All businesses face challenging developmental stages. Family businesses have the additional challenge of accommodating generational changes in ownership and leadership. When these two develop in sync — when the rising generation has skills commensurate with the next business stage and the current leaders support passing that baton — family businesses can thrive. This synchronicity is rare, however, and conflict can occur when generational “age” and business “stage” collide.
The Entrepreneurial Stage
Founders create something from nothing — a spark of life that turns an idea or dream into a business. These entrepreneurial companies are often flat organizations with minimal hierarchy and a focus on tactics rather than strategic plans. They tend to be “lifestyle” businesses — they exist to support the lifestyles of those directly involved in the company and aren't intended to be scaled up.
While rising-generation family members may learn the business or trade from the founder (if succession is considered) and replace him/her over time, more often, the business serves to provide financial support for the rising generation to attain the education needed to follow their own dreams. These small lifestyle businesses require continued entrepreneurial replenishment from the rising generation if they are to be sustained. But, if the business is scalable, and its owners have that intention, it may be able to evolve to the next stage: professionalization.
The Professionalization Stage
Growth beyond the entrepreneurial stage requires professionalization. Organizational charts become increasingly vertical, with specialized departments and divisions. Policy, process and planning codify how work is done and decisions are made. Job titles, market-based compensation and accountability become the norm. Members of the rising generation, who typically have grown up in the family business and have earned business degrees, are often the best leaders for this stage. However, the handoff from entrepreneurial leadership to professionalized leadership can be fraught if the founding and rising generations have conflicting values, styles or readiness for change. Typically, a founder needs to see the entrepreneurial spark and commitment in the rising generation to feel comfortable sharing and transitioning power.
This stage often requires the hiring of non-family executives to sustain and accelerate growth. These hires inject talent into the business but may also threaten veteran employees (both family and non-family). Care must be taken to clearly define roles, responsibilities and cultural fit. When managed well, these new hires can add a necessary level of energy and expertise to businesses navigating this developmental stage.
These companies are likely to still be owner-led businesses, and those leaders may be first-time CEOs. Advisory boards and coaching can be valuable at this stage to provide both experienced business guidance and leadership development.
The Governance Stage
At this stage, the family business has become substantial. It is less likely, though not impossible, that a family member would qualify for senior leadership. The business more complex, and it is likely that the ownership group has grown as well. Owners may not know each other well and may not have experience making decisions and working together. Developing corporate governance to ensure transparency and accountability to balance the diverse needs of owners, organize family employment and provide “been there, done that” experience is essential.
The demands of managing a substantial business require a clear strategic vision and experience to develop and execute plans to meet that vision. The family, now sharing ownership among generations and family branches whose interests and values may have begun to diverge over time, can benefit from family governance structures like family councils and owners councils.
The Regeneration Stage
With a secure business, family stakeholders can begin to diversify from their legacy operating company. They can use their resources to create new opportunities through family offices, foundations and family venture funds. Cultivating commitment and shared purpose as a family (building their “family factor”) is the key challenge and requires developing more formalized family governance.
Alignment of Ages and Stages Is Rare
Few families are fortunate enough to have their generational ages align with the needs of the business at every stage. Even fewer manage the handoff between generations smoothly. Rarer still are those who achieve consistent growth and expansion from one generation to the next.
In a perfect world, the entrepreneurial founder would pass their company to the next generation, who would possess the education and experience necessary to professionalize the business. That generation of siblings would then recognize that their next generation of cousins — and the demands of a growing business — will require governance, and they would prepare the cousins for those roles. This consortium of cousins might see the need for diversification and the regeneration of entrepreneurial activity. As the company grows larger, it may provide the resources needed to create a family office or fund new ventures. However, we don't live in a perfect world.
Some companies spend multiple generations stuck in any one of these stages. Some extraordinary founders take their companies from the entrepreneurial stage through professionalization and beyond in a single generation, leaving little room for their rising generation to contribute. Some founders are uncomfortable with change and professionalization, to the frustration of their next generation. Some members of the rising generation may simply want to replicate what their parent, aunt or uncle has done and may not be interested in or capable of advancing the enterprise's stage. Additionally, next-generation members are not always aligned on needed changes, or conflicts between generations could stall the evolutionary process.
Here are two examples of how misaligned ages and stages can hinder the growth of a family business.
Example 1: When Rapid Business Growth Surpasses Next-Generation Skill Sets
An extraordinary entrepreneur started a small company without much capital and built it into a $1 billion well-structured manufacturing company. His children were brought up expecting to succeed their father in the family business. They worked at the company in various roles and had relevant professional education, but leadership of this business required more seasoned executives. The business did not “need” the rising generation for leadership or even to professionalize the business. Instead, it needed the rising generation to develop and lead governance. This shift in purpose and identity for the rising generation was challenging, but it was necessary for them and their enterprise. The business was at a scale that required experienced managers to navigate a complex competitive environment and a complex organization. No longer was it a place where a young person could learn to lead the company through on-the-job training, even with the benefit of professional education. The rising generation had been shuttled up through “staff positions” over many years. This gave them exposure to the various departments of the company, but they did not manage people, nor did they have much P&L responsibility. Yet they had executive titles and expectations of corporate leadership. Redirecting them to governance roles was difficult for them. In a sense, they were victims of the accelerated success of the founder's extraordinary accomplishment.
Example 2: When Resistance to Professionalize Sparks Generational Friction
In another example of ages and stages colliding, a group of entrepreneurial brothers grew their business into one with 2,000 employees. However, they couldn't let go of many of the values that served them well as a smaller family business. They were reluctant to fully professionalize their company. They still made decisions around the water cooler, maintained a relatively flat organization and lacked formal family employment and other policies. With a diverse set of cousins coming in as owners, the dynamics were complex. Some held MBAs from top schools and expected to be on executive career paths at the company. Others were also well educated but planned to pursue other careers while owning shares in the family business. This created a fraught environment. The clash of values and expectations between these two generations (ages) threatened company success and family cohesion. They were stuck between stages, leaving the rising generation to clash with the senior generation over the need to professionalize their company.
Success in family business doesn't mean the ages and stages of development need to happen in sync. Rather, success means being aware of the challenges when the two don't align, and having the systems and skills in place to manage conflicts and stalled transitions when they occur. The potential for conflict is woven into the fabric of family business. The potential clash of ages and stages is manageable, and the families who have acquired good conflict management skills are the ones who succeed.
Change is always hard. But, change is inevitable; it is growth that is optional.