Succession Planning: Key Considerations Between First, Second and Third Generations

by Jon Flack

According to a recent survey, 62% of family business leaders plan to ‘pass the baton’ to the next generation, but just 18% have a robust, documented succession plan in place.

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After starting a successful family business, the next question many founders consider is ‘how can I continue to grow my legacy?’ The answer is often more complicated than many family businesses expect, as it lies in continuity planning for both the business and the family. Creating an impactful succession plan involves tough conversations about the future of the business, of course, but adds in the emotional complexities surrounding the founder’s intent, the current leader’s vision, and future generations’ desires to innovate and put their own mark on the business. 

According to PwC Private Company Services’ (PCS) recently released 2019 US Family Business Survey, 62 percent  of family business leaders plan to ‘pass the baton’ to the next generation, but just 18 percent have a robust, documented succession plan in place. 

What’s behind the disparity between those who want to pass on their family business and those who actually have a plan in place to do so? Often the pain points in succession planning are generation specific. Passing leadership from the first generation (G1) to the second generation (G2), and then from G2 to the third generation (G3) presents unique challenges that families should keep in mind: whether you’re creating your first succession plan or refreshing one that’s already in place. 

First Generation to Second Generation

Succession planning from G1 to G2 is often the hardest transition. The simplest reason is that a leadership transition hasn’t happened before in the history of the business or the family.  Additionally, the business has often been led by one individual or controlling owner who has not needed or had to share in key decision making for the business.  The transition to the next generation from a controlling owner will require the family and the business to create new processes and structures to effectively make decisions.  When beginning succession planning, there a few key items family businesses leaders should keep in mind.

Creating a Family Vision

Continuity and succession planning involve identifying the desired future legacy of the business by creating a vision for the company. Specifically, that means establishing the family’s near and long-term goals for how the business will grow, the legacy it leaves behind, and the role that the family has in managing and governing this growth. Creating a family vision serves as the core value proposition that all subsequent decisions lead up to. More simply put, the vision provides a direction, making it easier for future generations to ensure their decisions are following the right roadmap. All they need to ask themselves is: ‘does this decision allow us to achieve the family vision?’

Prepare for the Unexpected

There are two main reasons family businesses don’t plan for a succession – the first reason being that that they can be inherently emotional both for the now generation and for the next. This is understandable – often, leaders of family businesses are loved ones, and it can be difficult to plan the eventuality that they will not be around forever. Emotions can cause families to put off succession planning because it’s ‘not the right time’ to be having conversations about loss.

The second reason is that in many cases the G1 founder doesn’t want to step away from the business until they’re forced to. Creating a plan without a receptive G1 leader makes it difficult to prepare G2 for their leadership. These reasons for delaying succession planning lead to a common pitfall: an unexpected transition or events that causes turmoil or disruption if a plan hasn’t been developed and agreed upon.

Clearly Outline a Power Transition Plan

Another common issue between G1 and G2 is that the family business goes from one decision maker to potentially many. In some instances, family members may compete for the top leadership post thinking that they’ll be the sole decision maker, causing a large business disruption. In many cases, they have grown up watching their mother or father lead the business with full control creating a perception that there is only one leader.  While a 1:1 power switch may be best for some families, a separation of powers between siblings may also be an effective succession planning tactic as well. Either way, developing an agreed upon power transition plan is key as the family transitions from one leader to potentially many.  The business at the time of the transition is often much larger and more complex than when the G1 founder started, thus, creating an environment that fosters more broad sharing of leadership responsibilities.  Identifying these responsibilities and then aligning and developing the skills of the next generation will allow for a successful transition of power and leadership.

Second Generation to Third Generation

Family successions that occur between the second and third generations have the benefit of experience. Afterall, succession planning has almost certainly already occurred. However, as families grow larger, smaller issues have an ability to become more complicated. The policies and recommendations suggested below should be a part of all successions plans, including between G1 and G2, but they become even more important and nuanced between G2 and G3.

Create a Family Employment Policy

As families and the businesses they oversee continue to grow and mature, there comes a time when their leaders need to decide on how family members should be involved in the organization. Just as families grow, so do complications with generational transitions. Having clear guidelines on the roles and responsibilities of family members (including in-laws) is critical to allowing the business to operate efficiently and in a manner that family members can agree is fair and equitable.

Preparing the Next Gen

While a family employment policy is important in terms of setting specific rules and guidelines, a succession plan also needs to include how to get the next generation ready for leadership roles. Not only does this help family members gain the necessary skills to run part of the business someday, but it also helps clarify the next generational power transition.

Continue to Reevaluate the Succession Plan

A common mistake that can happen in succession planning is that once a plan is agreed upon, it is put on the shelf and considered final forever. But life isn’t stagnant, we all undergo change and evolution, and so should a succession plan. This requires a plan that is a ‘living’ document and is reviewed regularly. Each family business is unique, but we recommend our clients continuously review their continuity plan by including an agenda item on each board or family council meeting agenda or using a unique event in the business or family (retirements, death in the family or major changes in the business) to trigger a review.  Each review and periods between the review often raise areas of the transition that were not previously considered creating the need for a revision to the plan.  This should be a living document that is discussed often both within the business and amongst the family.

Consider Creating A Board of Directors, and be Conscientious About Who Joins

Even when families create a solid family vision, a strategic growth plan and a family employment policy, there are always unexpected variables that can cause challenges. Creating a diverse board of directors, that includes non-family members, can be an effective tool to provide outside perspective to business challenges and for mediating any transitional issues.  

Creating or sustaining a board of directors becomes more challenging entering the third generation as the number of family members increases. If a board exists, some key questions to keep in mind include: which family members get a seat? Should family members who are active in the business be treated differently from those who don’t work there? What happens if a family member wants a spouse/partner to serve instead? These types of questions are important to keep in mind for succession planning especially in this generational jump.

Creating a successful family business doesn’t happen overnight, and neither does comprehensive succession planning. Each generational shift presents its own unique hurdles and additional complexities as the business matures and families grow and change. While each family business and governance structure is unique, a robust succession plan that is regularly reviewed and updated is the best way to turn a family business into a family legacy.
Jon Flack is Private Company Services Partner; Leader of the Family Business Services Practice at PwC.