Managing transitions from the founder to Gen 2

By Marion McCollom Hampton , Nick Di Loreto

Smooth transitions across generations take years to accomplish. Even though the prospect of discussing the future seems awkward, the alternative is to work through the handoff in a crisis atmosphere. To avoid a crisis:

1. The controlling owner must ask: Do I really want this to be a family business? It’s OK if the answer is no — not every great business needs to be handed down to the next generation. But if the answer is yes, the business leader must prepare a plan to give the next generation the authority to make meaningful decisions by themselves (without Dad or Mom as the mediator) and must commit to a timeline to hand over control. Identify who will take over which roles and clarify the authority behind those roles. Communicate clearly about when you will step down, first from the small roles and later from major leadership tasks.

2. The current leaders must build the governance needed for the future. Because there will no longer be one decision maker going forward, second- and third-generation family businesses need a board of directors (to represent the interests of the shareholders and oversee management) and an owner forum (a venue where owners can align on their purpose for owning the company and the high-level guardrails for how the business should perform). With these governance structures in place, future generations will be better equipped to operate in separate management, board and owner roles.

3. The second generation shouldn’t wait to prepare the third generation for future ownership. This generation is likely to be more diverse and less connected than their parents. They will need education about the business and about the role of business owners. They will need an opportunity to decide if they want to be part of the business or if they would prefer to opt out of ownership. Start conversations with the third generation early; get their questions and their perspective on the table. Find ways to involve them in smaller decisions about the business and hold them accountable, as a way of building their decision-making muscles and fostering their ability to make decisions together.

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