In the following section you will find answers to frequently asked questions about family business.
We would be delighted to answer any other questions you may have, and you are welcome to contact the Center by clicking on the contact button below.
Q: Why is succession planning important to a family business? What risks does a family business face if it does not do it?
A: Succession ensures survival and sustainability. While succession planning is essential in any organization, for family businesses it is even more important due to the proximity of the family to the business and the overlap of roles. Family members can be owners as well as managers. This overlap uniquely concentrates power, knowledge and experience, making managers harder to replace than in public corporations. So succession planning in family businesses involves a long-term approach and planning ahead for the next generation. Not planning the succession properly or, even worse, not planning it at all can have serious consequences for the survival of the family business.
Q: How do you begin planning a succession and how long does it take to complete the planning?
A: The most successful family businesses plan the succession in phases, firstly by encouraging the next generation of teenagers to develop an interest in the family business, not by force but by telling them interesting stories and exciting their curiosity about the history, and then motivating them to commit to a good education followed by outside work experience. The senior generation presents the family business as a platform, an opportunity for the next generation to do something important and interesting, but it wants the next generation to make that commitment itself. If done properly, succession planning is a long process that can span well over 10 years and a number of different phases.
Q: Can a family plan succession on its own? Where can an outsider add most value?
A: Succession planning begins with the parental generation creating the appropriate cultural context to involve the next generation. Since family members are close to one another and often emotionally involved, it can be difficult to rationally assess the real potential of one's own children. Well-focused outside guidance on both the process and the content may be helpful because outsiders see structures and processes, whereas insiders or family members tend to see other family members through a historic lens, often influenced by emotions.
Q: What characteristics and abilities should an "heir" have to compete for the succession?
A: That depends on the future role. Taking over as an owner requires solid financial and business understanding and experience. Taking over as a manager requires the same level of professional competence as a non-family manager would be expected to demonstrate - if not more. In both cases a next-generation heir needs to understand the history of the family and the business, and have a clear and stated vision for this generation's ownership and business plans. A healthy sense of respect and humility with regard to the achievements of the previous generation helps the successors find the most appropriate role for themselves.
Q: What is the best way to bridge the generation gap?
A: The best way to bridge the generation gap is for the senior generation to involve the next generation early on and to establish a realistic timetable for the phasing-in and phasing-out periods.
Q: Where do successors tend to stumble as they take over?
A: Deciding what to preserve can be challenging. The question to ask is: What is the right degree of tradition and innovation? Typically in family businesses, the next generation tends to push too aggressively for innovation at the expense of preserving the vital achievements of previous generations.
Q: How do family businesses deal with issues of nepotism?
A: They generally do not accept the idea of nepotism. If the next generation is well educated, committed and competent, why should they not join the family business? They know more about the business than most people since they grew up with it. The problem arises when the next generation is clearly not competent to take over the family business.
Q: It is often said of family businesses that the first generation creates, the second preserves and the third destroys. What types of companies have survived the three-generation test with aplomb?
A: The most successful companies are those that see family as an asset and create appropriate governance structures reflecting the diversity of interests of both active and inactive family members, and that care about educating the next generation to become responsible owners.
Q: Despite the complexities of family businesses, statistics show that they are more profitable than non-family businesses. What are the most successful practices that determine this?
A: Clarity on the benefits of private ownership for the family, the business and society is vital. This facilitates strategic planning for the long-term benefits of the next generation and creates value in a more meaningful and sustainable way. The objectives and the means of achieving them foster a more beneficial long-term perspective. However, checks and balances need to be included in order to achieve the highest degree of professionalism in the way these results are achieved.
THE FAMILYNESS FACTOR
Q: It is said that "Some family businesses are more 'family' than others." How would you define the "familyness" factor?
A: This typically reflects the value system of the founding and owning family - for example, caring about employees and stakeholders, and being guided by community-driven concerns in addition to financial performance targets.
FAMILY BUSINESS ROLES AND PROFESSIONAL MANAGEMENT
Q: What is the common approach to professional management in family businesses today?
A: This depends on size, age and industry. There are examples of strong family leadership in both entrepreneurial and growth-oriented family businesses. There are also families who move to an ownership role and leave the management to outsiders. Often, their ownership influence tends to be strong in different ways. But typically, decreasing or weak ownership influence on the part of the family may be an early indication of a future change of ownership or even an initial public offering (IPO).
Q: How important are good advisors for family businesses - particularly in times of crisis?
A: They are vital. Most families do not realize just how important a good advisor is until they find themselves in the midst of a crisis and wish they had one. We at the IMD Global Family Business Center are still surprised by the lack of risk-management thinking in families and business-owning families when, for example, they all travel together in the same plane or car. It may be awkward to travel separately - but it is safer. Good advisors are not only important in times of crisis, but they can also bring expertise and perspectives which the family may lack in many situations.
FAMILY BUSINESS AND WORLD ECONOMY
Q: Can you give us some idea of how a family business manages the business cycle and leverages its global resources, especially when the whole economy is gloomy?
A: Family businesses tend to focus on the long term. They think and act in terms of generations, rather than years or quarters. So they know of the bull and the bear and accept that both are part of the business cycle. From that perspective, for family businesses hard times can be good times to invest and to play on their real strengths.
Q: It is said that family businesses often earn "slow" money rather than "fast" money. What can non-family businesses learn most from family businesses?
A: Truly sustainable success is rarely the result of financial engineering. High leverage can create high profit but it also means high risk. Long-term success is usually the result of hard work, better products, satisfied customers, strong and trust-based relations with the people at work, and financial stability. This is what the vast majority of excellent family businesses around the globe are doing. This is what makes them strong and allows them to develop the competitive advantages to outperform their rivals in the long run.
Q: What does recession mean for family businesses? Is it more of an opportunity or a threat? What advantages and disadvantages, normally specific to such companies, come into play during a crisis?
A: Recession tends to be more of an opportunity for family businesses since they are often less leveraged and have lower debts than public corporations. The long-term view into the next generation allows for a stronger and more consistent strategy. Family businesses are also less exposed to the risk of a takeover because they are not quoted on stock markets. One disadvantage, however, could be a lack of flexibility due to strong traditions.
Q: What are the strengths of family businesses?
A: Their strengths are their independence, deep knowledge of their market and industry built up over generations, values, and the trust developed over generations inside and outside the business.
Q: Family companies are more philanthropic than non-family businesses. Are there particular reasons for this?
A: Family values typically include social responsibilities. Philanthropy is a great way for next generations to justify their place as wealth inheritors.
Q: In general, what is necessary to create the conditions for success in a family business?
A: Long-term success depends on the owning family's approach to creating a sustainable business model. The key driver is the family itself and how it defines its own role in each generation. We recommend that each generation learns what the family business is good and competent at, before defining the vision for its own generation. This brings commitment and clarity to the family itself as well as to all stakeholders.
WEAKNESSES & CHALLENGES
Q: What are the weaknesses of family businesses?
One key weakness is their often limited horizons. Family businesses can be too narrowly focused on their own family and historic business. Traditions are often too strong, making innovation difficult. Also, governance systems are often too focused on the family's needs and not sufficiently balanced.
Q: Are family businesses particularly exposed to conflicts? Why?
A: Family businesses are especially exposed to conflicts because family members have some sort of involvement in both ownership and business issues. Differing views, generational disagreements, diverse interests - these are all family issues that tend to be brought into the business and can lead to serious conflicts. Also, the emotion of families can have a negative influence on the business; businesses need to be rational.
Q: What are the most common challenges faced by family businesses?
A: Succession from one generation to the next is one of the common challenges. Since, by its nature, it does not happen very frequently, its significance is rarely fully understood by the key players. Another challenge is limited capital. If families want to retain control of their business and not share ownership with others, they have to approach the growth of their business in more modest but also more creative ways.
Q: What are the three most limiting factors of a family business?
A: They are: limited competencies within the family, increasing diversity among a growing number of family members, and lack of capital.
DEALING WITH DISASTER
Q: Many unexpected events can happen in a family, and if the family is wealthy the consequences can be huge. Parents may die, become disabled and so forth. How should a family prepare for the unexpected?
A: Proper, well-balanced governance structures that anticipate unforeseen circumstances are essential. For the family, this means trusted advisors, clear wills and succession plans. Regarding ownership, this means an owners' council with outside advisors. And for the business, this involves corporate boards with independent directors. Strategic planning, risk management, and thinking the unthinkable are important and necessary.
LEADING THE FAMILY BUSINESS (LFB) PROGRAM
Q: What is IMD's Leading the Family Business (LFB) program about?
A: In a pioneering move, IMD launched a global family business program in 1988 - the first international business school to do so. The program set the standard for educating families in business and family ownership and explained how these dimensions interact. The content and teaching methods are unique and intended to be practical and relevant for all participants. In addition, the program offers participants the chance to meet and network with other families from around the world, thus providing additional learning opportunities. The five-day program is offered twice a year in slightly different formats.
Q: What part of the world do participants on the family-run business program come from and why?
A: Participants come from all over the world because the issues for family businesses are essentially the same everywhere.
Q: Do many families attend the program in teams?
A: We have had many family business teams attend. Increasingly, they are returning with their next generation members as a team. This allows them to address succession and other issues in a neutral environment, facilitated by IMD Faculty.
Q: How frequently do alumni revisit and what are some of the continuing partnerships with families?
A: Alumni stay in touch in different ways: by email, phone, Facebook and visits. They also return to the program with their next generation members.
WHAT MAKES IMD DIFFERENT
Q: How does the IMD experience differ from that of other institutes or schools?
A: IMD has a generation of experience in researching and educating the world's leading family businesses. We have developed a unique curriculum and learning methodology that addresses the specific learning needs of families in business, who may have diverse backgrounds and needs. In addition, because IMD's home market of Switzerland is very small, there is no particular country bias. The IMD experience truly is global.
FAMILY BUSINESS IN ASIA
Q: Many private Chinese entrepreneurs are now facing the issue of leadership succession. The new generation shoulders both expectation and pressure. They have different values and lifestyles from their fathers. What is your advice to family leaders?
A: The most cautious approach is to start with education. Understand the strengths and weaknesses of family-owned businesses over time. It is important to recognize the general political, legal and economic context when deciding whether and how to continue as a family-owned business. Both generations should openly discuss this important question of general continuity.
Q: What are the biggest problems that family businesses in India face?
A: One of the biggest problems is finding the right balance between an egalitarian family based culture and the business driven need to select the most competent managers. A "family first" model allows for an egalitarian approach, but not necessarily the most professional one. A "business first" model acknowledges that businesses need to be run by the most competent managers. These are often not next-generation family members, who must then accept an ownership role rather than a management role. Although this provides clarity to all and is the best foundation for a long-term success model, it is difficult to implement in most Indian family businesses, which are still deeply rooted in an owner-manager culture.
Q: What is essentially different about the way family businesses operate in India and in the West?
A: In the West there are more dynastic reference models, which provide clarity on the role of the family. This involves either continuing with an owner-manager model (buying out other family members) or creating a comprehensive governance structure and a culture that allows for diversity among family members. Too often, Indian family businesses are concerned about equality among family members, which tends to come at a cost for the business.
Q: Are there any issues unique to family-run businesses in India?
A: India is opening up to the outside world. This provides new growth opportunities, which are typically best explored by next generation members in family businesses. We have seen this pattern in several countries that are currently globalizing. Senior generation members may find this more difficult to accept, whereas next generation members are often more open to connecting family businesses to new and emerging development and growth opportunities.