Winging it often works for business founders. But not in succession

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You might have heard the story about the parents who hid their extensive wealth from their two sons. “We want our sons to have big hearts, not big pockets,” they said.

But when it came time to pass on their business, the sons were not interested. Nor were they interested in managing the wealth they would one day inherit. This left the parents disillusioned; they had thought that by hiding information about their assets, their children would be better people, not ones unprepared and disinterested in succeeding them.

It’s a story shared by Elizabeth Bagger, founder and CEO of Avanti Family Business Advisory, based in Chicago and Los Cabos, Mexico. It illustrates the gulf that can widen between the older and younger generations, despite the best efforts of the parents.

It’s a common mistake among wealthy families to conceal information about their business to prevent their children from becoming entitled, spoiled adults, says Bagger, who is a second-generation member of her own family business and serves on its board. But the approach can fail.

“It’s important to educate the next generation,” she says. “If you don’t talk about it, it won’t help you in the long run.”

Preventing gulfs from developing in the family requires a lot of communication, frequent check-ins and a discussion about expectations on both sides. For a smooth succession to occur, families need to take a formal, structured approach that involves everyone.

Here are suggestions from Bagger and Gerry Meyer, founder and CEO of Meyer Advisory Group in North Vancouver:

Start young: Waiting to have big conversations about the business until the younger members of the family are in their 30s or 40s is a mistake, says Bagger. She suggests starting when the next generation are kids, and introducing complex subjects as simply as possible. It might be something as basic as bringing a child to a philanthropic event the family is involved with, explaining that, “’These are some of the things we do with our money,’” she says. “Have those conversations at a young age.”

Put aside any assumptions: In situations where the first generation wants to pass on the business to a second generation, there is often an assumption the sons in the family will automatically take over, Meyer says. But he suggests shelving those ideas. To begin with, a son or sons may wish to pursue another career. And daughters are equally qualified business owners. “What’s happening now is fathers are passing the business to daughters,” he says.

There comes a time in every family when formality becomes your friend.

Gerry Meyer, Meyer Advisory Group

Come up with a family creed: It’s a good idea to develop a mission statement for the family that outlines the business’s goals, aims and strengths. It could explain “what’s our purpose and what are we trying to create,” says Bagger. That way, all family members know what is expected of them and they can begin developing a pathway to achieving that goal. She suggests doing “values exercises,” which can determine whether the older and younger generations’ values are aligned or not – and how these differing value sets can work together toward a shared goal. Bagger says that everyone in the family needs to understand that managing their wealth is a stewardship role — and that they need to grow and protect assets for subsequent generations.

Meet frequently and seek everyone’s feedback: If there are multiple generations, it’s important to bring all stakeholders together regularly to get to know each other and to determine where they all fit into the family business, says Meyer. Some family members may want to sit on the board of directors and play an arm’s length role in the company. Others may wish to actively manage the business. And yet other groups may want to exit it completely. “You’ve got to sit down with the next generation and understand what their aspirations are,” says Meyer.

Engage an advisor’s help: Sometimes, when it’s unclear how succession will go, an external advisor can help determine the root cause of issues that have arisen and pave the way to a smooth succession. Meyer says that in one recent situation he encountered two sons who were refusing to take the reins of their father’s business. It was only after he pressed them over many months that the reasons were revealed: They didn’t want to run the business in the same manner their father had, with long hours and little time off. They did want to continue their father’s legacy, but not on a day-to-day basis. In the end, it was decided the family business would be run by external hires with the sons remaining as senior officers overseeing its direction.

More from Canadian Family Offices:

• ‘Please fix my kid’: Parents regret being too easy on their children
• Why wealthy people engage in risky behaviour
• ‘My parents did a stupid financial thing’: 13 mistakes to learn from

Choose formality over informality: Many families believe that sharing information about their business should be done informally, says Meyer – an approach that could mean certain family members are in the know, while others are not. “That informality can backfire,” he says. “There comes a time in every family when formality becomes your friend.” This includes putting together a policy that stipulates what skill sets are needed for various roles within the family business and what credentials will be sought for those roles. This paves the way for interested and motivated family members who wish to continue within the business to get the requisite skills and education needed to perform those roles. Meyer says that some of his clients mandate that family members work for competitors to see how other organizations operate, in order to bring key skills back to the family business.

Set up a “shadow board”: Setting up a shadow board of younger family members can be a very effective way of training, says Bagger. This involves having all paperwork and decisions from board meetings shared with a group of younger employees, to show them how decisions are made and how the business is being run. Another option is to have a potential successor shadow the owner of the business. “It’s a chance for them to understand the business,” says Bagger. “It’s a great educational tool.”

Encourage peer groups: Wealthy members of the family business need to be around people who also belong to affluent family businesses, says Bagger. “It’s very useful for the next generation to have peer groups of others in similar situations, because other people don’t really get it,” she says. By connecting with other members, they can bounce ideas off them and have a sounding board when they need it.

All in all, says Bagger, it’s important that families never force anyone to join the family business. “Make it welcoming and don’t pressure,” she says. She suggests giving family members time, as their goals might change as they grow and mature.

Meyer agrees. The groups that succeed “have been given the skills, support and the necessary conversations to understand their role within the family.”

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