Family businesses are a heterogeneous collection of companies of different sizes, with different driving forces and different backgrounds. But they all have one thing in common. Those that have not been sold will be inherited by the next generation. Research has shown that generational shifts are a crucial factor in the family companies’ actions and even their survival. But a shift can also mean a lot of challenges.
An answer to the question of why generational change can be seen as difficult also explains why textbooks in business administration do not provide the answers to the challenges family businesses face. Because generational change is often about psychology rather than numbers.
Expectations – whether they are too high or too low – is an area where lack of communication between generations leads to consequences that no one wanted, says Mattias Nordqvist, professor at the Stockholm School of Economics.
“Sometimes you see that the older generation has an excessively positive or negative view of their children’s capacity. And I have seen examples where they do not even know if anyone in the younger generation wants to take over the company. It is assumed they do not if they have not said anything. Then it turns out the children were certainly interested, but never received the question explicitly.”
Then one day it’s too late. So it is important to prepare for a generation shift in good time – without committing to how you want it to look in 25 or 50 years. The world around us and technology are changing too fast for that to be wise, and children go through their different phases. But it may be worthwhile to “test” their aptitude for taking the family business further, Mattias Nordqvist suggests.
A younger generation can have a lot to contribute to the family business, both in terms of views on sustainability and the value of diversity.
“A new generation may have a better understanding of the present and future in the form of digitalisation and other major societal changes, such as globalisation,” says Mattias Nordqvist.
Entrepreneurial families are therefore important for the entrepreneurial ecosystem in Sweden, he says.
“A lot of money for start-ups in tech right now comes from private-owner families. It is important to make this clear.”
There are now many successful entrepreneurs in the Nordic region who built their companies in the 1980s and 1990s and want to continue as a family business before their first generation shift. Many choose to bring in owners outside the family, but research shows that there are many benefits to remaining a family business. They are more profitable, more gender equal and better in terms of sustainability.
Being family-owned means caring a lot about the brand, especially if the company bears the family name.
“What is exciting about entrepreneurial companies is the connection between the founder’s identity and the company. Sometimes the name is the trademark. To sell it means for some to lose part of their identity,” says Mattias Nordqvist.
The idea of sustainability and being a good citizen locally is a central part of a successful family business, he says.
“Many family businesses have worked for generations with sustainability from various aspects even before it became a buzzword and necessary for the climate. Being sustainable means keeping up with the times, and that’s exactly what successful family businesses do.”
How do you ensure a successful generation shift?
Often a shift goes well, but if any sibling rivalry, jealousy and in-laws’ suspicions are dead set against control of the company and money, it can lead to unhappy endings. Ole Hamre, advisor to family businesses at SEB, has good advice on how conflicts can be avoided.
“What you absolutely must have is a clear plan and strategy. Not having these leaves you ripe for conflict and suspicion.”
However, there is no one-size-fits-all solution, he says.
“Each family is unique and each fortune has its unique history. Communication and transparency are most important, to convey what ambition you as a founder or owner have and what kind of legacy you want to leave behind. Define what is important for the individual family members, founders as well as descendants,” he suggests.
It is also important to formulate a vision of the company’s purpose and role that the family can rally behind. And to share – and preferably pass on – the passion and values that once laid the foundation for most successful companies.
“It is often passion that created the drive that originally built up the business and made the family business successful. It is not automatically there to the same degree in future generations. The children may want to become doctors or teachers and follow their own dreams outside the family activities,” he says.
“In cases where no one in the next generation has the desire or aptitude to run the company further in an operational role, many families in different situations choose to sell the business and manage the family fortune as a financial asset,” says Ole Hamre.
In those cases, you benefit from a Family Office with professional advice. It strengthens the family. There is a certain complexity in passing wealth from one generation to the next. The goal is to create stability and realise that you have the money “on loan” and want to secure it for the next generation. Eternity as a perspective, that is sustainability.
“The most important thing for family businesses is to realise that they need to be regulated using corporate governance, so there are policies and rules for how to handle certain decisions. This way you can avoid conflicts. So says Pontus Tonning, head of family business at PwC, which conducted a survey of 2,800 family businesses in 87 countries.
“Family businesses have a certain strength in that they build on relationships, and you can make a quick decision. At the same time, family dynamics are a factor to consider,” he says.
The survey shows that the vast majority of family businesses handle conflicts within the family. Only 13 percent have conflict management mechanisms in place and about the same number are willing to seek outside help.
Only 58 percent answered that all family members agree on the direction of the company, while 7 percent testify to regular conflicts.
Seeking support outside the family is not a bad idea. And the professionalisation of, and increasingly, research on family businesses means a completely different support structure today, Ole Hamre points out.
“At SEB, we have actively supported family companies and owner families for over 165 years, there are networks, for example Family Business Network in Sweden, that can also assist with best practices and knowledge sharing. In the Nordic countries, there are many families who have succeeded well with generational changes, and for each new generation, the family’s experience increases.”