SHOULD YOU MIX BUSINESS WITH FAMILY?
One of the commitments Donald Trump made upon his election as U.S. President was to put the management of his business holdings in the hands of his adult children. Whatever you might think about the politics of the situation, there are also business implications to the move. Is the next generation of Trumps the best qualified team to take stewardship of those businesses?
Business history is filled with examples of how a new generation handled the family business ‚Äì Donald Trump himself has been cited as both a positive and negative example of this practice due to differing opinions on how well he has grown the wealth and business interests inherited from his father.
In any case, it is a decision that many entrepreneurs will face at some point. Again, historical results are too split to allow for a universal judgment of whether passing a business down to your children is a good idea, but it helps to be aware of both the pros and the cons, and of what you can do to increase the chances of success.
Arguments in Favor of Family Succession
Here are some of the things that make it worth considering bringing your sons and daughters along in your business:
- Loyalty. Business can be a cut-throat affair, and though an entrepreneur might be in firm control of her company, she has to worry about valuable talent or ideas being poached by rivals. This is less likely to happen when other key executives in the firm share both the family name and the associated long-term financial interests.
- Willingness to speak truth to power. Parent-child relationships generally get tested as the child comes of age, but if the relationship survives the rebellious phase there can be a value to having family members involved in the business who are not afraid to suggest new ideas or question your judgment. Executives from the outside trying to make a career within the company might be less comfortable with being so direct with the founder.
- Continuity. If you hire an executive from outside the company and start grooming him for future leadership in the company, chances are it will only be a matter of time before he is anxious to take over the reins for himself. In some such cases, the would-be successor jumps ship if he believes the transfer of power isn’t taking place quickly enough. In other words, it can be tough to groom future leaders for ten or twenty years and have them remain in place, but a family member who is positioned as successor might be more willing to show that kind of patience.
Arguments Against Family Succession
On the other hand, choosing the next generation of your company’s leadership based on parentage alone can have some drawbacks:
- Sense of entitlement. Just ask yourself who is going to be hungrier ‚Äì an executive from the outside willing to earn promotion up the ladder, or someone who feels entitled by birth to step into the parent’s shoes?
- Promotion beyond abilities. Top talent is hard to find. Business acumen is not necessarily hereditary, and drive certainly is not. Promoting someone just because they are next in the family line could mean ignoring an unrelated person who is better qualified for the job. Worse, it could mean handing that job to someone who is nowhere near capable of handling it.
- Jealousy. Nothing can de-motivate a workforce faster than being passed over in favor of someone whose most prominent achievement was being born to the right parents. Also, if there are multiple children interested in the business, bitter disputes over primacy might break out within the family as well.
Preparing the Next Generation to Succeed
Certainly, passing on leadership of a business to younger family members can not only be successful, but it can be a step towards building a multi-generational dynasty. Some of America’s largest private companies, such as S.C. Johnson and Koch Industries, have taken this approach. Looking further back into business history, families like the Mellons and the Vanderbilts provide examples where a subsequent generation was able to not only sustain the founder’s success, but expand on it.
However, prominent as those examples of multi-generational success are, they are not the norm. A study in the Harvard Business Review found that just 10 percent of family-owned businesses remain active and still family-owned by the third generation. That is not entirely a commentary on the ability of subsequent generations ‚Äì the sustainability of the original business model has much to do with it as well ‚Äì but it does demonstrate the degree of difficulty faced by business founders who envision their heirs thriving with the enterprise after they are gone.
Here are some thoughts on how to increase the chances of success in passing management of a business along to your children:
- Require competitive qualifications. If your children are going to take their responsibilities in the family business seriously, you have to take their appointments to any management roles seriously. This means demanding that they get the educational degrees and show the level of academic success that you would expect of any outside applicants to the company.
- Encourage outside experience. Even when the plan is to bring your sons and daughters into the family business, there is no reason they have to spend their entire careers there. Working elsewhere first will require them to prove they can thrive in an environment where they are being evaluated more objectively. Also, when they do eventually come into the family business, this outside experience can allow them to bring fresh perspectives that will help the business from becoming too insular as it is passed down within the same family.
- Give clearly-defined responsibilities. Creating a nebulous role for a daughter simply to get her involved in the company is not a very constructive plan. Like anyone else, she should have clearly-defined responsibilities and evaluation metrics. This not only will require that she prove her ability, but it will also give her a chance to build credibility within the firm so employees will view her in the context of measurable achievements rather than simply as the boss’ daughter.
- Involve trusted non-family advisors in these decisions. It is very helpful to have good managers around you who can help evaluate a family member’s abilities from a more objective perspective. Not only will this help you get a more honest assessment of your son’s abilities and work ethic, but it could also start to build a supportive team of key executives who have bought into junior’s rise to the top.
Involving your sons and daughters in your business can be a rewarding experience which helps preserve management continuity, or it can be a disaster that makes the family miserable and incurs the wrath of investors and employees. Making it work requires making sure the heirs you choose are thoroughly prepared, and that you’ve chosen the best person for the job rather than simply the best person whose last name happens to be the same as yours.
Barbara GoodsteinPresident & CEO of TIGER 21