Articles Family business: What the next generation needs to get to grips with

Family business: What the next generation needs to get to grips with
A successful generational change is critical for the survival of the family business. But what can the next generation do to best prepare for taking the reins?
Family business

Family firms are the backbone of many economies. However, handing over a family business to the next generation can be a hurdle that many successful business owners fail to clear. So it's worth taking a closer look at this phase and asking what family firms that have succeeded for multiple generations do better, and how they manage to pass on the family legacy. In what aspects do these families and companies differ from those who don't succeed?

Cristina Cruz, academic Director of the IE Center for Families in Business and professor for Entrepreneurial Management and Family Business at the IE Business School in Madrid, explored these questions in a recent white paper "How to increase cross-generational potential?", which was developed in collaboration with Credit Suisse.

An entrepreneurial mindset is key

Cruz, who comes from an entrepreneurial family herself, started with the question of what knowledge or qualities parents must pass on to their children for the family firm to keep growing successfully and create long-term value after it's passed on to the next generation. First, a family business, like any other company, must strike the balance between exploration and exploitation. The former ensures that the company remains dynamic, discovering and taking advantage of new market opportunities. The latter ensures that the business reaps financial benefits.

Finding the ideal balance is tough. Often, exploring new markets, business areas, and products falls by the wayside. This is why it's critical for all companies to foster and maintain an entrepreneurial mindset.

What successful family firms teach the next generation

Getting back to family businesses: To find out which are the "best practices" of leading family businesses, Cruz's study categorized family-owned companies by successful, average, and less successful businesses. Then, members of the next generation indicated which of the following aspects they considered important to pass down in the family.

  • Family values
  • Entrepreneurial mindset
  • Management knowledge
  • Family control

The heirs to successful family businesses said that family values and an entrepreneurial mindset were the main qualities they wanted to learn from their parents. They cannot obtain this knowledge anywhere but from the family. Less successful families placed their priorities on the opposite side of the list: The next generation said that what they expect to inherit is the control of the family assets and what they want to learn are the management skills from their elders. Family values (essential for a family company) and an entrepreneurial spirit (exploration), which ensure that the company remains dynamic, were ranked very low. "This difference separates long-term, successful family firms from those that will not survive the transfer to the next generation," summarized Cruz.