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Easing the G2 - G3 Business Succession Process

Posted on July 06, 2017 by Chris Reichert

The challenges of transitioning a family business between generations.

I’m sure we’ve all seen the statistics about transitioning family businesses between generations. Spoiler alert, the stats are pretty grim! According to the Family Business Institute, fewer than 30% of family businesses will successfully transition from G1-G2, and of the ones that did successfully transition to G2, less than 13% of those will successfully transition to G3. For those of you doing the math at home (0.3 x 0.13), this means that fewer than 4% of companies started in G1 will remain under family ownership into G3 (www.familybusinessinstitute.com/consulting/succession-planning/).

The statistics can be misleading; big successes can be reported as failures.

There are many reasons for this, and what is often overlooked in many publications is that these stats aren’t necessarily all bad. For instance, many businesses are started by G1 founder that has no intention of keeping it in the family for generations. In cases such as this, if the founder is approached at the right time by a strategic acquirer with a big cheque in hand, the business is sold and the family may experience a life-changing liquidity event. Assuming everyone on the family was on-board, this is an example of what might be a success story for a family that might be reported as a family business ‘failure’ in the popular press.

12 reasons why G2-G3 transitions can be exponentially more complicated than G1-G2 transitions.

We’ve worked with many enterprising families that are in the midst of a G2-G3 transition. These projects present unique challenges and tend to be exponentially more complicated than a G1-G2 transition for the following reasons:

  1. The various family branches have often been raised with different values, perspectives, and priorities in life
  2. Businesses at this stage tend to be more established, so a G2 sibling ownership group tends to have significantly more ‘chips on the table’ (higher valuation).
  3. More established businesses are also more complicated (more staff, number of locations, non-family members on senior management team, etc.).
  4. Each G2 sibling may believe that one of their own G3 adult children ought to be the next leader, and has raised their child under the belief that one day it will be their turn to lead.
  5. The business may have a loyal team of non-family managers with aspirations to lead so there is a risk of losing key managers if G3 is introduced.
  6. G2 sibling shareholders may find themselves in different financial positions. The disciplined savers may be ready to sell and retire, whereas siblings that have become accustomed to a more extravagant lifestyle may not yet be in the financial position to retire in a way that supports their ‘burn rate’.
  7. G2 parents may want to maintain control of a lucrative business with strong cash flow in order to continue to support and ‘equalize’ between their G3 kids. The ability to do so is often reduced after the business has been sold, particularly if the G2 parents themselves need to preserve the majority of the sale proceeds to secure their own retirement.
  8. Some G2 siblings may be prepared to gift shares to their G3 kids, while other G2 siblings may not. The reasons can vary.  G2 owners may need their ownership position to be bought-out up front to fund retirement and reduce the level of risk they are carrying. Other G2s may simply believe that shares in a transition must be purchased.
  9. G2s may deem the relationship risks to be too great. Buy-out/ownership negotiations are just plain awkward with your children/nieces/nephews and so G2s avoid the topic of succession with the next generation.
  10. When G2s retain an ownership stake while G3s are being introduced as shareholders, performance reviews and compensation discussions with the adult children/nieces/nephews that are actively managing the business can be challenging and create relationship tension.
  11. G2s and G3s may struggle with determining what voice non-active family shareholders will have if they are going to be present in the transition picture.
  12. G2 siblings often face issues around purpose, identity, and self-esteem. “Who am I if I can no longer introduce myself as Johnny Appleseed from Appleseed Inc?”

If approached properly, rich discussions around these 12 challenges can unite a family, while also positioning the business for multi-generational success.

Rather than engaging with an entire family at once, we often approach families navigating a G2-G3 transition in very distinct and controlled phases:

Phase-1: Interview each of the G2 siblings separately, then facilitate a G2-only family meeting to table topics in a way that helps them to achieve alignment. Once all of the G2s are ready to begin involving G3s, we would then consider advancing to the second phase below.

Phase-2: Interview each of the G3 cousins separately, then facilitate separate family meetings within each G2-G3 family branch. Dig to understand the real aspirations of each G3 family member and to understand concerns that family members within each branch may have.

Phase-3: After family meetings have been facilitated with each G2 and G3 family branch, we typically facilitate another family meeting involving only the G2 siblings.  This is where high-level details of each family meeting may be shared, such as which G3s are genuinely interested in building careers in the business, etc. Having this level of clarity is important so that important topics can be tabled within the G2 sibling ownership group, with a goal of beginning to clarify what everyone at the table wants the future to look like.

Each of the controlled phases above are designed to help families discuss the big “what and why” questions. Deep down each of us have goals, aspirations, and a ‘bucket list’, whether formalized in writing on not. Free from any judgment or hidden expectations, what does everyone in the family member really want, and why?

Every family is different

Every enterprising family is different, yet most navigating a G2-G3 transition will encounter many of the same issues. John L. Ward, a well-known researcher, lecturer and family business consultant, wrote “the most critical issues facing business-owning families are family-based issues more than they are business-based issues” (Perpetuating the Family Business, 2004, p 6). For families contemplating a G2-G3 transition, we recommend beginning the conversation as early as possible within your family, and then following a structured process that helps your family to maintain a forward-moving cadence that everyone is comfortable with.

By planning WITH your family vs. FOR your family, you create open dialogue for every family member to share their “what and why”; you get their real aspirations, goals, and concerns. An open process like this facilitates alignment in the multi-generational family, while also making the planning roadmap clear to all parties (family, non-family management, advisory team, etc.).

In short, adopting a process for family governance and planning WITH your family can help your business to be among the 4% started in G1 that successfully transition to the third generation, while also ensuring your family remains strong for generations to come.

As always, we would welcome your call if you have any questions.