How to transition a family business to the next generation

More than 55% of businesses that have borrowed through Funding Circle are family run businesses. They are an integral part of the UK economy, contributing to our culture and local communities. On 23rd September 2019 we’ll be celebrating Family Business Day to recognise the amazing work of these fabulous families.

To discuss the transition periods for family businesses and the challenges created, we sat down with Professor Alfredo De Massis from the Free University of Bolzano and Lancaster University Management School. He holds the Chair in Entrepreneurship and Family Business and is the Director of the school’s Centre for Family Business. His specific focus is on family businesses, and his work has been widely published in leading academic and professional journals. 

“First, in your opinion, what are the five key things that a family business owner needs to consider when thinking about transitioning the business to the next generation?”

1. Many business owners presume that the transition will be instantaneous. However, research has shown that successful transitions actually take anywhere between 7 to 10 years. 
2. Business leaders shouldn’t be so concerned with having an exact replica of themselves, it is illogical and unnecessary. A different leader, with new intentions can actually be beneficial for the business. Of course, welcoming a different leader may require to adjust and/or change organisational set up of the family firm.
3. Communication both internally and externally are key to a smooth transition and allows everyone involved in the business to develop relationships with the successor. 
4. Another key consideration is the defining principles and guidelines for the new generation, you need to be able to prove that your choice of successor is the right one. Think about creating a job specification that the new leader must meet, like any standard job interview – this will help to legitimise the final choice for the new leader.
5. Managing the cultural gaps between the successor and incumbent is very important. There could be multiple generational gaps which could affect company culture. Try to foresee these gaps and prepare for them as much as possible.

“How hard is the transition of a family business to the next generation?”

Research has shown that succession can be problematic. It is important to not shy away from succession; it’s not a taboo! Succession will normally happen for natural reasons but this doesn’t mean you can’t talk about it or prepare for it.

“How helpful is access to finance in these situations?”

Often during a succession you need to professionalise your business, which can mean recruiting outside professionals or turning your internal people into professionals. In both cases, you are in need of finance. 

Also, the transition is often accompanied by reorganisation and innovation in the family firm. Innovating typically means investing in something new that might payoff in the very long term, and especially for some types of innovation – e.g., radical innovations – you may need financing to make these projects a success. 

“Is there any advice you’d give to someone who has just taken on the family business?”

Once the succession has happened, it is important to legitimise your role. Create environments and opportunities to show that you are capable and committed. Prove to everyone involved that you can lead this company and that you are motivated to take it to its full potential. 

Also, don’t be scared to innovate. Some successors think it means that they’re being disrespectful. Innovation is very important to keep a competitive advantage. In family run businesses you can do something called “innovation through tradition.” Rather than seeing the past and present as two separate things, see them as one. Leverage the past and use it as a strategic resource to create a strong business. It is possible to be innovative while still being anchored to the past and tradition.