In working through various family business transitions over the years, a recurring theme has emerged around control and incentives.
On one hand, the senior generation—often having dedicated most of their careers to the business—faces the discomfort of relinquishing control and responsibility. On the other hand, the next generation is ramping up their careers, full of enthusiasm and ambition for the future.
This naturally creates tension between the senior generation, who are typically focused on preserving capital, and the next generation, who are more inclined to take risks, with a longer time horizon to recover from any potential missteps.
So, how do families successfully navigate this complex dynamic and balance the senior generation’s reluctance to relinquish control with the need to keep the next generation engaged and motivated? Each family and business situation is unique, but certain strategies have proven effective.
Strategy #1: Consider a Recapitalization to Maintain Control While Sharing Equity
One useful technique is the recapitalization of the business into voting and non-voting shares or units. This allows the senior generation to retain a level of control over the business's affairs while still transferring equity to the next generation.
Depending on the senior generation’s liquidity needs, the non-voting equity can be gifted, earned, or bought over time. In cases where some family members work in the business and others pursue careers outside of it, generating liquidity for estate rebalancing becomes important. This allows the family to avoid conflict while ensuring that the parents’ assets are fairly distributed.
Recapitalization can also help maintain the delicate balance between authority and engagement. The senior generation retains a meaningful role in guiding the company’s direction without stifling the incoming generation’s ability to take on responsibility and shape the business’s future.
Strategy #2: Gradually Transition Responsibilities to the Next Generation
When it comes to transitioning control and responsibilities, a gradual handover is often more effective than an abrupt transfer of power. A step-by-step approach allows both generations to adjust and ensures that the next generation is well-prepared to lead when the time comes. This method helps preserve the valuable insights and experience of the senior generation while giving the next generation space to develop their leadership skills.
Actionable tip: Create a timeline with key milestones for the transition, detailing when specific responsibilities will be transferred. This will keep both parties accountable—the senior generation can avoid "sticking around" too long and potentially undermining the authority of the next generation, while the younger generation is held to a reasonable pace of stepping up.
Strategy #3: Build Mutual Trust Through Communication and Mentorship
Balancing control and incentives during a family business transition is a dynamic process that requires clear communication, mutual respect, and intentional planning. Mentorship is a critical component of this balance. The senior generation should focus on transferring not just technical business skills but also the family values and legacy that underpin the company's success.
Establishing trust is key. The next generation needs to feel empowered to make decisions, but they also need to know they can rely on the senior generation’s guidance when faced with challenges. Regular, structured meetings and open communication channels can help ease the emotional and operational transition.
Crafting a Recipe for Multi-Generational Success
Successful family business transitions require careful attention to both control and incentives. By creating governance structures like voting and non-voting shares, gradually transferring responsibilities, and fostering a culture of trust and mentorship, families can ensure that their businesses thrive across generations. The goal is to create a collaborative process that honors the senior generation’s legacy while empowering the next generation to carry it forward.
With clear strategies in place, family businesses can not only survive but flourish through generational changes, continuing to build on their legacy while adapting to the future. If you would like to discuss how your family business can successfully implement the above strategies, please contact us.