Transition in the Family Business Generation to Generation - Term Paper Example

Running head: TRANSITION IN THE FAMILY BUSINESS "GENERATION TO GENERATION" Family Business Transitions Family Business Generation To Generation Transition A business transition is the transfer of the management or the control of business ownership which focuses on who will own the business, what changes are to occur and the accountability for the results and how these results are relied upon. 1 A family business is usually identified with its ownership, control structure and management and lastly it's inter- generational transfer with important aspects such as intentions, vision and culture in practicing the family business. Only 30% of family-owned businesses successfully transition to the second generation of family ownership. Less than 5% successfully transition to the third generation of family ownership. Succession planning in family business is an issue of growing importance. This activity generates a significant proportion of the economy in many countries, whereby the enterprises are approaching the point where business owners' are making serious decisions regarding their long term future, this decision impacts, individual businesses, business sector and the whole society. This move results into a widespread interest in various business succession planning. Though this business operates within personal relationships which affect and influence the business concern. When these relationships are central to the operations of the business, then there must be a focus upon the relationship in a successful negotiation of a business transition process. It is not normally easy to have a successful family business transition, since there are many problems associated in this generation to generation transition. This family business includes relationship involving individuals and those involving the business itself. The individual relationship has an impact on transition whereby, the quality of the relationship is vital, whether they are involved directly or indirectly. Most problems occur in this individual relationships where we find the small generation has no desire to take over the family business, this may not be the only case of failure, there are more influences leading to the failure of the generation to generation transition process, this includes: Poor communication this can lead to negative emotions evolving during the transition process , there is also a psychological factor under which the perception of the key family stake holders especially those of the highest generation and the lower generation has a crucial influence considering their roles, intentions and attitudes of others within the transition process. Therefore when the low generation is not psychologically prepared to take control over the transition then this makes this process unsuccessful and also when the transition process is not successful then the successor is not psychologically ready to prosper. This makes the incumbents and the successor's mental status very important in judging when the transition should be taken and what requirements are needed for the process to be successful. 2 Also family values influence the business heavily, whereby there happens to be a higher risk for poor long term business performance, this normally occurs when the subject of the business relies on the family needs. Under this case of psychology we find tat during the transition process, the psychological process results into conflicts between individuals, that is between the incumbent and the successor, there is therefore a contradiction arising at the succession, whereby, the successor desires to imitate the incumbent in order to supersede him while seeking independence, this causes an internal conflict for the successor on how to behave, in such a situation , both the incumbent and the successor desire to be a leader thus reinforcing a leader role causing a spiral of conflicts, confusion and confrontation. 3 Many family business issues derive from the different experiences of each family member presenting the business, not putting in mind other factors involved, generational these differences mean that the incumbents and the successors will automatically bring differing attitudes, experiences and expectations to the succession process. This case is normally brought up by the awareness of where each individual is their positions of life and it affects the process is important in planning for succession. 4 Preparedness is also said to be one of the problems, which expresses how an individual is prepared for a transition, meaning the willingness and preparedness of the successor to take control and the willingness of the incumbent release the control. This process where an incumbent undergoes withdrawal from the business forces him to let go the leaders role and break the mental attachment he had accumulated through out the years in the business, this causes more problems despite the needs of the firm and other members of the family, this problem is normally caused when a member has not taken time to prepare to do other things thus making the transition process more difficult.5 Lack of experience is also regarded as a cause of failure in the transition process in a family business though there are opportunities for change in transitions, there is no guarantee that there will be an improvement, they just bring up anxiety in the members of the family who may decide to make premature decisions. These members would like to move directly to commitment, with spending not enough time in exploring alternatives and evaluating experience whereby if a choice is made prematurely, it may not stand the pressure of implementation, making the organization to pay dearly financially. 6 The type of control and planning methods in a family business is also seen as a contributing factor in the failure of these business transitions whereby without an effort of creating the management styles of the successor and incumbent operational then there is a risk for failure. Financial issues are also viewed as an indication for the option of terminating the business if it is pronounced non- profitable to survive in future where by it includes the history of the firm in a case where the business has not achieved the average industry profit level in the past therefore this will probably lead the family business not to survive in future. Though it is not easy to carry out a successful family business transition from generation to generation, the family members should practice the following courses in order to make their transition successful. The business should have a good communication set up with an open honesty dialogue involving the respect for other members of the family this maintains the focus on important considerations for achieving a smooth transition. There should also be a high quality communication system in which the creation of a genuine generational dialogue is effective, as it provides the basis for negotiating the transitional planning process.7 The prime task under this is to encourage a healthy practice of communication and dialogue within the family business thus creating a conducive environment to the equitable participation of the individuals involved in the family business. 8 As in the case of psychology discussed above, the members should ensure that effective counselling is done to help in controlling and releasing the successor from confusion of how to reach independence, therefore the family members should determine the best way to manage the business transition. In the willingness of the members of the family a series of carefully planned stages should be practiced whereby, the incumbent helped out of the business and is encouraged to take up a other activities and tasks, under this the incumbent recognizes that they are giving up important things and that they can assisted to reach the other side of the transition process. In experience the successor should be encouraged to gain appropriate skills and experience needed in the leadership role whereby, he can obtain these through working in the business from an early age and gain direct experience of the business operation from the bottom to up, he can also gain experience through education that is useful to the business , this can make him acquire technical experiences required, he cans also acquire the same knowledge through working in another similar business which enables him to broaden his abilities and skills.9 The management of the business should establish a clear guideline for duties and responsibilities required of the family business entering the firm under which proper training should be provided through which the family members are placed in a position that gives them the skills and experiences required in the business. Also the firm should involve external advisors and family council mechanisms to assist in the process of assuring that the next generation is capable of fulfilling the management needs. The family members should ensure that the areas which are competitive in their business are evaluated including those areas that need improvement. The business managers should plan for the future in manner, whereby they should begin by thinking about the existing business resource base after which he comes up with a comprehensive planning process needed to increase the likelihood of a successful business transition. 10 This planning process should begin with a development of a shared business stakeholder vision then it flows through the development of associated mission, objectives, goals, strategy systematically, this process helps the family business to achieve the vision that the stakeholders have. Finally stakeholders need to examine the resources needed to determine the changes needed in the current resource base for them to achieve the goals for the business.11 Still in the finance status the family members should also ensure that the remuneration is based the ability and contribution to the business, whereby individuals' rewarding on role and performance helps the business in maintaining morale and preventing conflicts between family and non- family organizational members. The members need to arrange for financial survival of the business whereby an orderly transition of financial control and ownership in a manner suitable to all in the next generation this can be achieved through maintaining adequate dividends, regular share value determinations and good financial reporting, these activities ensure a successful family business transition. For the management to come out with a successful generation to generation family business transition it should state the following criteria to be used in the process. 12 It should start an earlier planning to enable the firm reach the business's vision by the use of the right communication and development processes, prepare a succession plan that is included in the business plan, discuss whether the majority of the stakeholders share the desire the business transition, ensure the involvement of all stakeholders in the communication process regarding the succession plan, discuss on whether the legal, accounting, financial planning and family mediation would benefit the transition process, the firm should also consider the economic factors ranking with the succession plan these factors may include financial profitability, feasibility, size and risk issues, the older generation retirement plant should have a target date of retirement and retirement fund sources and interests to pursue should be discussed upon, finally make a written plan and timetable for implementing each phase of the succession process. 13 So in general the following themes emerge for any business that wishes to have a successful transition, the successor should attribute the needs to be identified and the process for selecting and nurturing a suitable successor should also be determined. The handing over manner and time should be matched with the knowledge and roles of the members in the business should be acknowledged. 14There should also be an establishment of the future vision whereby the ownership and the inheritance issues appearing in the family business are addressed .the firm should also ensure that good relations and communication is applied in the business this will definitely render the business a successful transition. References Allred, R.C. and Allred, R.S. (1997): The Family Business: Power Tools for Survival, Success, and Succession: - Berkley Trade Paperback Edition: New York, Berkley Books Barach, J.A., and Doochin, B.A. (1988): Entry of the next generation: - Strategic Challenge for family business, Journal of Small Business Management; Vol. 26, No. 2, pp. 49-56 Belardinelli, S. (2002): The evolution of family institution and its impact on society and business: Family Business Review; Vol. 15, No. 3, pp. 169 - 173 Birley, S., Dennis, N.G. and Godfrey, A. (1999): The family and the business: Long Range Planning; Vol. 32, No. 6, pp. 598 - 608 Lansberg, I. (1999): Succeeding Generations: - Realizing the Dream of Families in Business: Boston, Harvard Business School Press Lee, K, Guan H & Wei L, (2003): Family business Succession:-Appropriation risk and choice of successor: Academy of Management Rev. Vol. 28: No. 4 pp; 657-66 Morris, M; Roy W, and Deon N. (1996):-Factors influencing family Business succession: - International Journal of Entrepreneurial Behaviour and Research Vol. 2 Murray, B. (2003):-The succession transition process: - A longitudinal Perspective: Family Business Review Vol. 16. Thomas, J. (2002): Freeing the shackles of family business ownership: Family Business Review Vol. 15 Wortman, M. (1994): Theoretical foundations for family owned business: - A conceptual and research-based paradigm: Family Business Review Vol. 7 No. 1, pg. 3-27 Read More