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Successful business succession: From founder to mentor

March 10, 2022

reading time: 7 minutes

by Klaus Rathje, journalist

Successful business succession: From founder to mentor

Prof. Dr. Thomas Zellweger (University St. Gallen) is an expert on family-owned companies. In an interview, he explains how a company can be handed down successfully.

Professor Zellweger, what fascinates you about family-owned companies?

They are a type of company that stands in contrast to what they normally teach you when you study business administration: These are companies that do not have purely financial goals, that have a long-term focus. They have a Board that is set up in a somewhat anachronistic way because it consists of family members. I find this situation where you have a very archaic set-up that does very well in the modern world highly interesting.

Where do you see specific advantages or disadvantages?

Family influence is ambivalent, in other words, the typical attributes of family-owned companies can bring just as many advantages as disadvantages. If the owners are also running the company, that can be an advantage in terms of efficiency and can lead to swifter decision-making. Due to their long-term focus and sometimes long history, family-owned companies have an advantage in terms resources, such as expertise, strong networks and knowledge of the market.

However, they can sometimes be somewhat reluctant to take risks. Overall, family-owned companies have higher profit margins than non-family businesses. But when it comes to using funds to do something new, family-owned companies tend to be more cautious. So the bottom line is that they are about equally successful.

Prof. Dr. Zellweger on business succession
"A common misunderstanding is that the handover process to the successor generation should be carried out as quickly as possible," says Prof. Dr. Zellweger on business succession.

What are the stumbling blocks when it comes to succession?

I think a common misunderstanding is that the handover process to the successor generation should be carried out as quickly as possible. Something along the lines of: the next generation comes in and the older generation leaves right away. Our research shows that it makes a lot of sense to organize this process sequentially, with overlapping periods.

The handover processes where the older generation continues to provide support for a certain period of time are the most successful. However, this requires them to redefine their role vis-à-vis the next generation. That means becoming more of a mentor, preparing the ground so that the successor generation can be successful, and creating a sense of stability. So planning these handover phases well is important.

How long should such a transition last?

It’s key that the handover unfolds in such a way that enables a successor to truly take over. The older generation should stay on until the new person is firmly in the saddle, has the support of the senior staff and knows the markets well. For me, that means a period of three to eight years. In some cases, this phase is longer, but that’s when things become increasingly problematic, because at a certain point, the older generation becomes a hindrance, because ultimately, the successor generation has to find its own way of doing things.

Family Advisory

LGT supports entrepreneurial families through its family advisory services. If you would like to know more, visit the website of LGT Bank (Schweiz) AG.

But this process requires a high degree of maturity on both sides. It requires a strong sense of responsibility from the older generation.

Yes, it is a fluid process where one person loses influence and another gains influence and status. This is sometimes associated with a fear of loss on the one hand, and a fear of not being up to the task on the other. But that is the price that both sides have to pay.

Sometimes there can be a lack of dialogue between the generations. When is the best time to talk about succession?

The question is, under what conditions can a person feel comfortable in such a role? Autonomy is an important prerequisite if a person is to feel at home in a new leadership role. The successor generation must be allowed to make autonomous decisions. This doesn’t have to apply to the entire company right away, but it should at least apply to certain areas, such as a department or a country-level company. What is also important is that the person taking over feels up to the task. This could be an executive board position, but perhaps another function is much more suitable. Creating an environment where the next generation feels comfortable can in turn be an exciting task for the older generation.

"Autonomy is an important prerequisite if a person is to feel at home in a new leadership role," says Prof. Dr. Zellweger (University of St. Gallen). Photo © Keystone/Ernst Weingartner.

How can a family constitution help with the succession process?

A family constitution is helpful wherever there is a need to establish the influence an owner family has on the company and where complexities exist within the company and the family. If the successor generation consists of an only child, there is probably no need for a family constitution. But in cases where different branches of a family exist or where the company has high expectations of management, it makes sense to clarify the relationship between the owner and the company. That way, the owners can to a certain extent professionalize themselves.

Discussing values and goals within the family can also be very fruitful.

Yes, and putting the results of the discussion in writing can quickly make it clear to management what the family expects from the company, which values and goals it represents. This can in turn make a family-owned company a valuable and meaningful employer – and help to head off conflicts.

Study on family-owned companies – how handing down the business can be an opportunity

Every year, the Austrian branch of LGT Bank AG focuses on a special topic as part of its “Family-owned companies – companies with a pedigree” initiative. The 2021 study focuses on succession planning at family-owned companies.

Exciting insights and interesting findings about company succession as well as further information on downloading the study can be found on the following website (web page available in German only).

What advice would you give the next generation?

Well, what I also see among my students who come from such families is that joining the family business is only one of several career options. And it is not necessarily the most attractive one. That means it competes with other options such as starting your own company or a career at another company.

Alongside that is the option to join the family business, which can certainly be attractive financially, but is of course longer term and comes with the expectation that this is a job for life. That puts many people off. So I would recommend that young people first do their own thing, gain some international experience and find out what they are good at.

Joining the family business is only one of several career options.

Prof. Dr. Zellweger (University of St. Gallen)

Only then would I recommend they look for a way into the family business that enables them to first get to know the company, maybe through internships. After that they could take on a senior role before moving to the executive level. But in general, I would advise that they take advantage of this kind of opportunity to become an entrepreneur.

How can conflicts be avoided?

Well, it’s not just about finding the right successor from among the members of the inheriting generation. Thinking about what the others will do is also important. It helps to avoid competition between family members and having to divide up a company.

It is better to foster a constructive relationship and involve family members who do not join top management through a supervisory board, a holding company or a family office or other bodies. This enables those who do not work for the company at the operational level to still play a role in the overall organization. This is an important success factor for family-owned companies.

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