businesses.  It calls for both technical and interpersonal focus.

First Things First

Maintaining an entrepreneurial edge is becoming evidently critical for long-term survival. Creative destruction constantly churns the rankings of companies in the S&P 500 index of the largest US companies.

However, as family businesses grow through the generation, barriers to entrepreneurship and innovation creep in.  Maintaining the entrepreneurial spirit of the next generation of family leaders is essential. But developing, engaging and motivating them is the biggest challenge.

Family owners want to keep the next generation involved. This is to maintain the business as a source of family pride and to preserve the founder’s legacy to keep it within the family.

Successful generational succession can be achieved. Family Businesses just need to take on 3 important principles.

Preparing the Next Generation: The 3 Important Principles for Succession

  1. Build emotional connections. A common problem in a family business is fostering communication across generations and borders.  It can be difficult but essential when building emotional connections.
  1. Develop responsible stakeholders. Based on the McKinsey Family Business Practice survey, the next generation family members are willing to take more responsibility in running the family business. Yet, only 30% feel that they are confident about making decisions involving Family Businesses.
  1. Establish clear rules and career paths. A leadership position is not the only role for members of the next generation.  There are several important roles to be played above and beyond full-time employment.  A critical need is to develop a path and make family members understand how they can embark on those paths.

Having a good grasp of the 3 important principles will pave the way for effective Succession Planning in family businesses. When these are in place, the very fundamental foundation of the family business is established and ready for the 21st-century challenges.

Interested in gaining more understanding of Family Business Succession Preparation? You can learn more and download an editable PowerPoint about Family Business Succession Preparation here on the Flevy documents marketplace.

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About Joseph Robinson

Joseph Robinson is the Vice President of Strategy at Flevy. Flevy is the marketplace for best practices in business management. Learn how the Fortune 100 and global consulting firms do it. Improve the growth and efficiency of your organization by leveraging Flevy's library of best practice methodologies and templates. The documents at Flevy (https://flevy.com) are of the same caliber as those produced by top-tier management consulting firms, like McKinsey, BCG, Bain, and Accenture. Most were developed by seasoned executives and consultants with 20+ years of experience. Flevy covers 200+ management topics, ranging from Digital Transformation to Growth Strategy to Lean Management. You can peruse a full list of management topics available on Flevy here. Prior to Flevy, Joseph worked as an Associate at BCG and holds an MBA from the Sloan School of Management at MIT. You can connect with Joseph on LinkedIn here.

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