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Family Business Transitions – All in the Family or Letting It Go?

In this issue, we look at some of the common issues faced when family business owners consider transferring ownership to the next generation.

Family Business

Mark has been working full time in the family manufacturing business since he was 18 years old – he is now 42.  His parents started the business when he was 7 – it was his part time and summer job as a teenager, and he juggled time at the plant with getting his college business diploma.  His parents are now in their mid-60’s and it has always seemed a foregone conclusion that Mark would take over the family business from his parents.

But Mark has a number of questions buzzing around in his head. Will the long-time employees respect him as the owner, or do they still see him as a little kid? Are his parents really ready to let go? Will buying out his parents leave him with a big debt? And the question that he loses sleep over: Is taking over the family business what he really wants?

For prior generations of family businesses, it was normal and expected to pass on control to the kids. But things have changed. As described in PWC’s 2014 Next Generation Survey:

“In this as in so much else, they’ve been brought up in a very diverse world, and enjoyed a very different upbringing from their parents. They often have different attitudes to work, and being rich appears to be far less important to them than having a rich range of experiences. In the case of those who stand to inherit a family business, the wealth generated by the firm has funded both a comfortable lifestyle and an expensive education, leaving the next generation with much broader expectations, and a much looser connection to the business that made all this possible in the first place. As a result, the next generation are much more likely to assert their own choices than their parents were.”

This change in priorities is likely a major contributor to the troubling success rate, estimated by many studies at only 30%, that family businesses have had transitioning to the second generation. The parent-founders needed passion, commitment and drive to build the company to its pre-transition success. But if the second generation leaders don’t have the same passion, they might struggle to earn the respect of staff, customers and suppliers, and to convince the founders to let go. Without the ability to match his parents’ passion, the questions haunting Mark as he approached transition may have unhappy answers.

This situation shows the importance of having a strong, trusted business advisor with the confidence to ask the right questions, even when the answers are uncomfortable. Sometimes the business founders are wearing blinders, and don’t recognize the signs of a tentative successor. If the odds are stacked against a successful family transition, early recognition and acceptance will allow the business owners to build an alternative comprehensive exit plan targeting management or external buyers, and to build the value and sellability of the business prior to their exit.

However, if family succession is the transition of choice, what can owners do to optimize their chance for success? According to the Family Business Institute, “Research indicates that family business failures can essentially be traced to one factor: an unfortunate lack of family business succession planning”. Over the past decade, fueled by the demographic of aging baby boomers, exit/succession planning has become one of the most discussed topics in business circles. Every major bank, legal and accounting firm has published a guide to succession planning for their clients. But for family business issues, many of these plans only address part of the challenge. As discussed in KPMG’s “Family Business Succession” guide:

“Far too much attention continues to be paid to the technical component of succession (e.g., tax minimization, estate freezes, family trusts, buy-sell agreements, wealth management, etc.) with far too little attention being paid to the people or non-technical component (family communication, family expectations, family values, family competencies, family dynamics, etc.) of the succession process”.

One topic often ignored is the transition of management roles. The best result comes when the two transitions – the founders stepping aside and the second generation assuming control – are well-planned starting five to ten years before the day that the ultimate transition occurs. One approach is to identify new roles for the founding parents that allow them to stay engaged with the activities of the company, but with diminishing “day-to-day” management responsibilities. For example, the departing owners could become responsible for new product development, special projects, community/philanthropic activities, trade show planning or other similar functions, where taking time off (perhaps to travel) will not negatively impact business operations.

At the same time, the role of the “next generation” leader needs to evolve, not only so that he/she is comfortable to take over leadership of the business, but so that they can earn the trust and respect of employees, customers, suppliers and other business partners. The more that the new leader can be placed in leadership roles, with the support of the retiring owners, the more likely they will be accepted by key partners.

Owners of family businesses, as they approach the next phase of their lives, have a variety of exit options. If family succession is their best option, careful planning, beginning many years before their exit, will maximize their chance to defy the odds and deliver future success to the next generation. However, if the next generation is either not qualified or not committed to becoming the next leader, a comprehensive business exit plan will enable them to successfully transition the business to non-family owners.

For more information on how best to navigate family business dynamics in an upcoming business transition, contact us for a no-obligation initial consultation.

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