On Freedom to Let the Next Generation Control the Family Business

When you transfer management and control of your family business to the next generation, it is best to let go of your involvement in business decisions.  If you want to feel the freedom to let go, however, you may need to ensure that your security in retirement is not dependent on whether the family business continues to thrive after you have withdrawn.

Why does the senior generation have to "let go"?

Recently, Arthur Sulzberger Jr., age 69, announced that he would retire as chairman of the New York Times Company, which his family has controlled since 1896, and turn over control to a member of the fifth generation, his son, AG Sulzberger.  According to a recent story in The Guardian, "One secret to the Sulzbergers' success is that each time power has been given to a new generation, predecessors have not become second-guessers.  This is what has made it possible for the paper to change with the times."  ("' I Figured I'd Give it a Year': Arthur Sulzberger Jr on How the New York Times Turned Around," The Guardian 12/20/2020).

There are many good reasons to take the Sulzberger approach, to resist second-guessing leadership decisions after you have passed control of your family business to the next generation.  First, as the Guardian article points out, by fully surrendering leadership of your family business to the next generation, you can help ensure that the business will evolve and adapt as necessary to remain successful in a changing world. If you are no longer involved in day-to-day operations, it may be difficult for you to keep up with developments in your industry, your market, and relevant technology, but those developments may seem natural and obvious to the next generation.

For example, during his tenure, Sulzberger Jr. helped the New York Times adapt to the internet.  A friend of Sulzberger Jr. is quoted as saying, "He was among the first (if not the first) traditional newspaper guy to grasp the importance of the internet, focus on it and never get distracted from it." ("Sulzberger," The Guardian 12/20/2020.)  According to recently published research, the New York Times is the "digital subscriptions trailblazer" and leader with more than six million online subscribers. ("The 100k Club: Most Popular Subscription News Websites in the World Revealed," Press Gazette 12/17/2020.)

Another reason not to second-guess the decisions of next generation leadership after you have withdrawn from management is that second-guessing can undermine successor leaders' confidence, energy, and enthusiasm for their work. As you know, running a family business is exhausting and stressful.  Your successors may come to you for advice and may appreciate your insights when they do. In contrast, however, they may not appreciate your input if it is unsolicited, especially if they interpret your position to be reproachful or overassertive.  Instead of being helpful in such cases, your input may simply become another source of stress and distraction for your successors.

About half of the time that I am approached about helping a family with business succession planning, it is a member of the junior generation, not the senior generation, who is initiating the discussion.  Often, these potential successors have a lot of energy and enthusiasm for taking over leadership of the family business as part of their own career path and job fulfillment, but they also are concerned that the business may fall behind if management does not adopt a new vision, embrace new thinking, or seize new opportunities.  These next generation members have a sense of urgency that blends their personal objectives and fulfillment with the future success of the family business.  If they are promoted to leadership in name only, because the senior generation retains ultimate control, they may not be able to apply or sustain the passion that made them want to run the family business.

How can the senior generation afford to "let go"?

Although you may agree with the concept of giving autonomy to next generation leaders of the family business, it may be difficult in practice if you continue to be economically reliant on the success of the business after you have withdrawn. In such circumstances, you may view the temptation to second-guess your successors as not just an urge but rather a survival instinct.

This is why I believe that retirement planning for the senior generation is an essential element of family business succession planning and that the retirement plan should fully function even if the family business does not fare well under next generation leadership.

There are many ways that you can derive cash flow from your family business after you transfer ownership to the next generation, such as continued employment, consulting fees, deferred compensation, or redemption proceeds.  Such mechanisms, however, may leave your security in retirement dependent on whether the family business can continue to make those payments. Under such circumstances, you may feel compelled to second-guess next generation leaders and become vocal when you disagree with their decisions.

A better approach is to design your retirement plan so that when you leave the family business, your cash flow and assets can continue to be a resource for you apart from the family business.  Ideally, you will have investments that are separate from the family business.  If you do not, however, you can nevertheless make your economic relationship with the business less risky in retirement.

For example, if you are planning to receive deferred compensation, consider how or when the payments can be funded and cease to be exposed to claims of the business's creditors.  When you make plans for the business to redeem your shares, try to find means other than seller financing for the business to pay for your stock, such as through accumulated investment assets (a sinking fund) and third party credit.  Also, if you plan to receive lease payments for real estate that the business uses, be prepared to find a new tenant or sell the property if the family business can no longer use the property.

If you have the economic freedom to retire from the family business, then you can give the next generation freedom to take the family business into the future without second-guessing.

Happy winter solstice.

Gregory Monday