Transitioning a family business to the next generation is one of the most important and toughest business decisions a family firm owner will ever make. No other challenge has as much potential to exacerbate the special stresses—or, conversely, highlight the unique advantages—of operating a family-owned company.

A family business should consider how to engage and empower the next generation for the role they'll play in governance, strategy-setting, and all other aspects of the business. However, a lack of a formal succession plan can lead to a number of problems when the current generation of leadership fails to address the transition of its functions and next steps. Furthermore, the next generation may be reluctant, unprepared, or unable to assume the current leader’s level of responsibility. As if the operational, legal, and technical issues surrounding the process weren’t already thorny enough, consider this daunting fact: only about 30% of family businesses survive into a second generation.

In today’s public spotlight, we see a prime example of how one family is navigating a generational transition in real time: the Trump Organization

The Trump Organization’s Transition To Gen. 2

In January, we witnessed firsthand an instance of the “sticky baton syndrome,” a reluctance to pass on control of the business to the next generation. For the new First Family, it was a forced transition brought on by President Trump’s ascension to the White House, and the public had the opportunity to watch just how a family-owned firm would go through this corporate changing of the guard. According to the latest bi-annual Family Business Survey issued by my firm, PwC, 46 percent of U.S. family firms share this hesitance.

In this case, the family identified important goals—both commercial and personal – and laid out a succession plan that includes President Trump’s sons assuming control of the business. However, elements such as timing, future leadership, ownership status, management shares, and issues of capital are additional considerations that all family-owned companies must review and plan for before succession, whether they intend to keep their business in the family or not.

According to our survey data, only about half of the U.S. companies that plan to transition ownership in the next five years intend to keep the business in the family (down from 74% in our prior survey). Our survey also shows that as family businesses reach the third generation, they seem to become less ambitious in terms of growth and innovation, settling instead for a ‘steady hand on the tiller’ and ensuring that the business operates well in the near term rather than pressing for perceived bold strategic changes that could carry the business into the future.

Securing The Future

In order to secure operations for generations to come, family firms need to consider a strategic plan that looks beyond the next two, six, or 12 months, and anticipates and prepares for potential industry disruption. They should be on constant alert for new innovations and markets, as well as competitive threats. Once a transition occurs, family businesses typically turn their attention to longer-term strategic planning.

Family businesses that want to keep things in the family may focus their strategic planning primarily on operational change (systems, digital, some elements of professionalization and governance) and find strategic change (diversification, international expansion, elements of digital) harder to achieve, especially if leaders tend to be very hands-on in day-to-day management, as the Trump Organization’s leadership is famously known for.

Effective strategic planning can be challenging, especially in the wake of a leadership transition. To help ensure that they stay in business for the long term, family firms should remember to focus on goals, invite input, and prepare for change.

Keep Evolving Or Risk Dissolving

Family businesses that make it past the second generation don’t get there by accident, but rather by being strategic. More companies that have survived into or past the third generation operate in multiple industry sectors and countries, compared with younger companies. However, diversification is more than a way of surviving or catapulting forward in the near term. It’s a strategy for thriving well beyond a company’s second generation.

The Trump Organization has a vast empire of holdings, with interests in real estate development, investing, brokerage, sales and marketing, and property management. Divesting the company and the entirety of its holdings might have resulted in the family receiving less than the assets’ worth, due to a swift sale. But most notably, because the company’s holdings are primarily in real estate and property management, they could not be sold quickly like a stock or bond. The company’s diverse assets may have presented challenges during transition planning, but diversification is necessary for a family firm to live long and well.

 

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Jonathan Flack is a lead engagement partner to some of the United States’ largest family-owned businesses and leverages a strong global network of partners with a similar focus. He also taps external advisors (attorneys, family business counselors, trust advisors) as needed to deliver innovative solutions to multi-generational family businesses.

As part of his role in leading the US family business practice for PwC, Jonathan spearheads the strategy, operations, talent development, thought-leadership and marketing for the family-owned business sector. He supports other client teams serving this sector and has published thought-leadership and led regional forums on family business issues.

Jonathan is also an Assurance Partner where he has extensive international experience with multi-billion dollar, private clients. He assists clients with business transactions and new products. He started his career in the Carolinas working on large privately held businesses in multiple industries.

Jonathan and his colleague, Charlie Carr, spoke about Steering the Conversation on Business Succession during their presentation at the 2017 FOX Fall Forum.