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Passing the Family Company to the Next Generation Is a Complicated Business Having a clear, organized succession plan often goes a long way towards smoothing the rocky transitional period.

By William Bauer Edited by Dan Bova

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Robbed. That was the first thought to cross my father's mind when he opened up our distribution facility last week, while the rest of the family was abroad seeing clients. Where is item 652-3? His mind raced, panic stricken. (Our family regularly resorts to speaking our own dialect of catalog codes.) What happened to 952-5?

Just a few years ago, our father could have been blindfolded and still be able to pick items off the shelves with precision and ease. Today, my brother and I have transformed our father's business model, much to his chagrin and confusion. Where toiletry bags and passport cases once stood on our shelves, it is Bluetooth tracking devices and fingerprint scanning briefcases that now take pride of place.

Related: 3 Key Agreements Every Family Business Needs in Writing

Ironically, in 1974, when our father formally took over our grandfather's workshop and scaled the business beyond its modest scope, his efforts, too, were met with frustration and bewilderment. Had my father not reinvigorated the business, our family's tradition might well have petered out into the abyss of obsolescence, as many New York City artisans had at that time, the mass exodus of light manufacturing overseas spelling their doom.

It is too easy to get comfortable with familiarity, and lose the ability to distinguish it from complacency. Cancerous to any business, complacency has the potential to metastasize into something far more damaging than a bankrupt client or faulty production run. Therein lies merely one such challenge that a family business faces when changing hands and, more notably, generations.

Given that an astronomical 90 percent of American businesses are family-owned, one would think Americans would be reasonably skilled at coping with the challenges a family business faces. However, transferring businesses down the family line, an essential component of keeping a family business, well, exactly that, has troubled over two-thirds of such owners. This has serious implications upon the longevity of businesses of this nature, making the transition itself and the ensuing period an extremely stressful one on all involved, notwithstanding the typical pressures associated with running a business.

Risks and pitfalls

The pitfalls and risks that often accompany a generational transfer of control are immense. The future of a family business is only as promising as the competence and acumen of the next generation. So, to ensure survival, every single transfer through the generations has to be adeptly calibrated and managed, and upon each one of those, a business, painstakingly raised from the ground, groans and creaks. Under the tutelage of a generation less competent or fortunate, it will come crashing down; a chain, after all, is only as strong as its weakest link.

Related: Keepin' it in the Family: How to Structure a Business With Your Closest Relatives

Conversely, very successful family businesses can become victims of their own success. A business that has made meteoric gains in one generation can place huge burdens on the slender shoulders of its heirs, leading them to believe the bar has been set so high that they have failed before even starting. Concerns about their ability to sustain and foster the momentum left by their parents are not uncommon, and often not unjustified either. Are they cut from the same cloth? Will the company's employees respect or undermine the new owners?

One of the most common mistakes parents make in handling transfer of power is to rush it. Too much responsibility at an early stage in their children's' careers often means they don't have the opportunity to learn their way around the business from pillar to post, and an out of touch new owner not seen to have paid their dues is unlikely to endear themselves to their employees. This not only leads to incapable management from the top, but pervasive disorder within the hierarchy in its entirety.

No one, regardless of his or her last name, is born a business leader. Even if family business owners envision their children eventually taking over the reins, the step-by-step process that takes them there is of paramount importance. Knowing what it takes to move up the ladder opens their eyes to the challenges their employees face, and to have realistic expectations of them.

What makes generational transfers so particularly complicated is the virtual absence of a parallel framework in other professions. No one expects a great basketball player to produce offspring that rival their feats on court, or artists to spur similarly prodigious descendants. To expect successful businessmen to spawn geniuses in that mold is decidedly absurd. In that regard, it is not surprising to see so many family businesses stutter when it comes to shifting control, but avoiding oft-repeated mistakes certainly won't hurt their chances.

Related: Timeless Lessons From a Fourth-Generation Family Business

Having a clear, organized succession plan often goes a long way towards smoothing the rocky transitional period, in which parents giving their children incrementally increasing responsibility and control. This helps them to spot potential weaknesses of these future custodians, who are, in turn, reassured that help is at hand whenever they should have need it.

The parents' role at this stage is critical here: too much meddling, and it risks denting whatever self-belief their children might have in their own ability to leave a positive mark on the business, while letting control go completely can very rapidly see a family business slide irreversibly. The next generation needs to be given enough confidence to trump their apprehension, and at that same time kept tethered to reality. These balancing acts are never easy; the testimonies of people who formerly owned family businesses serve to enshrine that fact.

My father, when he handed us control, understood that. He might not be able to find his way through our warehouse anymore, but he helped plot this modest family's path to success for 42 long years. And all without a Bluetooth tracking device, too.

William Bauer

Managing Director of ROYCE New York

William Bauer is the managing director of ROYCE, a handcrafted American accessories brand based in New York City. His small-business marketing and entrepreneurial acumen have been featured in The New York Times, Entrepreneur, BBC, CNN Money, and other prominent publications.

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