In the first part of this article, I addressed five key areas that require attention when running a family owned business. Another area of focus for family businesses should be the issue of succession.
Like any company, a family business needs to have a program in place for management succession. This can be a major source of turmoil and is often the reason family businesses don’t survive the transition from one generation to the next. The owner/manager should address this issue while there is ample time to get consensus on who the successor should be and train him or her.
Family Business Succession
As with any business, the succession program should be put in writing. The family should keep in mind that the most qualified successor may not be a family member. Many family firms should be prepared to consider a conversion to professional management. This is a critical decision. If professional management is brought in, they must be sensitive to the family’s history, goals and culture and be able to work well with family members on the Board.
As for ownership succession, a family business owner should ensure that he or she has a properly prepared and up-to-date will. In drafting the will, it may make sense to differentiate between “active” and “passive” family members - by rewarding active members with ownership of the family business while providing passive family members with other assets.
Family business issues can be emotional and difficult to resolve. It is important that you seek advice from a variety of professionals including an estate lawyer and an experienced exit planner. Careful planning and even-handed consideration of the interests of all stakeholders will lead to the best outcome for the family and the business.
Family Companies in No Man’s Land
It is not uncommon for family businesses to fall into the category that Newport Board Group calls No Man’s Land. This is the stage of company development where a company has hit a plateau. The formula that has brought it to this point is no longer effective. It has become an urgent priority for a firm to scale its business to the next level of growth, around what we call the Four Ms℠: Market, Model, Management and Money.
For a family business these “Ms” may mean:
Market – The company has to expand beyond the market niches where it has long been known and trusted. It may have to modify its value proposition for a new set of customers.
Model - Difficult decisions must be considered as to how to finance step change improvements in infrastructure to support higher volume, while continuing to fund retirement of family members.
Management – Bringing in experienced managers who can help the company grow to the next level may be a particular challenge if it involves replacing or demoting long-serving family members.
Money – Raising capital to fund growth requires careful thought. If financing results in new family or outsider equity shareholders, assessment of the impact on Board governance must be considered.
A Bright Future for Family Businesses
Family businesses that can surmount the challenge described above have the opportunity to bring in new energy and thinking from a rising generation of family members. Firms who succeed in resetting their strategy, governance and business practices, adjusting to new realities inside and outside the family, have a chance to sustain their legacy for generations to come.
About the Author
Bill’s career has focused on emerging growth companies that need to get past No Man’s Land and private equity firms that invest in these firms. He also has extensive experience with his own family's business and several others where he has served as an interim executive and advisor. Contact or learn more about Bill here.
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Photo Credit: S.C. Johnson, "A Family Company"
