Next generation entrepreneurship

Background

Next generation entrepreneurship is the succession of family-owned business to the heirs. Due to the number of baby boomers that will be retiring soon, nearly 40% of family businesses in America will be facing a major demographic shift to the next generation over the next five years. However, “experts estimate that fewer than 30% of family businesses make it to the second generation, and about 10% to the third. At any given time, about 40% of family-owned businesses face a transfer of ownership.” In the United States, 35% of Fortune 500 companies are family-controlled, which accounts for 50% of U.S. gross domestic product and also generate 60% of the country’s employment and 78% of job creation.

Succession of family-owned business can be considered as a different kind of entrepreneurship. It may not bear the same challenges with starting up a brand new business, but it faces many difficulties due to family politics. First of all, Generation Y has a different approach to work from its parents’ generation in a way that they value work-life balance and finding meaningful work, while also at the same time feeling comfortable bringing personality into the workplace and feeling at home at work.

Within the family-owned business, “each succeeding generation has its own ideas about taking the company forward or if it wants to join the family business at all. Successful transition has always been crucial to the continued success of family businesses.” On the other hand, “the common phenomenon in family-business circles - where entrepreneurs’ fortune, worth, and identity are all wrapped up in their companies, and letting go can be scary, if not impossible, proposition.”

Advantages and Disadvantages of Joining a Family Business

Choosing to join a family business is certainly poses a dilemma to heirs. They could have an option of working for someone else or deciding to join the family business. There is no definite answer to whether or not the heirs should join. However, there are certain advantages and disadvantages of family business.

Advantages:
•The company is already up and running - the struggles to find funding and expand are in the past.
•The company offers job security and, likely, an attractive remuneration package.
•Family businesses often have an appealing environment that encourages a sense of belonging and shares a strong commitment to a common purpose.
•Family members enjoy a special status, both inside and outside the company - and have higher than normal chances of becoming owners of the businesses.’
•Family businesses have a competitive advantage in that family members tend to take a long-term view of their investment instead of focusing on short-term returns.
•Family members are likely to be more committed to the success of the business than other employees.
•There is an appeal and preference from other people to do business with a family-owned operation.
•Many multi-generation family concerns are proudest of their strong tradition of providing employment, commerce, and philanthropic benefits to their community.
•A chance to work with family members, a way to offer employment to qualified relatives, the opportunity to put cherished beliefs in to practice, and an enterprise that can unite and benefit the entire family.

Disadvantages:
•Family businesses are not typically diversified multinationals able to withstand dramatic change in the marketplace; there will always be some insecurity regarding the survival of the business for the long term.
•Those working in a family business must deal with the emotional complexities of family business life.
•The commitment to a family business is often significantly more involved than that required for a non-family business.
•Employing relatives regardless of their qualifications or allowing relatives to develop a sense of entitlement about the business can result in poor performance, hampered growth, and lackluster profits.
•Working together can ruin a couple’s marriage.

Heirs to Family Business

According to Harvard Business Review, “heirs to family businesses can’t sustain their leadership through raw power; stakeholders must grant them the authority to lead. Unfortunately, incumbents in family businesses often try to shelter heirs, sometimes by giving them ambiguous positions such as ‘assistant to the CEO’.” There are four kinds of tests that heirs have to pass in order to successfully manage the family business:
1.Qualifying tests: assessment based on the formal criteria that society in general and companies in particular use to judge executive capabilities.
2.Self-imposed tests: expectations that leaders themselves set and against which they expect stakeholders to measure their performance.
3.Circumstantial tests: unplanned challenges that leaders must face.
4.Political tests: challenges from rivals who want to enhance their own influence, often by undermining the leader.

Succession Planning
It has been supported, through research, that businesses have been more successful through the gradual succession of power within the family business rather than immediate change.
An Example of such transitions include that of a Canadian, supermarket conglomerate Loblaws, wherein since 1882 has been handed down from generation to generation. Most recently, Galen Weston Jr. advanced into an executive position following eight years of previous work experience with the Loblaw Companies.

Moreover, in terms of corporate governance, to avoid emotions which may come with families working together, attracting an outside board is often seen to act as arbitrators, bring in new ideas and perpectives. Using Loblaws as an example once again, this can be displayed through Galen Weston's move to hire outside marketing assistance, which ultimately led to the President's Choice Brand.

Strategic Objectives
Upon determining a transition period, performance measure should be developed in order to provide the next generation with performance goals. Such performance measures may include: revenue, cash flow, liquidity, etc.

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