Financial Security
Designed for Life

Family Business Generational Continuity

Preparation Guide

We’ve all seen the statistics: fewer than one in three family businesses make it to the second generation, and only about one in seven to the third¹. The reasons for this sharp decline are varied; however, from our experience, there are clear practices that can significantly improve the chances of long-term success in a multi-generational family business.

1. Communication About the Family Business

One of the most effective ways to build trust and alignment within the family is through regular family meetings focused specifically on the business. These don’t need to be overly formal, but they should have a clear agenda and purpose.

Deciding when to involve the next generation depends on your family’s unique dynamics. Many families find it helpful to bring in a non-family moderator to guide the conversation and ensure everyone has a voice; often the moderator is a trusted advisor or a professional manager within the business.

2. Engaging the Next Generation

During high school or college, some children may begin expressing interest in joining the family business. It’s helpful to set some expectations early on. The sooner the next generation understands the values and guidelines around joining the family business, the more time they will have to reflect and prepare for this role. We’ve found there a few best practices that have been helpful to many:

3. Participation is an Option, Not an Obligation

The most important message to communicate is that joining the business is a choice – not a requirement. As parents, we want our children to find happiness and fulfillment, whether that’s in the family business or elsewhere. Encourage them to follow their own path, knowing they have your full support either way.

4. Work Outside of the Family Business First

Before joining the family company, we strongly encourage that each child works elsewhere for a period of 3 to 5 years after completing their formal education. This experience not only allows the up-and-comers time to mature, it also helps build confidence and a strong sense of identity. Additionally, real-world experience outside of the family business can assist in broadening their knowledge – knowledge that may eventually be brought back to the family business to improve the current status quo.

5. Enter Through a Real Company Role

When they do come into the business, they should be hired into an existing role. This role should be clearly defined and meaningful to the company’s success. Compensation should be competitive and in line with peers in a similar role – just as if they would have to do if they held a different last name. This allows for a fair evaluation of their contribution, motivation, and growth within the company.

6. History is Important

Every company possesses its own unique culture, but in family businesses, the culture holds even greater significance.  It often forms a key part of the foundation behind the success – a powerful force that continues to drive prosperity across generations. Due to its impact, it is critical to teach each generation the business mission, strategies, and philosophies that uphold the organization’s culture, and thereby, success. Equally important are the lessons learned from past mistakes and failures. These experiences have played a meaningful role in shaping the enterprise and should be shared as part of the legacy. While founders often leave a lasting imprint on the business, each new generation contributes its own chapter to the story that enriches the company’s history and strengthens its future with new, innovative ideas.

7. Generational Continuity is a Process

As mentioned above in item II, planning for business continuity within the family is a process that begins long before the next generation steps into an official role within the company. This process should involve good communication and engagement among family members, along with well-organized family meetings. This is not meant to be a one-time conversation; it should be a dynamic and ongoing journey that adapts to the circumstances. At its core, Family Business Generational Continuity is a process, not a singular event.

8. Include Members not Yet Working in the Business

Family members actively involved in the business have regular opportunities to discuss company performance, operational strategies, and more. Although the new generation is already an owner by virtue of birth, they are at a disadvantage when excluded from these discussions. It is in the best interest of all parties to maintain regular and transparent communication about the business with non-employee owners; doing so fosters a deeper understanding of the company’s dynamics, encourages thoughtful questions, and promotes active participation among all family members. A practical way to bridge this gap for the new generation is to distribute quarterly financial reports, compensation benchmarking studies, and other vital information which is typically available to significant stakeholders of the company.

¹ https://hbr.org/2012/01/avoid-the-traps-that-can-destroy-family-businesses