The challenges of Generation 3

By Barbara Spector

Many second-generation business families are unaware of the monumental changes that occur when a company moves from a sibling partnership to a cousin consortium, a term often used to refer to a third-generation business.

Here are a few of the issues families face in their third generation of business ownership:

• The family has branched out into separate households, which may be geographically scattered. The households may differ widely in political affiliations, religious beliefs and values systems. Uniting them requires conscious effort.

• Distribution of shares across the branches is likely to be unequal if there are differences in family size. Wealth disparities among the households are also likely.

• Not all family members will be interested in joining the business, and not all family members who want to join will be qualified for jobs with the company.

• Shareholders who don’t work in the business will have liquidity needs and expectations.

• Family members who don’t work in the business may be poorly informed about business activities and disengaged from their business partnership with their relatives.

Fortunately, there is a way to manage these challenges: by shifting from informal to formal business and family governance.

An independent board of directors or advisers can help the company manage transition issues, develop a viable growth strategy and remove family emotions from business decisions.

A family council can establish family policies, clarify the family owners’ goals and expectations for their business, and plan educational and social events to inform family members about their company and develop strong family bonds.

Families who educate themselves about the challenges that lie ahead are better equipped to avoid business or family problems that often stem from those issues.

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