Family-owned businesses have a significant role in the development of most countries. Successful transition from one generation to another is a fundamental goal of owners of such firms, which benefits both members as well as local and global economies. Nevertheless, the Family Business Institute notes that only approximately 30 % of companies survive into the second generation (Schnaubelt, 2018). While effective changing leadership of a family-run organization guarantees its stability, long-term outlook, commitment, and decreased costs, it promotes nepotism, leads to unstructured governance, and may not withstand conflicts.
Transitioning control of a family-owned business to the next generation does not affect its stability. The position in the family determines the person to lead the firm. Leaders usually hand over the management to the eldest member who has been actively involved in the company’s operations to ensure the preservation of established standards and culture (Ramadani & Hoy, 2015). The organizations’ long-term outlook is guaranteed because the chances are that the new leadership will follow the strategies and decision-making processes of their predecessors. Additionally, the approach assures a greater sense of accountability and commitment, leading to such benefits as a better understanding of businesses, jobs, industry, and more productive operations. Moreover, costs decrease since family members are willing to take pay cuts, or contribute their finances for the companies’ long-term success, unlike in the public-owned corporations.
However, passing a family business from one generation to another promotes nepotism since the leadership is reluctant to involve outsiders in the top management. Consequently, chances for assigning individuals jobs for which they have no experience, academic qualifications, and skills are high, which inhibits the success of the companies. The process undermines governance issues, including internal rules and hierarchies and external corporate laws due to inherent trust in family firms, which can negatively impact them (Ramadani & Hoy, 2015). Further, conflicts and contempt associated with familiarity can adversely affect all workers, leading to divisive lines and the organizations’ possible collapsing.
Ramadani, V., & Hoy, F. (2015). Context and uniqueness of family businesses. Family Businesses in Transition Economies, 9-37.
Schnaubelt, C. (2018). Transitioning Your Family Business to the Next Generation. Forbes.