Businesses use succession planning to ensure that the key roles within the company remain filled throughout the life cycle of the organization. The goal of succession planning is to recruit, retain and develop the skills and knowledge of high quality employees in order to prepare for advancement into higher roles within the organization. Strong succession plans require active, ongoing planning to ensure that there are quality employees available to fill each level as the successors progress up through the chain of commands. Succession planning can be a labyrinth with constant challenges along the path such as turnover, changes in the economy, advancement in technology, etc. As difficult as it has always been to create a fruitful and well-fitted succession plan for a family business, there is a new challenge facing family businesses – millennial successors.
Millennials, also known as Generation Y, were born somewhere between the early 1980s and the middle to late 1990s. Studies have found that when it comes to work, millennials will put their personal values and the need to be their authentic selves above such things as independence or prestige. Every generation has its own approach to life, family and work. To ignore the extensive differences between millennial successors and baby boomers currently in charge would be a detriment to everyone involved with trying to plan for future growth and the continuity of the organization.
Succession statistics show that only a few percent of all family businesses make it through more than one generational shift. To help increase the odds of keeping the family business in the family, special consideration when drafting the operating agreement should be made. A basic operating agreement will include the rights and responsibilities of members and officers, ownership percentages, details on how to distribute profits and losses and how to change owners. Additional items a family business may want to consider addressing in their operating agreement include the roles in which family and non-family members will be a part of decision-making processes of the company and an outline for how management and family members will be expected to communicate with each other. While some may object to putting parameters around things like how to deal with family conflicts in a written agreement, addressing these potential issues can help keep the business running smoothly should a conflict arise.
In addition to a family business oriented operating agreement, the family should discuss openly and plan for areas that tend to result in the most concern for those putting their eggs all in the family basket. Sound financial planning will require not only the current needs of owners (such as cash flow and tax minimization strategies) but also future needs (including how different techniques to transfer ownership can help with both estate planning and minimize business interruptions). Company policies around compensation, working capital requirements and promotions should be formal and written and meetings with trusted advisors should include all of those impacted.
Considerations specific to a family business when planning for succession become even more complex when the family business successors are from a different generation. As beliefs, values and goals evolve, generational differences can become a major factor as to why family businesses do not survive. Knowing that all individuals and family dynamics are different there are things that business owners can do to help bridge the gaps to help for a smoother transition to the next generation of owners.
Generation gaps are challenging. With a better understanding, core differences can be transformed into opportunities if both sides are willing to take advantage of the changes that are sure to come along with each new generation.