If family succession is your dream, it pays to be straight with non-family employees, says Trevor Merriden. Junior's rise to the top must be handled sensitively if others are not to lose interest and lose out.
Junior's just out of college, looking to place a tender young toe on the corporate ladder. You fear for the naivete of youth and want a good career for your loved one. Fortunately, you are in a position to help. It's time to welcome Junior into the family business. The family succession will be assured - and all will be well. Well, not exactly.
Nurturing your flesh and blood is both a complex and a sensitive issue - for family and non-family employees alike. Many owner-managers harbour hopes that their business will become an ongoing family concern. Yet difficulties in bringing on younger generations mean that fewer than a third of owner-managed businesses pass into second-generation hands. Less than 10% survive beyond the generation after that.
If family succession is your dream, then remember one vital word when first introducing Junior to your colleagues. That word is honesty. The wise entrepreneur, says Barbara Dunn, director of Glasgow Caledonian University's Centre for Family Enterprise, is 'absolutely straight with the workforce about what type of business they are working for. He or she must be clear whether this is a business that exists for the family, or one to be grown and then sold on.' Such straight talking on succession plans is necessary not just for those employees unlucky enough not to be born into the family but also for the fortunate family few. Understandably, everyone needs to be clear about their potential career opportunities.
Assuming Junior wants to take up your kind job offer in the first place, you may feel tempted not to commit yourself. After all, who knows whether he or she will turn out to be a triumph or a turkey? Yet silence about your intentions will inevitably lead to misconceptions, mistrust and possible staff departures. Without a clear message, non-family members will come to their own assessment of where they stand. Their conclusions may be self-deceiving. Says Dunn: 'That's where a lack of openness causes trouble.
If the next generation (but nobody else) is told, "Keep your head down, work hard and one day, this will all be yours", then the unhappiness caused as Junior rises through the ranks is often more trouble than it's worth.'
But how to manage Junior day-to-day on what you hope will be his or her inexorable rise to the top? One common method is to put the young aspirant through a fast-track programme, a sort of whistle-stop tour, with short bursts of experience in various departments. Dunn has definite views on this: 'The idea of a fast-track rotation process is such old-school thinking.' With departmental roles becoming more specialised, the danger is that the young whipper-snapper may become a jack of all trades, but a master of none. So many things happen which give the experience a short shelf-life - managers in each department can come and go, procedures change rapidly. 'It's a very high-risk strategy,' says Dunn. Fast-track rotation, she suggests, suits only the most capable of an aspirant younger generation who can absorb what they need to within the time given. And because you don't really know how capable your children can be until they have been around a while, think carefully before sending them on a high-velocity, learn-nothing trip around the company.
Far better then, to let them settle in and learn the trade of a particular department. Better yet, don't allow them within a mile of the premises until they have gained a specialisation elsewhere. While it's certainly true that a number of first-rate, second-or third-generation family business managers have never worked outside the firm, those managers can suffer limitations in terms of networking, openness to new ideas and, also perhaps, of credibility - no matter how good they are. Peter Leach, director of accountants BDO Stoy Hayward's Family Business Centre, says, 'I vehemently believe in outside experience for the younger generation coming into the business.'
Those who should know, agree. Nicholas Pearce is the seventh-generation member of his family to become chairman of Pearce Signs Group, founded in Southwark in 1791 by his great-great-great-great-grandfather Samuel.
The firm is now among Europe's leading signmakers, with a turnover of £41.5 million and pre-tax profits of £1.3 million in 1996. Pearce spent six years as a chartered accountant before returning to the family fold.
'Each new generation must earn its spurs and I personally believe that means outside the business. To put it crudely, I was paid to nose around other family businesses. I don't underestimate the value of that.'
Edwin Booth agrees. He is the fifth-generation chairman of Booth supermarkets, a chain of stores in the North-West. He expects the sixth generation 'to come in with a specific talent - accountancy, the law or something like that. And, in an ideal world, I would want them to have applied that experience somewhere - because our current people have levels of expertise which demand experience from someone entering the business from outside.'
Ironically, Booth himself came into the business at his father's request as an inexperienced 18-year-old. Even so, specialisation was his salvation.
Aged 23, he made buying his forte once he realised the firm lacked experience in that area. His own experience came second-hand from talking to as many buyers from outside the company as possible. It was only then, he says, that, 'I realised there was a big world out there with differing negotiating tactics and so on. That was my university, if you like.'
Another option to consider for the younger generation who have already started work for the family but have not been employed elsewhere is the work-experience sabbatical - with one salient difference. The Family Business Network, based in Switzerland, boasts 1,125 member companies and helps businesses arrange placements in one of 50 countries world-wide. The purpose is to offer high-level management experience to members of one family business in another family company.
Back at the starting line, however, once Junior arrives, the decision how much to pay him or her can cause a major headache. Leach notes that, 'What relatives should be paid is generally decided on the basis of an ambiguous combination of all sorts of tensions and inefficiency in the company.' Some firms pay family members significantly more than the market rate; others pay less because they see it as the duty of the family member to hold back; and if all relatives are paid the same, only the most incompetent are likely to remain. Leach, echoing Dunn, recommends, therefore, that the owner-manager plays it straight: 'If the entry deal is not done on a proper commercial basis, you're going to have problems.' One way to solve this problem, he says, is the use of share dividends rather than just a higher salary: 'Such an arrangement acknowledges the privileges of ownership but preserves a merit-based reward system in the business.'
Similar discussion will be required on how best to manage those outside the family, if your loved one is on his or her seemingly inexorable rise to the top. Many talented managers resign because they run out of opportunities in the family firm or the politics become too difficult to swallow. Sometimes, says Leach, key employees are not willing to remain unless they receive financial incentives such as shares or share options. Because share ownership is generally kept in the family, says Leach, there tends to be an impasse on this subject. One possibility is for the company to issue non-voting shares to the employee, or shares with restricted transferability. Alternatively, suggests Dunn, phantom share options are becoming more popular. Here the employee is allowed to exercise a notional option to buy market shares at the current value. Provided certain predetermined criteria are met, the employee is allowed to sell the notional shares and cream off the physical profit.
Another way of maintaining motivation is through profit-sharing schemes.
Such schemes in family companies are not that common, but David Burall, chief executive of Burall Ltd, a publishing and printing company founded in 1892 in Wisbech, Cambridgeshire, runs one. Burall says: 'We introduced a company-wide profit-sharing scheme in about 1970 and it has been a key to our success in motivating employees.' And Booth pays key personnel at middle and high ranks commission based on head office and individual store performance.
Don't forget, says Dunn, that working in a family business can have its own rewards. Most family-run businesses are privately owned and non-family managers can be motivated by the informality of the process, speed of decision-making, and the ability to make long-term decisions that would not appeal to outside investors. 'Non-family businesses very rarely offer these things,' she says. 'Non-family employees may say, "Well, perhaps I've got a limited career path but what I do get is a real sense of security".' Only through emphasis on these positive virtues, combined with an honest approach and merit-based financial incentives can you hope to keep your best employees while bringing out the best in your family.