From pre to post colonialism, micro small and medium enterprises (MSMEs) have been important drivers of equity, economic growth and sustained development in Jamaica. These enterprises create and retain wealth, generate employment, and provide the support for private sector growth and expansion. MSME and several of our larger privately owned companies in Jamaica are family owned, operated by either a sole family member typically a patriarch or matriarch and second and even third generation children.
Having established a thriving enterprise many business owners are confronted with the challenge of business continuity. With a strong emotional affinity the prospect of selling the business is often not a first option and consideration generally falls to leaving the business to children. Ironically, though, families often fail at properly managing the business for scalability and longevity. A study of management practices in about 10,000 firms globally found that family-owned businesses have the worst management of any other type of business except for founder-owned companies where the founder CEO is still in place.
Looking deeper, research also shows that 88 percent of current family owned business think their family will still be running the business in five years. Only 30 percent of these businesses survive into the second generation and an alarming 12 percent make it to the third. If you were wondering about the fourth generation, that statistic is even bleaker at 3 percent.
With these daunting numbers it is clear that family business owners must have a clear succession plan for their business to survive intergenerationally.
The common dilemma – Many well-intentioned family businesses succession is built around the idea that leaders from the next generation can simply step into the large shoes of their predecessors and run the business (and the family) exactly as their father or mother would have done. But that fails to take into account that each new generation of leadership likely has different skills and interests, and that business contexts and needs inevitably shift over time. When a family business assumes that the next generation can simply take over without pausing to consider the CEO job description, governance, or the evolving business context, they may be setting themselves up to fail. This is known as the “Sequel Fallacy.”
In Hollywood, many sequels were created in the 1910s as a cost saving measure that allowed directors to reuse sets, costumes, and props. Family business sequels have similar traits to cinematic sequels. But in family business, it’s not sets and costumes that are reused; it’s ownership structures, role descriptions, and decision-making processes. On paper, defaulting to a family business sequel makes perfect sense. It is mistakenly thought that what worked for the senior generation should work for the children. Enacting sequels also often offers the path of least resistance as it doesn’t require the senior generation to change their own responsibilities in anticipation of succession or to change how their organizations make decisions. But that path can lead to significant challenges and often business failure.
How to avoid these succession challenges
Your family business might avoid the sequel fallacy by sheer luck, however such success stories are the exception. When company and family have changed, but the approach to owning and managing them has not studies have shown it almost always has an unhappy ending.
Just as a business must reinvent itself as markets shift, so must a business family reinvent (or at least thoughtfully revisit and refresh) its ownership and leadership model. Families should take six steps in advance of succession decisions:
- Examine and discuss the changing dynamics. As families grow, they inevitably become more complex. What once happened all under one roof in one generation can quickly span to multiple households. Growing up with different experiences often results in a group of individuals with a much wider set of interests, expectations, and behaviors. Coordinating these more diverse groups presents much different challenges. A business started by siblings now has to deal with the complex relationships of each sibling’s child and their interrelationship as cousins and co-owners.
- Build Governance. As the business grows become more open to establishing a governance structure. Decentralize the decision making process by establishing a board of directors that includes non-family members from industry who are able to assess decision making without the emotional affiliation of family owners. The need for corporate governance also establishes discipline and ensures that financial reporting timelines are in compliance and that proper human resource and recruiting standards are met. This also ensures that key personnel that are hired are engaged based on the requisite qualification regardless of whether they are a family member or not.
- Don’t commit to succession decisions too early. Respect tradition and understand why decisions were made in the past. However, be open to charting a better path forward if preconceptions that no longer apply are removed. Remain open to retaining a non-family member in key positions. The CEO role and accounting role are crucial positions and should be occupied by persons with the most suited qualifications. Remain open to alternate structures. Succession may mean splitting up the business and assets into separate companies and appointing ownership and control to different family members.
- Prepare children and family members. Succession planning is a process, not an event, and it equally affects the family, the business, the owners, and the communities where each of these groups operate. For the second generation to succeed there has to be proper planning that involves making sure they develop the necessary skills to help sustain and grow the business through emerging economic cycles. They must be able to reinvent the business and help it build the resilience needed to succeed. The skill set required is not limited to tertiary education but requires a development of emotional intelligence and organizational and leadership skills. Very often not just in family businesses but persons who may have a particular technical competence and no training in leadership end up in senior positions disrupting what was built by predecessors. Children too must also know and work in all aspect of the business from the store room to the delivery outlet. Parents also have to guard against children coming into the business with a sense of entitlement and limited skills and then being thrown in at a senior level of the company which can cause discord among key stakeholders who have also helped to grow and attain business success. Second generation children like second generation immigrant children can lack the hunger for success as their parents who many times started with very little. The reality is some children either have no interest in entrepreneurship or the type of business and may better serve in a non-executive capacity as a director with the presumption of course that they are qualified enough to serve. Children should not be given a place in the family business because it is their birth right but because they meet the standard that would be required of any employee to be a key contributor to the success of the business.
- Be open-minded. Respect tradition and understand why decisions were made in the past. However, the reality maybe that the succession plan may include limiting family involvement. The business may have grown or scaled to a level that is beyond the training and competence of family members. A non-family member CEO may have to be retained and family members with a financial interest in the business retain their involvement as one of the company’s board of directors. The business may also have achieved a level of financial success that warrants the sale of a portion of the business to third parties enabling the founders to extract some cash for retirement. A future listing on the Jamaican Junior Stock exchange could form part of the succession planning process. The business should therefore be structured and organized to ensure that all listing pre-requisites can be satisfied should that decision be made.
- Don’t commit to succession decisions too early. The pride that comes with bringing the next generation into the business, and as a next generation family member honoring your family’s tradition, can lead some individuals to make their decision about succession too early. Consider the incorporation of a family trust to preserve the company’s assets and facilitate a seamless succession process. A business owner may choose to have the beneficial interest of family members who are not active in the company be separated from that of the business and a predetermination can be made as to that persons benefit in the trust deed. The family trust can also minimize conflict and ensures that the business can have perpetual succession without the interference of recalcitrant family members.