Dealing with Cousins, Aunts, Uncles and Leadership Diffusion in the Third Generation and Beyond

Posting by Geoffrey D. Brown, CPA

The impetus for creating a family business may be as simple as a parent wanting to provide his or her child with a business that will be there to provide work and financial security for life.  Those family businesses that even make it to the second generation, as we often discuss here at the Greater Washington DC Family Business Alliance, are relatively few.   Further complicating this growth is the fact that families are not static – they marry and divorce, they get along and they feud.  It’s unlikely in the first year of your new family business that you will know if it will survive to the third generation (only 12 percent do); and if it were to survive, who would be the family members involved and what roles would they play?

Some of the obstacles and building blocks from the first to the third generation can be found in this post from 2011 and another post from earlier this year.  Here are some strategies you can use as you expand family involvement in your business:

Branching out – leadership from all parts of the family tree.  Including more relatives in the family business isn’t necessarily a bad thing – if you’re Sam Walton, you’re going to need all the good help you can get to run your successful empire.  The family business is there to support – and be supported by – the family, after all.  It may be possible to provide a place for everyone who is interested, and thereby also giving some breathing room for those family members who would prefer not to work directly in the business.  By the third generation, the founder may now be the proud grandfather to six children from his own two children – these offspring being cousins to each other.  Maybe one grandson is the general manager, but his aunt (the founder’s daughter) is the CEO.  By the next generation, the company has a European branch as well, where another cousin runs the office with his second wife.  It’s not hard to see how leadership could be held at different levels by many different family members.

Overseeing the new generations.  From the example above, there is the potential for leadership to be diffused by the position of different types of family members into different leadership roles.  The contrast between the entrepreneurial and often seat-of-the-pants first generation and the likely more schooled and accustomed to success third generation can be great – the transfer of leadership is crucial.  Keeping in mind the company’s mission, or adapting that mission as a family, can help keep the focus where it needs to be, no matter who is leading.  Instead of just retiring to Florida, the exiting founder may wish to remain as a mentor, advisor and/or board member to support the still-learning newer generations.  As always, the importance of the succession plan cannot be understated.

Letting your expanding family work in your favor.  As the addition of so many types of family members means there is a need for all these employees, count your blessings.  It seems as family businesses make it past the third generation, it becomes more important to be able to generate new ideas and adapt the business as necessary.  Many newer involved members cite the access they have to the earlier generations as a resource for discussing ideas, learning about what has and hasn’t worked in the past, and as an ongoing reminder of the work it took to build the business.   A strong extended family is already present in one form or another for the business to make it that far in the first place; by the third generation it’s imperative to keep the extended family highly functioning.  The use of tools such as creating a family council orboard of directors, writing a family constitution, or having ground rules for family meetings can provide your past, current and future leadership the means by which the family business can continue to grow to the next generation and beyond.  The urgency to have formal, written governance and plans is warranted as there is more on the line for even more family members. Make use of all the Greater Washington DC Family Business Alliance has to offer.

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