From the risk-takers to the risk cautious – nobody said family business succession would be easy. Richard Lane, a Partner at Farrer & Co, has spent years guiding founders and their successors through the complex process of handing over the reins. In this Q&A, he shares his insights on the key differences between generations, why risk appetite can make or break a transition, and the warning signs that a transition might be heading for trouble.

You have worked with many founders handing over the reins of their businesses – what are the biggest differences between founders and the second generation in your experience?

Fortunately, the majority of the entrepreneurs that I meet in my work have been successful.   They have often started with very little and have built up a thriving business through hard work and a mixture of blood, sweat and tears.  They are natural risk-takers and have been willing to put their businesses on the line at difficult moments in their life as they have sought to grow to the next stage.  Sometimes they have not been to higher education, leaving school early to pursue a particular path.  Often they have strong personalities.

Their children are a real mixture.  Genuinely so.  It is difficult to draw threads here - but I will try.  Certainly, they are better educated than their parents, most take A levels, a degree and, perhaps, a further qualification.  Their parents are usually keen to impress the importance of education on their offspring.  This means that often their children have a broader world experience and have mixed with people from very different and more diverse backgrounds to that of their parents.

I do believe that with education comes a much greater awareness of risk. The second generation have more to lose.  And it is important to understand the psyche here.  Because there is a successful business to be inherited, there is more at risk for them than their parents so the path and the choices are not always so clear.  Questions I often hear at this point are: Do we stick or do we twist?  Do we keep the business doing what we have always done, or can we/should we move the business into a new area?  These are some of the concerns that keep this group up at night.  Will changes we implement negatively impact the business that Mum and Dad built?

You mention opposing approaches to risk, with the next generation being more risk adverse than founders. How can this shift impact a business’s long-term success?

The family business was often started by someone leaving their previous employment and branching out on their own, or with a spouse or cousin.  The sector and focus was chosen as it wasn’t being catered for, or the founders believed they could do it better than others.  There was little to risk, as there was little to lose.  

But for the next generation (or the now generation) a business has already been built.  Today we talk about the importance of growth and the need to keep growing.  If a business stands still it is going backwards.  So, the pressure is on – and the reasons why the original business was set up may have long gone.

Decisions need to be taken and this where I do see the differences between the generations.  I see those new to the business finding it more difficult to make decisions, any decisions, perhaps caught in the headlights and afraid to make a mistake.  I regularly counsel that the worst thing to do is often to do nothing at all, instead of taking a decision and moving forwards understanding that it is OK to fail.  I believe that one can learn a lot by failing.  

But there is no reason why the entrepreneurial spirit should flow down the generations.  I don’t think it can be forced.  If it isn’t there then it is often better to sell the business. I know parents who have seen their offspring grow up into young adults and then decided to sell.  Rightly or wrongly – but it happens.

You describe yourself as a ‘risk manager’ - what are the main risks you have seen when transferring a business from the original founder to the next generation?

In my job I am lucky to have many roles. Being a “risk manager” sounds one of the less exciting, but it really isn’t!  Lawyers are tasked with reducing risk as much as possible.  Where I see my role is to understand and communicate risk.  Business owners evaluate, manage, and live with risk on a day-to-day basis.  They are comfortable with measurable risk.  I try and map the key decision-making points to a likely risk, to a percentage outcome and to play out the options.

You ask about the main risk on transfer.  For me, the main risk is that the next generation has no interest, no desire to run the business and the hard work of the parents is left to slowly (or quickly) decline.  Passion is key to success.

What can be done to make this transition as smooth as possible?

My view is that a successful transfer and transition require work from both the founder and the next generation.  It is not one side’s sole responsibility.  It is a key element that all parties are interested and keen to ensure the success of the transfer to the next generation.

How have I seen this best done?  Each family is different, so there is certainly no 'one size fits all' but here are a few elements that I have found helpful:

• Telling the history. Communicating the story (by words and pictures) within the family of the struggles, the successes and the failures of the early years and how the business grew.  I find the second generation are often unaware of what the early years of building the business encompassed.  Exposure to this deepens the ties.
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• Taking the founder outside of his/her comfort zone. Exposure to technology changes and the different priorities of the next generations is important providing ways to better understand them.  What drives the children and what is important to them.  This area is often helped by involving external professionals.
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• Freeing the second generation.  Making them take their own decision to come into the business, and when/if.  Encouragement, or indeed in some businesses, the obligation for the next generation to work outside the family business to gain a wider experience.  And then only after this point, consideration being given to a role back into the business.

What are some of the most successful transitions you’ve seen, and what made them work?

I won’t talk about specific successful transitions I have seen, but time and time again these three key elements stand out: communication, respect, and honesty.

Communication – the importance of talking openly cannot be overstated.  Creating an environment where it is encouraged to speak what is on your mind, without being afraid to do so. It's equally important to be open to changing your mind.

Respect – understanding each other's perspectives and concerns is essential. True respect is shown through active listening and mutual consideration.

Honesty - Saying what you are feeling is crucial, however hard.  It is important to be able to express that you are ready or, not, to step into the business and acknowledge how that makes you feel - whether that's sadness, guilt, disloyalty, relief, or something else.  And similarly, also for the parent wanting to hand down the reins.  Life will be very difficult for all involved if people are unable to speak honestly about their feelings.  

And on the flip side, what are the warning signs of a transition that’s headed for trouble?  

Well, I could simply say it is the opposite of the above, but I would also identify the issue of leadership.  When there are multiple siblings or cousins in the next generation, identifying the next CEO and leader will be key, and it should not simply be the oldest.  

Agreement as to the leader is important and if no such agreement and understanding is reached the possibility for future tension and fallings-out is heightened and with it the future impact on the business, and possible loss in value.  Even where the next generation is keen to be involved.

And finally, what advice would you give to both founders and their successors as they prepare for this journey?

Much of the advice I give is set out above, but what I would also say is that the journey is best started early and carried on over time.  For all sides, I do say please do try and put yourself in the other person’s shoes as much as possible and think how they might be feeling.  Don’t be afraid to ask for help from professional advisers. The family business advisory world is becoming more sophisticated and can be of real help – but often it is a question of chemistry.  If you don’t get on with one advisor, go and find another!

But at the end of the day, my guiding principle has to be: “The founder generation had control of the past, your children that of the future, but you both are responsible for the now.”  

Conclusion

As can be gathered from our discussion, family business succession is rarely straightforward. The differing risk appetites between founders and the next generation, combined with evolving priorities and leadership styles, can make transitions complex. Richard's insights highlight the importance of communication, respect, and honesty in navigating this process successfully.

If you are facing a succession challenge and want to ensure a smooth transition for your family business, we encourage you to get in touch. We would be happy to help you develop a strategy that safeguards both your legacy and future business growth.

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Mark Estcourt

CEO at Cavendish Family Office

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