Our latest Wall St. Journal article has to do with 10 reasons family owned businesses may not transition successfully into the next generation. The article didn’t flow naturally at first, and my editor must have been growing frustrated by my substandard series of submissions. As always when I run into a writing brick wall, I asked my team of gifted consultants for their help. What I got back from them was “gold” according to my editor.
Most of the time when we speak or write about succession failures, we focus on poor management succession planning, poor ownership transition planning, the lack of a common vision among owners, etc. But, thinking outside the box as always, The Family Business Institute team came up with a pretty impressive list of reasons which have little if anything to do with planning either good or bad.
Sometimes it is just not in the cards for a family owned business to continue inside the family of origin. In fact, in the case of some of our clients, we are engineering an ever increasing proportion of transitions/sales to either non-family key executives or to a combination of key execs and NextGen family.
A second-generation construction company owner has given his daughter and son about 10 years to demonstrate that they “get it” and can run his company successfully. While they are competent employees, they don’t show the entrepreneurial drive he associates with operating a successful business. He begins a nationwide search to find the right person to operate and eventually purchase the company with the daughter and son each owning a minority stake.
The old idea that a family business is automatically transferred from generation to generation is no longer operable. In the past, succession occurred ever so gradually as the next-generation came into the business, worked and learned there, eventually took over from Mom and Dad, secured the senior generation’s retirement, and inherited the business upon their demise. Older generations often associated succession planning with aging, infirmity, and having nothing to contribute anymore; even discussing intergenerational transition was something to be avoided.
Another second-generation owner has three children all of whom have very successful careers outside of his industry. After a couple of failed attempts to entice his kids to come into the business on a trial basis, he elects to sell his company to a combination of his top management team and an ESOP.
Perhaps because the definition of family has changed so dramatically over the last generation or two, the new, evolving aim of succession planning is not necessarily to pass the enterprise along bloodlines but rather to transfer the business to people who have the necessary skills and passions to succeed. Competence, financial acumen, training in management and operations, and people skills are the modern watchwords. About 75% of respondents in a recent family business survey say, “There is no compelling rationale for continuing the existing business along family lines, and most believe that selling the business is always an option.” Another survey identifies a “significant shift towards merit-based candidate selection”
Family business leaders, pragmatists that they are, recognize that true win-win comes not from arbitrarily passing a business to family successors who may lack the skills to operate it effectively, but from transitioning to one or more capable, talented people who can continue the firm, provide ongoing jobs for employees and communities, and preserve the legacy of the hard work of previous generations. They are by no means disinheriting their children; they’re just providing for inheritance in other ways.
Whether transferring a business to family members or others, the overarching goal should always be the long-term success of the company and its people. From the seller’s point of view, getting the maximum purchase price (i.e. being greedy) is a non-starter. The transaction should meet the seller’s needs for retirement, and there should be a timeline governing how responsibilities, and, ultimately, control will change hands. From the buyer’s point of view, they must be focused on making sure they have the right team for continued success, aligning new ownership with leadership, determining how they’ll make challenging consensus decisions, and producing a plan and a schedule for implementing business growth and change initiatives.
Successful family businesses will continue to experience intergenerational transition both inside and outside of families, but today’s focus on talent, leadership, and entrepreneurial drive as primary attributes are leading to a new era of merit- and competence-based successors rather than simply inheritors.
Read The Wall St. Journal piece HERE
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