Ownership Transitions

Transitioning to the Third Generation

Despite all the factors pulling against the second generation owners,  they have successfully managed to transition from the parent generation to the sibling generation.  There were bumps along the way, but most of the kinks have been ironed out and things are running smoothly… for now.

The transition from the sibling stage to the cousin stage introduces a whole new set of issues.  No matter how far off that transition may be,  now is the time to start preparing the business for that eventual transition as well as preparing the next generation.

Preparing the Business

One of the first steps to consider is establishing a family employment policy.  If one is already in place, a thorough review may be in order to ensure that the particular issues specific to the cousin stage have been addressed.  For example, the owners may want to add extra provisions for further education and experience before family members can enter the business, or remove any limitations that may exclude non-family members from being hired as managers/executives. 

Other considerations are creating or revising the compensation policy and developing an exit strategy for the current leaders of the company.  The number of people and the various skill levels will invariably increase from the second to the third generations.  It is necessary to address compensation for family members, especially if the current situation allows for each sibling to be paid equally.  Usually the current leaders are a combination of one or more siblings.  As this is most likely not a viable option for the cousin stage, now is the time to address who will be the next leaders of the company.  What is the criterion for the next CEO?  Will only family members be eligible?  Who makes the decision?

Preparing the Next Generation

It is important for the third generation to understand what it means to be a shareholder and what responsibilities that entails.  The decision to enter the family business and to become a shareholder should be left to the individual family member.  The cousin consortium will only survive if each cousin has made a conscious and educated decision to be there.  Family councils provide a good opportunity for the next generation to learn about the business, to see how the sibling generation is working together and to determine for themselves what path they wish to take.

At the sibling stage the closeness of the relationships presents certain benefits and difficulties.  Because the siblings have grown up together with the same parental influences, they tend to have the same values and beliefs.  They have a certain bond that creates a certain amount of trust toward one another.  However, due to that closeness, siblings can bring pre-conceived notions about each other that may not necessarily be accurate any more.  Cousins on the other hand have grown up in separate households with differing values and belief systems which can be a source of conflict.  But that distance also allows for cousins to begin working together without any prior judgement about one another.

Challenges for the Next Generation

The first challenge each member of the cousin stage must conquer is the actual decision to enter the family business, and then to decide whether or not to remain a shareholder. 

Even before the sibling to cousin transition has taken place, the cousins should consider the following:

• Who is going to take on the leadership roles?  Will these roles be exclusively available to family members?  What are the hiring criteria for each?
• Developing a fair decision process.  Who gets to make certain decisions?  Are votes on a per capita or per share basis?
• Addressing the changes in governance structure.  Defining “family”.  Clarifying roles and responsibilities of owners/shareholders/family members.
• Establishing an exit strategy for shareholders who no longer wish to be a shareholder.
  
  

Conclusion

The transition to the third generation is bound to be a lengthy and complicated process.  The number of stakeholders increases significantly and therefore so does the number of issues that can arise.  It is never too soon to start the planning and implementation process if there is a desire to transition to the third generation.