Tricky Transitions in Family Businesses
As we head into the 2020 holiday season, we are all thinking about family. Did you know that there are an estimated 5.5 million family-run businesses in the United States? Prior to COVID-19, it was estimated that family businesses contribute 57 percent of the GDP and employ 63 percent of the workforce. Like any of the other middle-market enterprises we work with, family businesses have strengths and weaknesses. They often have strong brands, multi-generational relationships with customers, and deep ties to the community. But when they face major transitions, these same strengths can make critical decisions more complicated.
For family businesses facing a transition, especially during a global pandemic and challenging economic times, it feels almost impossible to simultaneously maintain business performance while managing a transaction that affects both business and personal wealth. Advanced planning and knowing what challenges to look out for can help. Here are five challenges family enterprises should watch out for when facing a major transition:
1. Leadership skipped personal and business transition planning
Much like completing a will, most leaders do not find this type of planning be a fun task, despite its importance. Too often, they wait until they are eager to leave the company to plan for their exit, resulting in a rushed, stressful process. The most successful exit strategies we’ve seen over the years were developed well in advance and had buy-in from key family members.
2. Management is trying to live the last generation’s dream
When preparing for a major transition it is important to ask, “Who’s dream are we living?” Does it make sense to continue to live with a grandparent’s dream? Are you passionate about it? How does the next generation feel? Do they have the skillset and the passion to continue? How should the vision change?
3. Everyone ignores generational math
As businesses grow over time, it is important to remember that families grow too. This is why mature family businesses are often harder to manage than newer ones. For example, let’s say a business was founded by grandma and grandpa. They had six children, three of whom worked in the business and three who didn’t, but they all sat on the board. Then each had grandchildren. Now you have a board that has grown exponentially, possibly with a large number of passive shareholders. Transitioning to be professionally run enterprise going forward starts to look pretty attractive when you have a large family with both actively and passively engaged members. Leaders need to understand the complexity of working with multiple generations and add planning time for the stickier issues that come with a large family tree.
4. Work invades family gatherings
When a family business transaction is on the table, it is guaranteed that both personal and professional lives will be affected. Nowhere is this more obvious than at a dinner table over the holidays. Disagreements over executive decisions are natural in the course of running a business. When running a family business, however, the only way to prevent them from ruining Thanksgiving is to anticipate the problem and carefully consider all stakeholders in advance. Doing so can help ensure that major decisions are made in the board room, ideally before major conflict arises.
5. The generation-in-waiting is running out of patience
Many business owners dream of their firstborn taking over the family business. In the healthiest of situations, that pressure is the catalyst for a succession plan and smooth transition. In other cases, it’s another family conflict that can delay the transition and weaken the company when talented family members run out of patience. It is logical that the “generation-in-waiting” would want to be elevated within the organization or feel like they need to leave before they miss a chance to have their own career. If an owner truly wants to keep a business within the family, only careful advanced planning can ensure that key family members have a professional path – so that they don’t have to find one elsewhere.
We have seen these scenarios, and others, playout time and time again. If you are considering buying or selling a business, please contact us for a confidential discussion of possibilities appropriate to your specific situation. Planning now can help.