Q: We own a growing family business. As we approach the transition to the next generation, what can we do now to help the next generation avoid conflicts?
A: With multiple family members working in the business, the family structure frequently becomes the business structure. When there is conflict within the family, that conflict is often felt by everyone in the business.
Thinking about and preparing for business transitions can greatly reduce conflict in the next generation. The greatest conflict in family business occurs during the transition from the first to the second generation. When the owners (father and mother) leave the business, there is some uncertainty about who should make decisions. Next-generation siblings are used to parents making business and owner decisions. Conflict escalates when parents leave the business because siblings disagree about who is in charge and what they should do.
Developing an organizational structure for the business and a governance structure for ownership helps to minimize conflict in the next generation. For the business, conflict is minimized when there is a clear organizational structure and the “right children” are put in the “right seats” within that structure.
The governance structure for owners is often called a family council. A group of family members sits on the family council and makes decisions about how to help members of the family learn about and make decisions as owners. With a family council, owners are able to determine the overall purpose for the business, business values, and expectations for business performance. Owners also determine whether the business needs a board of directors or advisers, and they choose those directors/advisers.
Forming a family council early can educate children about ownership and engage them in making governance decisions. Most experts agree that it takes about 10 years to prepare for a family business and ownership transition. In our Family Business Center, we have owners share what works and doesn’t in business and owner transitions. These kinds of educational events help families learn to minimize future conflict.
Ritch Sorenson is academic director of the Family Business Center and on faculty at the University of St. Thomas Opus College of Business.