The Generational Gap within Family Businesses

The generational gap within family businesses is one of the key issues in maintaining a family owned business in the course of time. Since worldview, work moral, goals and values tend to differentiate immensly between younger and older generations managing the generational gap within family businesses becomes increasingly important for those who want their family owned business to sustain and suceed.

A quote attributed to Socrates states: “The children now love luxury, they have bad manners, have contempt for authority, they show disrespect for elders and contradict their parents”.

Family businesses hold a pivotal position in the world’s business. Nearly 80% of businesses worldwide are family-owned. This domineering fact notwithstanding, the future of family business rests on its ability to stay united and meet new challenges in a concerted fashion and managining the generational gap within family businesses that exist between the current and NxG. A significant number of family businesses lose direction as the baton is passed from one generation to the next. One must keep in mind that preparing the next generation to run the business and managing the various hurdles faced by the family is both an art and a skill.

At the same time and far too often, the family business succession process is governed by the technical components, which are typically worked out between the current owners and their trusted advisers (e.g., accountant, lawyer) and would mainly focus on the provision of tax solutions. In these situations, although the impact of the family component could be considered in a minimalist approach, it is not actually actively integrated into the process thus ending up alienating the next generation. In other situations, where there is an attempt to integrate the family component into the succession process, it is often the process of managing the generational gap within family businesses itself or the lack of formality to the process that prevents the desired outcomes from being achieved.

Typically, as the family business moves from generation to generation, more family members become actively involved in the business and more family members end up having an interest in the business. Access to the broader family provides many potential benefits, but also brings with it many potential challenges. Some of the more common gaps that are noticed between generations when managing the generational gap within family businesses include (KPMG 2011: Family Business Succession):

Conflicting goals/values – Family members, especially between generations, can have different personal and business goals/values.The generational gap within family businesses expresses itself very clearly in these differentiating goals and values.

These goals/values need to be clearly expressed and understood by all, to avoid unnecessary stress and potential conflict among family members when managing the generational gap within family businesses.

Conflicting personalities – Aside from the generational gap within family businesses. Every person is different. As a result of the different personalities and family dynamics continuously at play sibling rivalries and intergenerational conflicts very often arise. Left unattended or unmanaged, they can destroy family and business harmony, and in some cases, even destroy the business.

Expectations – The more family members are involved, the more they bring with them differing expectations towards the family and the business. Expectations with respect to employment, management, ownership, compensation, work assignments, training, use of business assets, etc. will vary among family members. These expectations need to be addressed and managed in formalised structure for the family and the business to operate smoothly. Left unattended or unmanaged, they will negatively impact family and business harmony, and challenge the long-term survival of the business.

Work ethic – The work ethic tends to differ significantly as the family business moves through its generations. The newer generations tend to be less prepared to invest the kind of time their parents invested in the business. This can cause considerable stress and disaccord between the generations and can also unnecessarily delay the transition of both management and ownership. To acknoweledge and understand differences in work ethic is a vital part of managing the generational gap within family businesses.

Employment of family members – Who gets the opportunity to work in the family business? Who gets what kinds of jobs? Are spouses and in-laws allowed to work in the business? Will employment be based on what the families want (bloodline) or what the business needs (competencies)? How are these employment decisions made and by whom are they established? If not effectively addressed, all of these issues can turn into liabilities for both the family and the business.

Compensation – Compensation and inappropriate use of compensation to achieve family or personal needs instead of business goals continues to be one of the most challenging areas facing family businesses. The expectations to be fair are often in conflict with the desire to treat family members equally. Emotions run high when this topic is addressed.

Credibility – Having the family name on the door is not enough on its own to impart credibility. Many of the next generation think that it is actually a disadvantage to have once family name on the door as it would mean that they are expected to work even harder than others so as to prove themselves. Concurrently, the majority also consider that their biggest challenge is that of gaining the respect of their co-workers once they are in positions of authority.

Communication  Within the older generation there is also the tendency to overestimate their own effectiveness in how well they have managed to run the business whilst at the same time underestimating the skills and capacity of the next generation to do as well or even better then they achieved. We have to understand that the next generation have a different perspective of life and of their work life balance which is very different of how the older generation grew up to understand. These generational perspectives have to be bridged through the establishment of clear communication channels and governance structures, otherwise tensions will rise with the result of higher conflict levels. Clear communication is key to managing the generational gap within family businesses.

Conclusion

For any family business the stakes are high when it comes to dealing with the generational gap within family businesses that these families in business have to face especially during succession.The families that manage succession well are those that plan many years ahead – ideally, five to ten years in advance – accompanied by sensible conversations that address roles, responsibilities, and timings and the establishment of both family and business governance structures. Only through adressing and managing the generational gap within family businesses a family in business will be able to maintain it’s success. At the same time the issues accompanying this generational gap within family businesses need to be adressed to maintain a healthy family relationship in and outside of business. Doing nothing is not an option but at the same time the quote stated in the opening of this article clearly shows that the problems between generations being faced today are not just a recent occurrence but are simply related to human nature and family dynamics.

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