How to prepare NextGen to run your family business

Speaker A: Well, having the skills to run the business is very different to having the emotional connection to the business. And those two things should never be mixed up. There's real value in having emotional connection, but emotional connection doesn't always give you the skill to think coherently about what the best thing is for the business in the most objective manner.

Speaker B: You are listening to the Exploring Family Business podcast brought to you by Mazzaars. I'm your host, Natalie Wright, head of family business at Mazza's. And having worked extensively with family businesses for a number of years, I'm keen to support this valuable sector of our society. At Mazars, we believe there is nothing more personal than a family business. Every family and every business are unique. So we look forward to sharing knowledge, insights and practical tips for those navigating the unique issues that arise from being in business with family. Now, on with this week's show. Hello everyone and welcome back to the Exploring Family Business podcast with Mazars. For those of you who tuned into season two, you'll know that we covered a number of aspects of succession planning, from creating the framework that matches the wants and needs of each stakeholder, uh, to understanding the tax implications that succession can bring. We also considered the more intimate side of succession, being able to have those open and honest conversations with the rest of the family, handling conflicts and getting comfortable with handing over the reins to someone else. This season we want to delve further into that transition from now gen to next gen. So we'll be exploring both the personal and practical aspects of handing over the ownership and the management of the family business, as well as the challenges and opportunities that change can bring. Now, many articles reference that third generation rule which suggests that most family businesses don't survive beyond three generations. I believe the stats put it at less than 15%. However, if you look closer at the detail that actually sits behind this, we often find that family owned businesses survive longer than most other enterprises and that the continuation to the third generation or beyond is more around choice and design rather than failure. But for those that do survive the transition and go on to thrive, I'm really interested in what made the difference. So what does it take to create those steps to successful engagement between nowgen and nextgen? Joining me today is one of our regular guests, Alan Frost. Alan is a partner in the business consulting team at Mazars, based in London where he advises a wide range of family owned businesses, typically ranging from second to fourth generation. Alan also has the benefit of speaking from personal experience, as he was the third and final generation of his own, um, family's business. It's a pleasure to have you back, Alan. Thank you for joining us today.

Speaker A: Thanks, Natalie. It's great to be back.

Speaker B: Now, Alan, I know you've got a lot to talk about on this subject, so just let's dive straight in. When you're working with families who've decided they want to start that transition, particularly families where there's a number of individuals involved, what's the process for deciding who moves into which role? Or is there actually one?

Speaker A: Well, it's very easy to just go and pick people with the relevant surname, uh, and then put them in the most senior positions because of course it is a family business. So by default people will think the family should be at the top of the organisational chart and hierarchy. But to properly prepare for this, for the good of the business and for the good of the family, actually it's about trying to detach yourself from personal connections and instead really considering what are the requirements of the business first and foremost. And then once you've decided what the skills and responsibilities are needed and perhaps where they are needed in terms of geographical location or different departments, then you can start allocating people to those roles that have the necessary skills. Some of those skills might not actually exist in the business today and that's the worst thing that organizations can do, and family businesses in particular is put somebody from the family into a position that they don't have the necessary skills for. It's not best for them and, and it's certainly not best for the culture of the rest of the organisation.

Speaker B: It's interesting what you said there. So the skills might not actually exist in the business right now because I think it's clear to see that the combination of ambition, um, determination and that willingness to really take calculated risks is integral to the long term succession of family businesses. It's what makes them really nimble and adaptable, especially in times of crisis. But where that entrepreneurial spirit was the driving force, let's say, of the found, uh, or an earlier generation, how do you continue to nurture those entrepreneurial characteristics in the next generation where they might not obviously be there?

Speaker A: Yeah, well, I mean, the honest answer is that the chances are they're not going to be entrepreneurial enough the next gen, because they've had that protection maybe from other people, senior generations, et cetera, at least not yet. They might not be entrepreneurial enough. And although it can seem strange, I've seen many family businesses really benefit from when a family member who's particularly going to be the next gen has perhaps gone and worked somewhere else for 12, 18, 24 months and then come back with a huge volume of skills and experiences that they could never have really imagined to have gained in the, in the family business because the chances are they haven't had the space or the opportunity to show that entrepreneurial skill because it's such a safe environment. That said, that doesn't mean that next gen don't have a future in the business because they aren't entrepreneurial enough today. You know, often there's a belief that you have to be part of the family business or the family, I should say, to run the business, but I don't think that's a necessity. And you see many successful family businesses out there whereby the most senior people in the room aren't necessarily the family members and they've got a different role that really plays to the, that really plays to their skills, you know, and maybe family members shouldn't always be involved in the operations of the business, but more think about what's the culture that previous generations or that they want to instill in the organisation, what's the beliefs and really trying to drive the vision of the organization from uh, an external focus rather than focusing on the internal operations of the business.

Speaker B: So ultimately, regardless of whether your name sits above the door or not, you can still find your place and be part of the business's success, even if it means not being the ultimate decision maker.

Speaker A: Definitely. And that might be quite difficult for some family members to take on and consider the idea that they're not involved in the shop floor or in the sales team or potentially even in the boardroom for that matter. But that's why I come back to this idea that identifying what are the roles, responsibilities and skills needed in different areas of the business, that should be the first protocol before then allocating those roles to the individuals that have got the necessary skills or the necessary potential to acquire those skills. Most people, when they look at most successful businesses, they look at succession, reorganization maybe of their own business and they effectively shuffle individuals around into different roles or into different departments. And actually it's about removing that personal relationship that you've got with that individual and thinking about those skills, attributes and qualities that are needed by the people who fill those roles rather than the name and the family blood relationship. I suppose how do you create a team or a department that's going to work towards the vision and mission and values of the organization rather than how do we create a department that can work underneath a family member?

Speaker B: Let's move then on to leadership. Because if the nextgen is stepping into that leadership role, it potentially means using a different skill set, uh, as we've talked about. And if they haven't had the opportunity to explore or even demonstrate it before, that brings other challenges. Stepping into the shoes of the current generation, which I think is often how it's viewed. And therein perhaps lies some of the problem. But how do you know if the next gen has the leadership skills that the business requires? Accepting that the business needs may be different from your needs as the now gen and the current business structure? How do you go about that if you don't have the skills and, um, what can you do about it?

Speaker A: Well, having the skills to run the business is very different to having the emotional connection to the business. And those two things should never be mixed up. There's real value in having emotional connection, but emotional connection doesn't always give you the skill to think coherently about what the best thing is for the business in the most objective manner. And I can speak from experience in that respect of it's not what your parents or your grandparents maybe would have wanted, it's the decisions that you make today are about what the business needs and what's best for the organization and stakeholders, which include much, much more than the family, you know, your staff, your customers, suppliers and others. One way to objectively go about this process is to actually undertake a capability assessment of the whole organization. Now, this isn't something to show up individuals or to show up family members. It's actually to understand where are people's strengths and how can we accentuate those strengths accordingly. It's certainly not about identifying weaknesses and how do you get them up to a threshold level. Although actually at times it does highlight weaknesses that maybe you didn't realize you had, others didn't realise that you had, but it really allows you to understand, do we have the right skills in the business for what we need today and uh, more importantly, what we need tomorrow? And if not, where are we going to find those skills from? Is it through training our current staff or do we need to go out and recruit accordingly? And by following this method of a capability assessment and then looking at your organizational design approach, there can be no argument either within the family, which is important, or probably more importantly within the wider business, that the right people are placed into the right roles because there's been a thorough process undertaken. Now, it still could be the case that the family members are in fact the right people to run the business or to take the most senior senior roles. But whether it is or whether it isn't, you can prove to the whole organization, which is so important for the culture, that a structured approach has been undertaken. And the conclusions we've arrived at, uh, will mean that people are placed into roles that are going to accentuate their strengths and ultimately lead to happier employees, a more engaged workforce and undoubtedly then you're going to move closer towards your vision and your mission as a business.

Speaker B: I'm sure you'll know this from personal experience that you can't get away from the personal relationships that exist in that family ecosystem, especially when it comes to making decisions which carry financial implications for a really wide group of stakeholders potentially. So how do you prepare the next gen then for handling the responsibility that being an owner and um, a decision maker can bring in terms of how

Speaker A: you can prepare potentially family members for leadership and for being that next leader? It's probably about giving them the space to make the mistakes that you probably made when you were their age or had their level of experience. And that's a really difficult thing I would imagine for any parents or now gen to um, to, to undertake and to, to watch as your, your children or future generations make decisions that you don't think necessarily are the same decisions that, that you would make. But actually there's an awful lot to be gained from making mistakes of a size, don't get me wrong, and just, you know, if you're able to do that, but also provide that safety net to the younger generation or the next gen to go and say take the business where you think it can go with my support in the background. But you are front and center now. This sounds really easy to say these things on a podcast, but it's so much harder in reality to go and deliver on um, that. But I honestly feel it's the, it's almost the only way in which you can prepare your next generation to take the business on in their own way. And that's what you should really want I think, for a family business, is that future generation can take it in the way that they think is best. They're going to have different ideas to the now generation. Some of them will be positive, some might be negative. But with you providing that safety net behind, the ethos and the core of the business is safe and is resilient in that sort of manner. I think in terms of other ideas, if you do give that space, it's then about perhaps not being the first car in the car park and then the last one to leave, not potentially Being the loudest in the boardroom or having the final sign off on all key decisions because none of these things are going to be available or will be happening when you do pass the business on um, to the next generation. And this is going to help that next gen really, you know, have a much clearer and concise structured plan I would hope for what is the next phase of this business? How do we create that strategic plan on where, on where the business is going, what it stands for, what's important, the different risks that it may well encounter in the future and how you're going to overcome them and also the opportunities that you're going to look to seize the future. Jen is going to, you know, undertake the business in a, or be running the business in a very different economic environment. Perhaps what previous generations will have operated the business in and they need to make their own decisions, calculate the risks and um, seize their opportunities. That's going to give that next generation of the family business the greatest chance of success.

Speaker B: And what I'm taking from what you've said there is really get comfortable being uncomfortable whether that's for now gen or next gen. And you've talked through a number of things that can be done to engage and prepare. What are the risks if you don't engage the next gen and directly address some of those points that you've raised?

Speaker A: In terms of the risks, I think they could be catastrophic and that might seem extreme in terms of and there haven't let go until it's too late and the individual perhaps hasn't moved on as quickly as they should or in the right way, et cetera. But it will take an awful long time for a business to then go and steady this year and for that next generation to get the business operating in the way that they want. If you don't start planning for the next generation probably as soon as you take on the business, take the business now. And I don't think any existing family member or exiting uh, family business member would wish to stop the family business at the handover. I think they want to see, everyone would want to see the next generation flourish and to take the business on and succeed and um, grow etc. But equally that's a very very difficult thing to do is to hand over the business to the next gen if you're still so, so, so involved. None of us can predict what the future will hold. We don't know what this afternoon or tomorrow will bring. But by having that plan in place and by having clarity around rules, objectives, responsibilities, it can make that transition, whether it's planned or unplanned, much, much easier to undertake. People always say that the culture and the values of a family business are so different to other corporate businesses and to a large extent I would agree. I don't always think that's a positive statement, though. I think on the majority of times it probably is. But with a sudden crisis or without any continuity planning, some of those values and a large element of that culture could be eroded very, very quickly and take an incredibly long time to rebuild and recover in a period whereby that next gen is probably already under a lot of scrutiny from the exiting generation or the organization and staff that remain, whether it be Brexit, the pandemic, issues in Ukraine, uh, supply chain problems, whatever it may be. If the next generation are looking to lead the business and it's based upon the relationships and the goodwill of previous generations, it's going to be very, very difficult for them to withstand macroeconomic unexpected events. Preparing people for those events as best as possible with that comfort blanket and that safety net of the previous generation being in the background, I think is really the best way to do it. I'm sure if many people who are listening some of the issues we face today in 2022, you know, if you'd have faced that, you know, in your first week of taking on the family business, how would you have uh, coped? Providing that ability to operate in this way with the comfort of others behind, I think is the best way to prepare the organisation and the next uh, gen accordingly.

Speaker B: And so you've engaged the next gen then you've identified the strengths as you outlined with that capability matrix. So you've looked at areas for development, decided who should transition into which role. Uh, let's assume m all that's happened. What about the governance then? That's around dates. How do you create a strategy and um, the actual framework to formalize the things that we've discussed and essentially professionalize the family business so that it doesn't become something that you've just decided over dinner one evening?

Speaker A: And this is the 64,000 pound question. Really it is tough, it's not easy to do and um, for many family businesses they'll say, well, why do we need to put a strategy or governance in place to professionalise things? You know, we're a family business business, we've succeeded for many years, etc. Etc. But the future of the business is very different to the previous generations of the business. And that strategy and governance isn't to erode any of the family values or to remove the family from the business in any way. It's to make, or even to make the business more corporate like some of the organizations out there. It's to give it that structure and the platform to be able to succeed and grow, you know, in the next level of ownership or of leadership. And um, if I think about some other areas that we've talked about today in terms of people having the right skill set or just the right surname and the role in which family members can take and where they can add the most, uh, value to the business, a framework talks to all of that and it can really accentuate things that perhaps around the dinner table you didn't quite, you could, you didn't quite address or you didn't quite, uh, discuss in the right way. Now, it doesn't need to be 100 page documents that sat in the top drawer of somebody's desk. It can be just a really lean document that people can just come back to and say, what do we stand for, where are we headed and what do we want to achieve as this business? That clarity and that governance in terms of how are we going to make decisions, who's going to make, you know, who has the final say or what voting, uh, process do we need to put in place for decisions to be made? Just gives everybody that understanding that the business is in good shape and more importantly it's set up for success going forward. And um, for those listening that might want to start on this journey, I suppose, of creating a framework to formalize some of the things that we've talked about and professionalise the family business for the next generation. The best place to start, in my opinion, would be to undertake that, uh, skills capability matrix, understand what the skills of each individual in the business currently are and, and then consider what skills you think you might need both in the business today and in the future. That's going to help define everybody's role, probably more importantly family roles, but also everybody else, other team members roles as well. It's going to also show them a career pathway as well for everyone in the business and it's going to engage staff even further because they're going to be able to say, I understand what skills are needed now to operate in certain roles and I know that I can go perhaps all the way in this business even if I'm not a member of the family. Secondly, to define or refine the strategy of the business following that skills capability matrix. So understanding who are the operational people, who are the strategic thinkers and all of those skills that you know are uh, within the business around teamwork, who's a starter, a finisher, that uh, those types of things. And then, and then finally that would, that will allow you to understand that you've got the right people in the right place working towards the right goals. And then it's just a case of monitoring that performance. And I think this is something that family businesses in particular do really poorly. And maybe that's because the values or the objectives of the business may differ from uh, a listed corporate, for instance, that's owned by external shareholders and institutional investors. But the monitoring of that performance should be more than just looking at the cash flow or short term profitability in the year and really determining those measures of success. And uh, what they are is really, really key. They don't all need to be financial metrics either. You know, attrition levels of staff engagement scores, you know, if you do surveys internally, all those types of things can be really important and actually probably potentially even more important for a family business than some of the financial metrics.

Speaker B: Alan, um, thank you so much for your time and insights today. It's been a great way to kick off season three and if it's okay with you, I'll share your contact details in the show notes along with a couple of articles that you produced recently specifically addressing those points on leadership and um, succession planning in more detail. And if it's okay with you, I'm going to close with two quick fire questions. Can you tell me your favourite well known family run business and the reason why?

Speaker A: I would say it's Timson's and the reason why is because I follow James Timson on Twitter and it's really, really clear to me what, what the values of the business are and what they stand for and what's important. And I don't know what James Timpson's role is on a day to day of the business. He may be conducting everything, uh, behind the scenes, I don't know. But I do know that he's exuding the culture and the values of that business on social media. Granted in such a way that means whenever I need my shoes rehealed, keys cut, uh, dry cleaning, there is only one place I am going to go to and I think that's for me that epitomizes what family business is about. And like I say, I might be wrong, he might be doing everything behind the scenes but it may well be that his role in the business is to make sure that the culture and those values are being understood by everybody out there. And if that is the case, he's doing a fantastic job.

Speaker B: Great choice and yes, completely agree. A uh, great example of a family business who just share how they live and breathe, the values and final question then. Can you share with us either a podcast or book recommendation for rising family business leaders?

Speaker A: Well, this is the best podcast out there for rising family businesses. So I'll, I'll pick a book.

Speaker B: I'll take that on the podcast.

Speaker A: And um, there's a book that I really like called, um, what Got yout Here Won't get yout There by Marshall Goldsmith. And the reason I'm saying it wasn't written necessarily for, for family businesses, but I think it's, it's a really important reminder that just because previous generations ran the business in a certain way doesn't mean that you have to do it in the exact same way as the next generation. I suppose the reason I like that is that I've seen it firsthand, whereby actually if the previous generation in, uh, our business I was in ran it in the same way as the generation before, it probably wouldn't have lasted for as long as it as it did. But I think it's a great reminder that you are allowed and actually encouraged to take the business in the way it needs to go in the future. That's right. For all the different stakeholders, as opposed to just taking over the keys and operating exactly the same way.

Speaker B: Sounds like a great recommendation. We'll pop a note of that in the show notes as well. Thank you again, Alan. And um, that brings the first episode of season three of the Exploring Family Business podcast with Mazars to a close. If you enjoyed today's show, please subscribe to the series and leave a review on Apple Podcasts. It will help us to extend our reach to the family business community. Join me on the next episode when I'll be speaking with Josie Morris MBE, Managing Director of Woolcool, where we'll be telling the story of her journey of succession from her mother, Angela, how they've managed to transition without major incident and how their whole family has managed to maintain strong personal relationships it throughout the process. I look forward to sharing more with you then, but for now, thank you for listening.