EP01: How to prepare NextGen to run your family business

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Alan Frost: The route that previous generations took to get the business to where it is today in 2022 is not the route that you have to take to get it to where it needs to be in the future.

Natalie Wright: You are listening to the Exploring Family Business Podcast brought to you by Mazars. I'm your host, Natalie Wright, head of family business at Mazars UK, who has worked extensively with family businesses for a number of years, I'm keen to support this valuable sector of our society. At Mazars, we believe there is nothing more personal than a family business. Every family and every business is unique, so we look forward to sharing knowledge, insights, and practical tips for those navigating the unique issues that arise from being in business with family. Now on with this week's show.

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Hello everyone and welcome back to the Exploring Family Business Podcast with Mazars. For those of you who tuned into Season 2, you'll know that we covered a number of aspects of succession planning, from creating the framework that matches the wants and needs of each stakeholder, to understanding the tax implications that succession can bring. We also considered the more intimate side of succession, being able to have those open and honest conversations with the rest of the family, handling conflicts, and getting comfortable with handing over the rings to someone else.

This season, we want to delve further into that transition from now-gen to next-gen. We'll be exploring both the personal and practical aspects of handing over the ownership and the management of the family business, as well as the challenges and opportunities that change can bring. Now, many articles reference the third-generation role, which suggests that most family businesses don't survive beyond three generations.

I've laid the stats and put it at less than 15%. However, if you look closer at the detail that actually sits behind this, we often find that family-owned businesses survive longer than most of their enterprises and that the continuation to the third generation or beyond is more around choice and design rather than failure, but for those that do survive the transition and go on to thrive, I'm really interested in what made the difference. What does it take to create those steps to successful engagement between now gen and next-gen?

Joining me today is one of our regular guests, Alan Frost. Alan is a partner in the business consulting team at Mazars based in London, where he advises a wide range of family-owned businesses, typically ranging from second to the fourth generation. Alan also has the benefit of speaking from personal experience as he was the third and final generation of his own family's business. It's a pleasure to have you back, Alan. Thank you for joining us today.

Alan Frost: Hi, Natalie. Thanks very much. It's great to be back involved in this podcast and I'm looking forward to the event today.

Natalie Wright: Thanks, Alan. Now, I know you've got a lot to talk about on this subject, so let's just dive straight into it. When you are working with family businesses, and those who've started to think about the transition, particularly where there's a number of individuals involved, what's the process that you go through for deciding who moves into which role or do you find that there is actually a process that you can formalize?

Alan Frost: There is a process that you can formalize, but in my experience, the process in a family business tends to be starting with the people that have got perhaps the right surname or the right blood type effectively who's in the family already and perhaps trying to shoehorn them into the most senior positions. The reality is though that business, family businesses in particular need to prepare themselves for detaching, and that family aspect, and that loyalty to their own relatives away from these decisions and to think purely about what's best for the business.

That's a really difficult thing to sit back and do because there could well be two or three different individuals that you want to put in a certain position, but they perhaps haven't got the desired skill set that somebody else who's not a family member may have. The process that needs to be undertaken is no different in a family business to any other business when you're looking at organizational design pieces, for instance.

It is to look at what are the skills, and the roles, and responsibilities needed in certain positions of that business, rather than, "These are the people that we've got, where can we put them and where do we fit them? Who do they report into?" Et cetera, et cetera. The reality is some of those skills may not exist in the business today and they may need to be acquired externally, but being able to sit back and not get drawn into family politics, or trying to shape a business around an individual is difficult but a necessity.

Natalie Wright: It's interesting what you said there, actually that the skills needed may not exist in the business right now. I think it's often clear to see that the combination of ambition, determination, and willingness to take calculated risks is really integral to the long-term success of family businesses. It's what makes them nimble, and adaptable, especially in times of crisis, as we've seen on many occasions in the last couple of years, but where that entrepreneurial spirit was the driving force of the founder or an earlier generation, how do you continue to nurture those entrepreneurial characteristics in the next generation?

Alan Frost: Well, the reality is that there might not be enough entrepreneurial spirit within that next generation, or at least that not yet anyway. There's a really good chance that that next-gen hasn't even been given the space or the opportunity to show entrepreneurial skills. They probably haven't had the chance to fail because they've always had the protection of about the generations for instance. That said, that doesn't mean that these individuals don't have a future in their family business, it just means that things might take a bit more time or there needs to be training or exposure given in a certain way.

I think often there's a belief that you have to be part of the family to run the business and that a family business means that it's run by family members for instance, but I completely disagree with that as needing to be a necessity. There are definitely roles that should and shouldn't perhaps be performed by family members while it all comes down to who's got the right skills to be able to operate at those sorts of levels.

Instead, often the best role for the family members could be to actually play a part that isn't in the operation of the business. It may encompass more about the culture, the beliefs, and driving the vision of the organization, perhaps looking more externally rather than internally looking at the business.

Natalie Wright: Ultimately, regardless of whether you named six above the door, you can still find your place and be part of the business of success, even if it means not being that ultimate decision-maker.

Alan Frost: Yes. That might be quite difficult for some family members to accept and to take on considering this idea that it's their name above the door like you say, but they're not the ones making perhaps ultimate decisions. They're not involved on the shop floor on a daily basis or leading the sales team or even in the boardroom, to be honest. That's why I come back to the idea that identifying what are the roles, responsibilities, and skills needed in different areas of the business should be the first port of call before then allocating those roles to different individuals.

Most people, when they look at successful businesses, look at successful reorganization, maybe at their own business and the effectively shuffle individuals around into different roles and into different departments. It's the different structures rather than removing the personal relationships, and thinking about the skills, and the attributes, and the qualities that are needed by people who fill their roles that are not too important. How do we create a team or department that's going to operate effectively rather than how do we find a team that can fit underneath this certain individual that happens to be part of our family?

Natalie Wright: Thinking about organization restructure, let's move on to leadership then, because if the next-gen is stepping into that leadership role, it potentially means using a different skill set that possibly never had to explore or even demonstrate before and stepping into the shoes of the current generation, which I think is often how it's viewed and therein possibly lies some of the problems, it can bring its challenges, but how do you know that the next-gen has the leadership skills that the business requires accepting that the business needs may be different from your needs as now gen, and if they don't have those skills, what can you do about that from a leadership perspective?

Alan Frost: Having the skills to run the business is very different to having the emotional connection to the business and those two things should never be mixed up. There's probably more of a willingness than ever before of family members wanting to see things work, but desire and enthusiasm can't be mixed up with skillset and ability effectively. There's real value in having an emotional connection. Don't get me wrong, but the emotional connection doesn't always give you those skills to be able to think coherently and to think about what is the best thing for the business in the most objective manner.

I can speak from experience in that respect as well. It's not what your parents or your grandparents may have wanted, it's the decisions about what is best for the business needs, and what's best for the organization and its stakeholders, which include much more than the family, your staff, your customers, suppliers, The stakeholders as well and there's going to be decisions that you have to make as a leader of that business that maybe previous generations wouldn't have made or you know they would have disagreed with.

As long as you can make them for the right of the business that's the important thing. One way to go about thinking about the skills, though, that you mentioned Natalie is to actually undertake a capability assessment of the whole organization. Now, this isn't a process designed to show up individuals or to show family members, it's actually to understand where are people’s strengths and how can we accentuate those strengths accordingly.

It's certainly not about where are people's weaknesses and how do we get them up to a threshold level? It does highlight these don't get me wrong and it may be areas where a minimum level is actually needed. We're not looking to make an organization of all-rounders, it's really important to know what are the skills that we have in the business today and what are the skills that we're going to need in the business tomorrow and where those skills aren't there how do we generate them?

Is it through acquisition or is it through training our own staff and our own teams and building them up? Because often going to acquire those skills doesn't always need to be the process to go through. Following this method of a capability assessment and then an organizational design approach after that, there can then be no arguments within either the family or the wider organization that the right people have been placed into the right roles because the science beforehand has proved everything. It could still be the case that the family members are, in fact, actually the right people to run the business.

Whether it is or it isn't you can always prove to the whole organization which is so so important for the culture in family businesses that you have taken this structural approach to arrive at the conclusions that you have and that those conclusions that you've reached are the best for the organization and its employees as a whole not just for the family.

Natalie Wright: You mentioned arguments there and we hear about conflicts a lot, particularly in the context of the family business there is more so than I think other privately owned businesses, and we can't get away can we? From the personal relationships that exist in that family ecosystem, especially when it comes to making decisions that then carry financial implications for a really wide group of stakeholders. How do you prepare the next-gen then for handling that responsibility that being an owner and decision-maker can bring?

Alan Frost: In terms of how you can prepare potentially family members for leadership and for being our next leader it's probably around giving them the space to make mistakes, probably mistakes that when you were their age and had their level of experience you would have made as well and that's a really difficult thing I imagine for any parents or grandparents or previous generation regardless, to be able to do is to watch things that you think that's probably not going to be successful, is not going to drive what it needs to. Because as long as it's not jeopardizing the going concern basis I suppose of the business I think those failures are so so important to prepare leaders for the future.

If you're able to do that and provide that safety net to those younger generations that are coming through, the next gens to say, "Go and take the business where you think it can go, you've got my support, I'm in the background, you’re upfront and centre." It sounds easy saying all this on the podcast but it's so so much harder, in reality, to go and deliver that but I feel there's real value in doing this.

It's one of the only ways in which you can prepare the next-gen to take the business forward, to take that business that you've probably built and you've survived the time just thrive that others and you perhaps you don't think that the next generation is as intrusive of the experiences that you've been through. It's much more dangerous to pass on the baton when you have to and hope that they swim as opposed to sink than being able to effectively have a bit of a dry run in the background and say, "I’m still here, but off you go."

I think that'll be incredibly comforting as well for that next-gen that is coming into the business. Then I think alongside that as well as just saying, "You've got my back here if you need me." There's something about them not being the first car in the car park and the last one to leave, not potentially being the loudest voice in the boardroom, or having the final sign-off on key decisions. All of this comes back to ideas and processes that can really help facilitate that next-gen taking on that role and having a much, much greater chance of success.

Natalie Wright: I think the phrase that really springs to mind as you're saying all of that was getting comfortable being uncomfortable I guess and allowing mistakes to happen because we can't control everything. What are the risks if you don't engage the next-gen and directly address some of those points that you've raised there?

Alan Frost: I think the risks could be catastrophic. That might seem an extreme word to use but there are examples out there that don't need to be named on this podcast but by organizations and family generations haven't let go until it's too late and that individual has then been or the next-gen have then been forced into a position that they've not been ready for and they've not been prepared themselves for or the business hasn't prepared itself for them taking over.

Then it takes an awfully long time for the business to offer that next-gen to steady the ship and to answer the questions that they need to answer and move in the right direction. I don't think any exciting family business member would wish to stop their own family business or more importantly the next generation from succeeding or from moving on. They don't want a legacy whereby it stops the second they walk out of the business.

None of us can predict the future, we don't know what's going to happen later today, or tomorrow but what we can do is we can have a plan in place and have clarity around rules, objectives, responsibilities, and all those things. Whilst they can seem at times like a job, they will make the transition whether it be planned or unplanned so much easier to undertake and so much easier probably for the rest of the organization to accept as well as the current-gen and the next-gen.

People always say that the culture and the values of a family business are so different from other corporate businesses. To a large extent, I would agree with that but I don't think that that's always positive even though it's usually spelled out that way. I'd like to say the majority of the time it's positive, but when a sudden crisis or without some continuity behind it, some of those values and elements of that culture could be eroded very, very quickly and take an awfully long time to rebuild and to recover from.

Now whether that's Brexit, the pandemic, the war in Ukraine, supply chain issues, whatever it may be, if the next generation is looking to lead the business and it's based upon the relationships and the goodwill of previous generations that have gone before them, it's going to be very, very difficult for them to withstand macroeconomic or unexpected events. Preparing people for those events as best as possible with the comfort blanket and safety net I talked about and the support of people who've been in the business and experienced similar-sized events in the past will give that next-gen and the wider business the greatest chance of success.

The road is always going to be rocky and I think it's fair to say that the next few years for sure are going to be even rockier again. If people are in a position or the next-gen are in a position whereby you're getting towards that cusp of transition, now is the time to be preparing the organization and your next generation accordingly.

Natalie Wright: You've gone through those processes, then you've engaged the next-gen, you’ve identified strengths and areas for development, and you've decided who should transition into withdrawal. What about the governance that sits around it, how do you create that strategy and framework to formalize things that we've discussed and I guess professionalize the family business so that it doesn't become something you've just decided over dinner?

Alan Frost: Well, this is the £64,000 question, isn't it? It's tough, it is not easy to do and many family businesses will say why do we need to do this, why do we need to put strategy governance in place. This business has run for X many generations, we've succeeded for so many years, and we don't need to do this. However, the future of the business is very different from the previous generations of the business and that strategy and governance aren't to be eroded.

We're not trying to change the business and make it look any different, we're trying to preserve what's been built and strengthen that base on which further growth can be taken. We've talked a lot today in terms of people having the right skill set or just the right surname and the role in which family members can take where they add the most value to the business.

A framework that talks to all of that can really accentuate things that in my belief don't need to be 100-page documents that sit in the top drawer of a desk. It can be which is leading other than that and just provide clarity both from a strategy perspective and from a governance perspective in terms of decision-making processes in terms of how the business is run and the decisions that need to be taken on a consistent and fair basis that are the best for the business and not just the best for the family. It can be a conversation that happens over dinner but then formalizing it afterward, I think gives comfort to everybody that there are agreements on where the business is going or where the business needs to go.

Now, the journey on which it's going to take to get there is largely dependent on the next agenda will be meeting the business, but if everybody in the business today can agree on where the end goal is, well, that's the great thing for next-gen. They're the ones who can dictate the path and the journey that it goes on with real confidence. For those that might want to start on this journey of creating a framework to formalize some of the things that we've talked about, and professionalize the family business, the best place to start, in my opinion, would be to undertake that skills capability matrix.

Understand what are the skills of each individual within the business currently, and then consider what skills we need in the business both today and in the future, that's going to help define everybody's role. It's probably most important with family roles, but also other people's roles in the business as well. It's going to show that career pathway for everyone in the organization, and it's going to engage all staff, and family members too, even more.

Secondly, it's a case of defining and refining the strategy of the business, following that skills capability matrix. Where are we going from and where are we going from today and where do we want to go to? Sorry, I should say. Who are the operational people? Who are the strategic thinkers, and all those skills that you know that are currently within the business, how are they going to be operationalized and how are they going to be maximized, I suppose, across all individuals? That's then going to allow you to ensure that you've got the right people in the business, sitting at the right desks and with clear responsibilities and roles to how they add value to the business.

Because remember at this point, there's clarity around where we're looking to try and get to. When you know where you're today and you know where you're going to, and you've had your role responsibility defined, there's absolute clarity on how everyone plays their part. I think the family businesses, in particular, probably do this bit really poorly. Maybe that's because the values or the objectives of the business may differ from a listed corporate business, for instance, that's owned by external shareholders, institutional investors, et cetera.

The monitoring of performance should be much more than cash flow or short-term profitability that year in the family business and determining what those measures of success are, is really key. They don't need to all be financial metrics that, maybe a listed business has, maybe things like attrition levels of staff or engagement scores if you do surveys internally are actually more important for a family business than gross profit margin or EBITDA, et cetera.

Natalie Wright: Some great tips there, Alan. Thank you for your time today. Thank you for all the insights that you shared with us. I really enjoyed the discussion as always, and it's been a great way to kick off Season 3. If it's okay with you, I'll share your contact details in the show notes, along with a couple of articles that you've written recently, which specifically addressed some of those points on leadership and succession in more detail. With that, I'm going to close with two quick-fire questions for you. Can you tell me your favourite well-known family-run business and the reason why?

Alan Frost: My favourite family-run business would be Timpsons. I follow James Timpson on Twitter and he's really great value. Now, I don't know what James' role is in the business on a day-to-day basis, but I do know that he accentuates all of the positive culture and values of the organization externally to me as a customer, I suppose, in such a way that what happens behind the door of head office is irrelevant to me.

I buy into that business in such a way that it being a family business and it having this strong connection with the community, things like this, is so, so important. That means an awful lot, and I would never go anywhere else for getting my shoes repaired or my watch fixed or a new set of keys cut as a result because it's a brand I really can warm and relate to I think.

Natalie Wright: Great choice and it's a great brand, as you say, really built on values. Final question, can you share with us a podcast or book recommendation for rising family business leaders?

Alan Frost: Well, this is the best podcast there for rising family business leaders. I'll go with the book instead. There's a book that I've read a couple of times by Marshall Goldsmith called, What Got You Here Won't Get You There. I think the reason-- It wasn't written for family businesses. Don't get me wrong, but I feel it's so poignant to rising business leaders because it reminds you that just because the previous generations did things one way, it doesn't mean you have to do it the same way.

In fact, if anything, we live in a completely different world today compared to 18 months ago, what got you here almost will definitely get you there as opposed to anything else. The route that previous generations took to get the business to where it is today, in 2022, is not the route that you have to take to get it to where it needs to be in the future for yourself and your generation and future generations, hopefully, for your family business. Marshall Goldsmith, What Got You Here Won't Get You There.

Natalie Wright: Thanks, Alan. It sounds like a must-read for any business owner, to be honest.

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Upbrings episode one of the third season of the Exploring Family Business Podcast with Mazars to a close. If you enjoyed today's show, please subscribe to the series and leave a review on Apple Podcasts. It will help us to extend our reach to the family business community. Join me on the next episode, when I'll be speaking with Josie Morris MBE, Managing Director of Woolcool, where we'll be telling the story of her journey of succession from her mother, Angela. How they've managed a transition without major incidents and how their whole family has managed to maintain strong personal relationships throughout the process. I look forward to sharing more with you then, but for now, thank you for listening.

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