One of the most critical juncture and challenge facing any family business is how to treat the next generation. Most parents and current family business leaders, rightfully worry on providing their children with too many unearned advantages that undermines not only the next generation’s work ethic, but the soul of the family business itself.

When roles are given rather than earned, it often creates an attitude of entitlement, whose impact on the business is destructive. The most subtle signs of entitlement, such as showing up late to work or not performing adequately, will undermine the culture within the family business. This is the greatest risk of the so called “inherit model”, whereby the next generation will move up the business ladder without any link to performance. In such circumstances, when there is any manifestation of entitlement by the next generation, the temptation can be to remove the possibility of any inheritance altogether and make next generation family members earn not only their job, but even earn any future ownership in the family business.

It is very common to meet family businesses in their second generation, whereby the children that have taken over the leadership of the business from their father, make all the decisions, from operational to strategic. This normally leads to a company culture, whereby employees learn a very simple rule “To survive here and make sure you do not get in any trouble on anything, do not decide on anything and just ask all the owners!” This approach could work across the 1st and 2nd generation, but when more people are likely to get involved across future generations it becomes clear that a different approach would be needed.

There is a tendency to glorify the role of the “wealth creator” in a family business. It is quite regular that tension is created between a family business owner or owners who work in the business and create all the wealth and other family business owners who do not even work in the family business but still expect a share of the wealth created. However, while this tension can be understandable, the ones creating the wealth need to think calmly and consider all the options. The point is that the contribution of the so called “passive” family business owners need not be under estimated – They are the ones who have decided to keep their money invested in the family business. If those working in the company do a good job of running it and those who do not run the family business leave their money invested in the family business, then there should be more than enough to go around. Placing value on both of these levels of contribution is important – Passive shareholders should express their gratitude for the hard work of those working in the company (and reward them financially through market-based compensation) and those working in the company should show respect to their investors in their communication and by generating good dividends.

The extremes of either nepotism or unfair dealing of family members, will lead most family businesses to ruin. Instead, proper compensation and dividend polices, distinguishing management from ownership decisions and placing value on the contributions of both active and passive shareholders will help a family business find the right balance to grow further.

(All factual and statistical information presented in this blog has been obtained from an extract of a blog from silvansbusinessinsights.com ) Follow us on our Facebook page and Family Business Office website at www.familybusiness.org.mt

At the Family Business Office we can offer you assistance in dealing with family business succession planning issues through incentives supporting advisory and mediation services. Contact us today on familybusinessact@gov.mt.