Passing the baton to the next generation of leadership and management is difficult in any business. In family businesses it is often even more complicated. John Ward of Chicago’s Loyola University has characterized the first three generations in a family business in a way that adds helpful perspective to solving the unique challenges faced as family businesses attempt to move successfully through generations of management and

In Ward’s model, the first generation is known as the Sole Proprietorship . It consists of a founder who is also the owner and manager of the business. The second generation is known as the Sibling Partnership, in which one or more siblings must share the ownership, leadership and management responsibilities. Ward calls the third generation the Confederation of Cousins. In this generation the ownership, leadership and management roles and responsibilities are typically shared by members of more than one branch of the owning family.

Each transition brings with it a different set of problems and opportunities. Therefore, individuals involved in family businesses should understand the challenges they are most likely to face.

Running The Whole Show

The founding generation faces all the risks associated with a new businesses: raising seed capital, deploying that capital, getting the business into operation, hiring employees, acquiring customers, playing all the management roles and weathering the cash flow droughts common to most start-up companies. There are, however, two significant advantages -- one obvious and one, perhaps, not so obvious.

The obvious advantage is that if the founder is successful, the personal satisfaction and monetary rewards can be substantial. The not so obvious advantage is that the founder/owner is typically his/her only constituent, i.e., answerable to no one else.

Decision making is relatively easy in this generation when it is clear that one person alone holds all the final authority. The degree to which the founder is both willing and able to move out of this comfort zone usually determines whether the family business can even begin the process of its first intergenerational transition.

The Critical Passage

Even if the founder is willing to relinquish control, the second generation faces a unique set of issues. First, it has no model to guide the transition between generations. While any intergenerational transition is a critical period in the life of a family business, a business moving from the first to the second generation has never been through one. So no one has any experience with such a passage. This may explain why so many family businesses experience problems during the second generation of ownership and management.

In most cases, second generation siblings now work together in the business, share management responsibilities and often share ownership with siblings who are not active in management of the business. Because members of the second generation have grown up watching the sole proprietorship model in which one person holding all the power, they often don’t realize that the sole proprietorship model won’t work within the dynamics of their generation.

Simply stated, it is virtually impossible for all the power, all the control, all the decision making authority to be vested in one person when more than one sibling is in any way involved. We’ve seen too many family businesses in which open warfare is waged because everyone is trying to be the focus of control. And that warfare won’t stop unless, and until, family members make a conscious decision to change the management model and learn to share power and authority.

It GetsTo Be A Numbers Game

In one respect, the transition from second to third generation is a bit easier. At least by now the business has been through one changing of the guard, so there is some tradition of -- and experience with -- intergenerational transitions. But this generation has its own set of challenges.

First, it becomes a numbers game. In most cases there will be more family members with a direct interest in the business. How many of these the business can absorb as active "players" is an important question. Loading the business with family employees can quickly overtax available resources.

Along with numbers comes the question of representation. The number of owners can grow exponentially. Those family members who are active in managing the business will have more constituents to serve. Each constituent may have rather different investment objectives and expectations for the business. Managing the boundaries between family, ownership and management is always important, but as the numbers of owners grow, the magnitude of the challenge increases. Who has a voice and who has a vote?

The third major challenge for generations three and beyond is a bit more subtle, but every bit as important. It has to do with values. Second generation siblings all grew up in the same family and were exposed to whatever values were established in their family -- including values about behavior, work ethic, attitudes about money, sharing, etc. Third generation cousins will have grown up in two or more different families, and each of those families will have its own set of values. They may be good values, but they will most likely differ from family to family. Reconciling different value systems is a challenge that often goes unrecognized and, therefore, unresolved.

Knowledge is Power

As with all family business issues, there are no text book answers to the challenges of intergenerational transitions. Every family needs to find its own answers. There are, however, two prerequisites to successfully meeting these challenges.

First, identify and define the issues. Problems cannot be solved unless everyone involved understands what the issues are and agrees that they are issues. The second component of the success equation lies in communication. Families that have established a tradition of open communication will be more able to discuss and resolve the issues that get in the way of successful intergenerational transitions. The potential reward is absolutely worth the effort.