The leap from the second to the third generation is crucial in a family business, as many companies fail at this step. According to data from Known business knowledge (FBK), based on data from 3,800 family businesses worldwide, only 11.8% of them reach the third generation. In the fourth generation, the proportion drops to 2.3% and in the fifth to 0.7%. When we analyze the data, it may not seem very good at first, but the truth is that it’s not bad at all. The average age of family businesses is higher than that of non-family businesses: 33 years for 12 years, according to the study The family business in Spainthe Institute for Family Business and the Network of Chairs in Family Business in Spain.
Challenges of generational conflict
If you consider that the average life span of Spanish companies is 12 years and that a generation represents 25 or 30 years in the life of a company, a company reaching the third generation would be at least 50 years old, well above the average”, he says. Daniel Lorenz, Director of the Santander Chair in Family Business at the University of Cadiz. If we analyze the reasons that led to the dissolution of the family business with the arrival of the third generation, we see that there are several pitfalls.
business stagnation. “Typically, companies disappear when their original value proposition or business model becomes obsolete. Few companies know how or can transform themselves,” he comments Alberto Gimeno, Professor in the Department of General Management and Strategy at ESADE. “The difficulties in overcoming the third-generation milestone can be that the business cannot be renewed and the company’s survival is at risk,” explains Lorenzo. Especially in an environment like the current one with change factors such as globalization or digitization.
identity crisis. “In the second generation we are talking about brothers who have lived together and between whom there are very important ties. They share the family culture. You have lived at home the efforts linked to the creation and development of the company, the sacrifices and commitment that it entails; and the rigor that usually characterizes the first generations. The third, on the other hand, lived with greater prosperity. The kind of education parents give them is very important. Business success often leads to parents being too permissive,” says Gimeno. If the third generation doesn’t have the company as close to their hearts as their parents did, they lose momentum.
family branch. “When there is more than one brother in the second generation and property is divided, the appearance of branches is a common occurrence. Two loyalties are mixed. This usually creates a branching dynamic that loses the focus of the family on the company and the joint project,” says the ESADE professor. Consensus building is complicated and companies stagnate because they are unable to reach agreements to make the necessary changes to adapt the company to the new scenario.
struggle for power. A consequence of branching is the dispute over leadership. “They are usually aimed at a family member who runs the business. If the number of cousins is important, this can lead to rivalry between them, as there are usually several competing for the highest position. In the end they result in choral directions or winners and losers,” explains Gimeno.
Missing successor. It is simplified in smaller families, where only one or two children of the founder remain in the company. However, in these cases there is also the danger that nobody is interested in taking over the baton. “It can happen that in the third generation there are no people with the calling to take over the management of the company and keep it under family control. The entrepreneurial profession is quite professional and the following generations will not necessarily be entrepreneurs,” affirms Lorenzo.
Difficulty attracting talent. Some companies struggle to sustain an exciting business project. “One of the big challenges is attracting talent, starting with the family. You have to create an attractive project, because a boy who is going to do an MBA, who will have interesting job offers in large companies, must see that he has a challenge at home and that they will let him do it. Otherwise they wouldn’t even think of working in the family business,” he explains. Manuel BermejoProfessor of Business Administration at IE Business School.
While the challenges are great, the truth is that there are many companies that are moving past this defining moment and capitalizing on the work of each generation. “Everyone contributes. The first to set up the company. Second, by doing things in a more institutional way. And thirdly, another leap in the direction of digital transformation, internationalization, development of new products and services, etc.,” emphasizes Bermejo. However, to ensure that the project does not fail, it is advisable to adhere to a few guidelines.
Coexistence and gradual transition. “Succession must be understood as a process that can take three to seven years, in which functions and responsibilities are gradually transferred from the outgoing generation to the next. This process must be initiated by the outgoing generation in good time so that the next generation can develop personally and professionally,” explains Lorenzo. The goal is to be a natural substitute.
clarity and transparency. “There is a need to clarify the future roles of the next-generation people, who may be managers, directors or shareholders of the family business, or who may occupy several of these roles at the same time. A key factor is communication between all members of the entrepreneurial family and that the process is transparent,” affirms the professor at the University of Cadiz.
Protocol and family counseling. In order to achieve the above goal, it is convenient for the company to equip itself with the appropriate tools. “The family protocol is an instrument that, from a technical point of view, ensures the continued existence of the company,” he says. Alberto Hurtado, responsible for engineering at Hurtado Rivas. The IE Business School professor specifies that “families should practice building their family programs, in which they define their project, their values, their expectations… and move in that direction.” It also underscores the importance of separating family and business aspects and creating a government agency for each area. In addition, he points out that “the processes, as with succession, must be planned as well as possible”, following a strategy.
build identity. Bermejo recommends “taking steps to achieve family cohesion” as well as “educating families on family projects and values.” In addition, it is defended that the company will be “cleaned up” if necessary. “As a family grows, it’s sometimes difficult for all members to stay ‘hooked’ on the project. Sometimes you have to cut back and someone leaves because they don’t feel well, so that the company doesn’t go away,” says Bermejo.
Evolve or die. According to Gimeno, “The most important thing is to recognize that a phase has been reached that requires a qualitative change, a change in business model. There has to be a structural change, but also a mental change.”
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