Inheriting family companies should be motivated by passion, not duty – When is it possible to start including employees in ownership and what to do when children don’t want to work in the family business?

How to find a balance between preserving the tradition and adopting new business trends? How to deal with potential conflicts within the family, while at the same time securing the company’s stability and growth? These are just some of the questions that owners of family businesses are asking themselves when the time for a generational transition comes. In the world of business, there are few things as challenging and emotional as transferring the management of a family company from one generation to another.

Although it is expected for children to take the helm and continue successfully running a family business, the reality is often more complex. Boris Vukic, a partner and co-founder of Adizes Southeast Europe (ASEE) and Senior Associate at Adizes Institute USA, where he was certified for running organizational changes in 1995, points out for eKapija that the main challenges are split into two main aspects – the transition of running the company and the transition of ownership.

From here, numerous other challenges appear, explains Vukic, who has initiated, launched and run family forums and the preparation of generational transition plans in a large number of companies, in all countries of the region.

– One is to clarify the position of the founders and the successors during and after the transition, whether the successors can and want to work together, who will head the company, whether somebody from within the family or somebody from outside of it (who is not from the family), how the process develops, when it does, whether those future managers have enough knowledge, clarifying the ownership structure in the future, whether there is enough knowledge to manage the capital… In Serbia and the region, these challenges are made additionally complex by the fact that the topic of generational transition is returning here practically after a half-a-century-long break, with the return of entrepreneurship to our areas at the end of last century – our interviewee says.

Most common mistakes in inheriting process

One of the most common mistakes that Vukic, who is the author of the book “Founders, Successors, Managers”, which is a result of a ten-year work with companies which have gone through a change of leadership and management from the first to the second generation, notices when it comes to transition, is avoidance and lack of communication.

– This comes from the expectation that things can be resolved fast and, I’m not going to say a lack of readiness, but of knowledge and awareness that generational transition requires serious and dedicated work. This work primarily entails open and patient communication between the generations about many topics, some of which I mentioned in the previous answer. That’s where we also get to the mistake of “copying” solutions. Having had experience with hundreds of founders, successors, companies and families, I can responsibly claim – there are no two identical situations and that is why solutions cannot be copied – he says.

Among the numerous mistakes, and especially those dangerous ones, he also emphasizes the idea that family businesses are safe houses for family members.

– Family businesses mustn’t be safe houses. Here, it doesn’t have to apply that “it’s best to be at home”, because that idea can lead to incompetent managers, dissatisfied children, the leaving of associates and managers from outside the family and, eventually, bad business results – he explains.

In order to avoid and overcome these mistakes, he adds, it is first necessary for the interested parties to acquire plenty of new knowledge and learn about numerous potential practical solutions. However, it is also important to start implementing that knowledge through dedicated, continuous work on organizational and family management.

Four key steps of preparation for successful transition

Vukic recommends four key steps of preparation for a successful transition: the preparation of the successor, the preparation of the company, the preparation of the founder and the preparation of the family.

– The preparation of the successor in line with their ambitions and capabilities for the future role of an employee or a manager and/or a (co-)owner. The preparation of the company which will enable the setting of the foundations for a professional functioning through organizational arrangements (that is, the setting up of the system of planning, the structure, the system of measurement, reporting and awarding) and managerial literacy. The preparation of the founder, which is supposed to answer at least two key questions: what the position of the founder is after withdrawing from the operating management and what their financial security is. Finally, just as important is the preparation of the family – the question of the ownership structure, a joint or individual future investing – clarifies Vukic.

He points out that serious and dedicated work on all four preparations is necessary in order to increase the likelihood of a successful transition from the first to the second generation and the setting up of the foundations for the new generations.



The successor should acquire experience in another company

The preparation of the successor, according to our interviewee, can be viewed from two angles.

– One is the preparation during the formal education and it primarily entails precisely that – acquiring the best education possible and families should really not be stingy when it comes to that. During this period, I would also like to emphasize working during school breaks at the founder’s company. In the next phase, I warmly recommend for the first employment to take place in some other company, which must be at a higher level of organizational development than the family company. Then, upon the desired return, a gradual advancement from operating jobs and tasks (in line with the education, of course), followed by “climbing” up the managerial positions. This is the preferred scenario in case the successors want to and have the capacity to work in the family company. What’s important in successors is to be passionate about the activity that the family company carries out, and not about money or a sense of obligation toward the parents – underlines Vukic.

He also notes that the founders have to find answers to questions such as: what will their life look like after they withdraw from the operating management?

– It is very important for them to find, on time, the answer to the question: What will they do, what will their life look like some day when the prepared successor starts running the prepared company? If they remain working at the company, how not to jeopardize the new structure and the new “rules of the game” which arise after the generational transition. If they opt for a new “project”, they should start it on time and, again, refrain as much as possible from occasional visits to the company and interfering with its operations – he says.

He adds that, not rarely, one of the more important things when it comes to the preparation of the founder is ensuring financial security, personal sources of income after retirement. Contrary to public prejudices, the opposite happens – a substantial number of founders whose companies are worth millions do not have secure sources of income for a peaceful old age.

Participation of employees in company’s ownership

Vukic adds that, although introducing employees into ownership is not unusual in the world, when it comes to a generational transition, it is not as frequent as we perceive it here.

– It is usual in the world when it comes to startups, but is different when it comes to a generational transition. Yes, one of the many solutions can be, and is, to introduce both managers and/or employees from outside the company into ownership. From there, the story can develop – whether it is a gift or an option to buy out a part of the company (or all of it), whether at the real or preferred price, in what way… For sure, in the world, all these processes are accompanied with serious legal and financial advisory support. And that’s what it has to be like here too if a family is considering it. It is important to understand the motives of both sides – he says.

What is common practice in the world, he points, is participation in profit distribution and this is happening increasingly here too. But, as he clarifies, that also requires certain pre-conditions, which primarily concern reaching a certain level of professionalization in the company and the level of transparency of the financial data.

What happens when children don’t want a family business?

There are many of those who don’t want to work in family companies, and there are also those who don’t want to take managerial roles, but want to do a job from within their profession, our interviewee says. However, he adds that, among several hundred successors, he has seen one or two cases where they didn’t want to inherit ownership over the family company.

– Certainly, insisting on taking over the management “at any cost” is wrong, dangerous and, I will say it, unacceptable. Period. The idea of “passive ownership, is also there, which is not that present in practice yet, and which entails the ownership remaining among family members, while the company is run by managers from outside the family. This also requires the future successors to prepare and learn in order to take the ownership position – believes Vukic.

Selling the company is also a legitimate solution.

– Several years ago, I wrote an article about that with the title “Sale Is Not Surrender”. That could even be the best solution for the family and the company and the employees. But, and I will end with this, the successors and the company and the founder and the family still need to prepare for the sale – concludes eKapija’s interviewee.

Ivana Zikic

ASEE d.o.o. Novi Sad

Adizes Southeast Europe

ASEE

Boris Vukić

inheriting family companies

generational transition in family companies

Sale Is Not Surrender