Family Business in Transition

The things buyers look for — market dominance, structure, systems, independence from one or a handful of managers, stability, predictable cash flows, etc. — are exactly the things this owner identified as missing from his firm. To be blunt, many family business owners have pipe dreams about the “sellability” of their enterprises.

In addition, a significant number of business owners intend to participate in the operations of their companies after the transition, according to the CFIB survey. How they plan to do this, if almost 40 percent intend to sell to people outside their families, is not exactly clear. Consider that 38 percent of owners intend on being “special advisers,” while 7 percent expect to remain as senior executives. Nearly one-third (29 percent) don’t know what their role will be after transition. Nearly one-quarter (24 percent) of respondents said they will have no attachment at all after transition.

When asked why they plan to have a role after succession, 44 percent of owners said it was because of their “personal attachment,” according to the CFIB study. The longer an entrepreneur has been at the helm increases the likelihood that he’ll want to have a role after transition has taken place.

Even those who have planned their exits seem to have done so in a way that may jeopardize their success.

Business Scenario

A significant petroleum distributor and convenience store operator planned to sell his company to his family’s junior generation. He spent time, energy and tens of thousands of dollars on all the things leading up to the sale. However, the lion’s share of the deal was contingent (due to considerable seller financing) on the next-generation family business owners running the company profitably over the next 15 years, in order for the transition to become a true win-win.

If the junior generation runs the company into the ground, the senior generation stands to lose millions and will experience a significantly restricted retirement. Precious little time and attention was spent on preparing the successor generation to run the company successfully in the absence of the founder.

The owner in this scenario should have spent the same amount of time, energy and money in preparing the second-generation leaders in their proper roles, leadership mandates and success strategies. That would have strengthened the back part of the deal, where 80 percent of the financial transaction took place, and guaranteed it was as sound as the legal and financial parts. Without successful company management and operations, this deal could become a transaction valuable only on paper.

The data and statistics we have covered paint a none-too-flattering picture of the succession plans of family business owners. Family business is a massive economic engine in North America, and given that well over half of family companies expect a transitional event in the next 10 years, one would think that there would be a virtual state of panic among owners and stakeholders of closely held companies.

Business Scenario

John and Mary finished up their cocktails and prepared to go to their club for dinner. John said: “You know, Mary, I know how to run my business and make money, but we’ve never had to deal with these complex succession issues before. If you think about it, no family business owner really has to go through this except once per lifetime. We need to think about how to get through these next five or 10 years of transition the best way possible. I think the best place to start is to have a heart-to-heart among the whole family about how they envision the future. What we learn from our kids and their spouses might even surprise us when it’s all said and done.”

“I think that’s one of the best ideas you’ve had in a long time,” Mary replied. “It really makes sense for us as parents and stewards of this family to do a little ‘focus group study’ of the next generation to figure out what they want. Why, they might tell us to sell the business, put a few million dollars in our pockets, and move to Florida. Until we ask them, we simply won’t know.”

John, in a flash of insight, had come up with a brilliant idea. Beginning a productive dialogue among the family is a great place to start to determine future succession and transition strategies for any family company.

Wayne Rivers is the president of The Family Business Institute Inc. FBI’s mission is to provide complete solutions to help family businesses maximize their family and organizational success. Wayne can be reached at 919.783.1880, info@familybusinessinstitute.com, or on the Web at www.familybusinessinstitute.com.