The Great Wealth Transfer, during which baby boomers are projected to pass trillions to their heirs, has been a hot topic for some time now but will finally come to fruition over the next few decades. According to Cerulli Associates, between now and 2045, Generation X and millennials stand to inherit $84 trillion. Consequently, many are concerned about whether their inheritors are equipped to handle such a large influx of wealth.
One aspect of this transition that’s less talked about is the need for seamless transitions in passing family businesses to future generations. While there’s already a spotlight on the next generation and their preparedness for wealth, we must also use this time to consider how we can best prepare and engage them as leaders of tomorrow. This can be complex, but engaging the next generation early, giving them a seat at the table and designing the right roles can help family business owners navigate the transition.
Engaging the Next Gen
Ideally, business owners should engage the next gen at an early age. The key is to inspire them and create a draw for that business within the family. Older generations can work to keep them curious and interested by relaying the impact of the business on its customers and the family. The best way to engage next-gen members early is to figure out where their passions and interests lie and then explore areas of the business to apply these passions. If the next gen feels a genuine connection to the business, they’re more likely to find purpose and meaning within it. This can also help avoid feelings of dismissal, which can cause next-gen leaders to pursue unrelated careers or move on to start their own companies.
A Seat at the Table
Allowing the next generation to build a connection with the family business is only the start of the journey to truly nurturing their future leadership. They must feel like they have a seat at the table, an opportunity to learn and, more importantly, a chance to fail. While this might initially feel uncomfortable, older generations should create the space for future leaders to take risks and fail in a controlled manner. After all, the cost of controlled failure when the older generation is around is less than the cost of having failure when they aren’t around to provide counsel.
A willingness to embrace failure or take risks can be a tension point across generations as older generations develop an increasing aversion toward risk over time. On the other hand, a rising generation may be more comfortable taking risks as they perceive that the time to recover from a failure is much longer. They also have more relative time to try to make an investment a success. Conversely, older generations may struggle to see how innovation and risky ventures will become profitable.
Although this often leads to clashes in comfort levels, it becomes even more important that current and future generations of leaders align on the value and payoff of taking risks in the present day. Businesses can devise a strategy that allocates resources toward things that may never pan out during the lifetime of the older generation but can bring benefit to the business when the rising generation is leading. When both generations align on this, the potential for success down the line grows.
Designing the Right Roles
While succession planning is about identifying and preparing the right people for future leadership, it’s also about designing the right roles for the next gen. People in positions of power often make the mistake of looking for a successor who will do the job exactly how they did it. In most cases, this candidate doesn’t exist. The task at hand isn’t for business leaders to look at their selection of successors and ask, who can do my job? Instead, they need to consider the role itself and how it can be executed by other people through their strengths and expertise—including considering what operations need to be done and what qualities other people possess that will best fit into the puzzle.
On occasion, older generations hold back from properly engaging the next gen due to the older generation’s perception of the next gen’s lack of qualifications and experience. Families can unknowingly “raise the bar” for successor generations to unachievable heights. In some respects, this is expected as a business grows and becomes more complex. However, it can also occur due to the same risk aversion attitudes discussed earlier. When the bar is too high, it can hinder the ability of the next gen to participate in the ongoing leadership of the business Recognizing these biases and “resetting the bar” as appropriate can be a helpful exercise.
There can also be an absence of effort by the older generation to engage in succession in some cases, especially when they enjoy their current role in the enterprise and aren’t ready to give up their spot. While it’s difficult to think about stepping away, facing this internal attachment must be met head-on. Older generations can use their passion for their job to find ways for younger generations to reap the same benefits and find their own purpose in the enterprise. As long as the proper amount of time and effort is allocated to doing so, leaders can find great pride in helping the next gen flourish—leading to more success for the family business in years to come.