Generation 3 marks a monumental shift

By Barbara Spector

At our Transitions Canada 2018 conference in September, attendees from second-generation businesses were eager to learn about the challenges they would confront when they transitioned to the third generation. Several were 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 business likely has grown to the point where experienced non-family professionals and sophisticated management systems are needed. That means family leaders must get comfortable with delegating important projects and trusting non-family executives.

• 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.

• Some shareholders may want to transition out of ownership, and the business must find a way to fund the buyout of their shares.

• 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.

The exponential increase in complexity is one reason why many families decide to sell their business at this generational stage, and others consolidate ownership in one branch.

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.

The Golub family, featured on the cover of this issue, is planning ahead for the transition of their Chicago-based real estate firm, Golub & Company, to the third generation. The second-generation leaders recognize that the growth of both the business and the family will require a different style of leadership in the future. They have created some family policies and governance structures.

As we discussed at Transitions Canada, 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.

Copyright 2019 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.

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January/February 2019

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