Family Businesses and transition to the next generation
According to a recent study, only 1 in 3 family businesses continue into the second generation. 88% won't even make it to 3rd. Any family business that wants to remain family owned must have a serious, robust, and highly ethically acceptable succession plan.
Succession planning is complex. It requires a team of professionals with legal, financial, tax and organisational skills to manage the process. Consequently, experts may influence the opinion of the first generation about the second generation because they simply wish to maintain their position as advisors by faithfully following the first generation without being objective or out of self-interest. In particular, if the first generation does not want to lose control of the company for fear of its security in the future without its presence.
The "Study of Succession and transition of small and medium Commercial Enterprises" from the Ministry of Labour and Social Security and the National Confederation of Hellenic Commerce, confirms its difficulty. According to statistics, 30% of family businesses are predicted to pass successfully into the hands of the 2nd generation, and about 15% have successfully passed into the 3rd generation, while the longest-running ones end up being only 3%. These percentages show the failure of transition from generation to generation and there are several reasons. For example, the founder believes that the change of leadership is dangerous and postpones it for fear of causing an issue on the future well-being of the company. The next generation is tired of the previous one and is not willing to follow a succession process. Most people think that succession is a quick process, while it can take a few years. The founder wants to be fair to his children and gives everyone a share in equal proportions, whether they work or not.
Sometimes, the biggest mistake in the succession process is the transfer of responsibility (such as bank contracts signed by family members as guarantors for company loans) but power or part of power is not transferred. Founders often have no strategy for their life after the business, so they begin to feel their existence is meaningless. But volunteer roles such as mentoring other entrepreneurs, writing manuals and books, and promoting them while their business thrives in the hands of the 2nd and 3rd generation, or engaging with the 3rd generation from their position in family, are activities that will emphasise the general business. Founders should work FOR the business, not IN the business.
In his best-seller, Jim Collins argues that the most successful managers were not the self-proclaimed stars who grace Forbes and Fortune, or who flaunt their achievements, but instead are the thinkers, who quietly lead and inspire others. They are the Leaders and not the Bosses. Check out the example of Warren Buffet and the humble lifestyle of this multi-billionaire entrepreneur.
Founders who experience a state-of-mind like I mentioned above can have a big impact on the 2nd generation. Dr. Ramani Durvasula, a psychologist and professor of psychology at the University of California, San Francisco, lists some toxic habits that business founders who don't want to do succession maintain, especially around the company's finances. Because they assume they have financial control, they make the wrong financial decisions. They create instability, degradation, confusion and use money as a way to punish. Business pathology occurs when such entrepreneurs mismanage their finances, especially when surrounded by problematic advisors with vested interests. There are many examples of legal claims conflicts e.g., in the hotel ecosystem in Greece between families. The family members and the founders are not solely to blame, but to a significant extent a) the way the next generations grew up and b) the toxic environment that surrounds the founder.
The 3-cycle model developed by MIT Professor John Davis has been the standard framework for family business analysis for the last 40 years. It argues that families and businesses face a volatile, uncertain, complex, and ambiguous (VUCA) reality. This makes family success more difficult. Adaptations for transition and succession can be planned and motivated properly and with appropriate means. This experience should be collaborative and unifying as the family builds on the founder's foundation and passes on a successful 1st generation business. Of course, on the condition that it is successful and not problematic, because nobody would ever want to take a destressed business. There are many examples and especially in periods of capital increases of companies, increases which appears to be made out of healthy resources and for entrepreneurial reasons but it turns out to be the opposite.
Two important changes affect family businesses. First, globalisation is increasing. This gives businesses more choice for consumers, suppliers, and partners. It increases customer expectations and competition. The accelerated change in almost all work, family and social activities is the second main trend. Family members influence management and governance. Business decisions now consider family values and aspirations. The founder now invests in opportunities that will benefit future generations, so investments are made with a long-term perspective.
The 2nd generation should gradually take on different roles defining future responsibilities. It must be prepared with development plans. We must remember that the transition is best made when the 2nd generation fully understands and respects the achievements of the 1st generation. Of course, the previous generation must deal in depth with the strategies of organisation and development in cooperation with each subsequent generation that will succeed the previous one.
The management team or the Board of Directors of a family company may involve non-family members. As long as these people are from the particular industry where the company belongs and of course 100% ethical. Families become very protective of strategy, and when working with non-family members, these must be highly skilled executives. The members involved must be exclusively knowledgeable about the subject, for example in a hotel business, senior executives and tourism entrepreneurs, high-level hotel managers with a broad knowledge of economics in particular, economists who at least know what a business plan means and measure the return-on-investment with current assessment tools, not simple tax advisors. Therefore, a serious business needs business executives - members of the management team (or Board of Directors) who have worked widely in the field of entrepreneurship, not simple accountants - tax advisors, lawyers, or chief operations officers who have nothing to do with the industry, or even relatives simply because they are related.
Family businesses that do not manage to overcome difficulties such as the covid period worldwide and have not foreseen in their finances to have cash as security, may fail. Or worse that their founders receive exorbitant fees which they then offer as supposedly capital raises by mischievously landing the financial capacity of their business. Serious businesses save every cent by making robust sales and savings forecasts to maintain quality, business integrity and momentum over time. Serious businesses take advantage of family members, of blood ties when they are able and promote their dynamics by transferring and training rather than removing them from the management of the companies.
In conclusion, the transition from the 1st to the 2nd generation and so on does not happen to be trouble-free for most businesses. The founders of the companies are responsible for this. Their advisors, as I mentioned above, must be competent in the field in which the company operates and not take part in any process just to do nothing at all. It is also important that the company and in particular the 1st generation has taken care to be completely clear with its wishes, with its tax matters, with its regularity, its dedication to the law of any kind that concerns the company, and that it has no sins which one day will provoke create existential issues. Primarily the founder must look at the business strategy before the above with a spirit of ingenuity and entrepreneurship.
Succession is a delicate issue that concerns the Greek business community widely. We know especially in the hotel sector in which my consulting company operates, that the largest percentage of transition from 1st to 2nd generation has occurred in the last 10-15 years. Some companies are being properly transferred, others are experiencing significant issues, and others are being liquidated or sold to third parties. In my humble opinion from my experience, and internationally, either from the literature or from reality, there is a need business education to be brought to the next level regarding the issue of both family businesses and generational transitions. A specialised and targeted field of psychology, economics, legislation, taxation, etc. should create special procedures that will significantly help companies’ transitions.
It is in the interest of business, of the state that taxes and legislates, of society that is the source of executives and partners, of the market and of sustainability that the transitions from generation to generation are done correctly.
*Kostas Falangas is a specialised consultant for hotel companies (especially in the fields of finance, investment evaluations, sustainability management, hotel operation and marketing) for hotels and hotel companies with clients inside and outside Greece. www.kostasfalangas.com