Circles of succession

Understanding these three circles could save you from a family feud and having to sell the farm.

Circles of succession
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Emotions lie close to the surface in families. When they erupt, logic and rational behaviour evaporate. This is the reason why so few family businesses make it through the generations under the control of the founding family. In a family farming business, passing the baton to the next generation successfully is much more difficult for one simple reason. Farmers and their families live and play on their farms.

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The children grow up on the farm. All their fondest memories of childhood and their formative years are created on the farm. Home and business are inseparable, and this is bad news for a smooth succession.

Overlaps

I’ve written about it before, but let’s have another look at the three-circle concept developed by Tagiuri and Davis in the 1980s, which captures the essence of the dilemma family businesses face. Check out the diagram of the three overlapping circles. If you’re facing family succession issues – take your time! Understanding this may just make the difference between success or failure in your family succession plans.

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There are three main sectors, but the overlaps create four other sectors, which complicate things. All family members will fit into one of these sectors, and each one will have their own interests and emotions. It’s complex, and interpersonal conflicts, role dilemmas and priorities interact with each other and issues get blurred. Let’s look at each sector in turn:
Family members:

There will be different levels of family linkageand emotion to deal with. Children of the owner-manager who live on the farm will have very different expectations compared to the brother of the owner-manager who’s a shareholder, but a doctor in town. The child who aspires to be an artist will be very different to the one who wishes to be a farmer. An understanding of the personal expectations of each family member is crucial to crafting a successful family succession formula.

Owners:
In the first generation this will be the founders. In the second, the owners will normally be the children of the founders who have inherited shares in equal proportions. Owners of a business are entitled to dividends and growth in the value of their shares. They also have the right to participate in the appointment of directors who appoint the manager and direct the business. That’s it.

Business:
Here we have the people who draw salaries from the business. There are the directors who set policy and direct the business – not manage, but direct. Then there are the managers, who depend on the business for their livelihoods.
These two roles are distinctly different. Now look at the diagram again. There are seven different combinations possible. In a second-generation business there will always be people in each of these sectors. It’s in this overlap that the confusion between roles causes trouble.

Unique setting
Family businesses combine love and work in a unique setting. Owners, managers and family members all want different pieces of the pie – a recipe for disaster if not properly managed. If the leader in the family and all family members understand their own positions in the three circles, they can moderate their behaviour and manage the conflicting roles and objectives. If you haven’t yet done so, make a start in educating your family about the issues they’ll face by giving each a copy of Tony Balshaw’s Thrive – Making Family Business Work (Human & Rousseau).

Contact Peter Hughes at [email protected]. Please state ‘Managing for profit’ in the subject line of your email.

This article was originally published in the 17 August 2012 issue of Farmer’s Weekly.