Handing Down the Family Business

Like many business owners, you may dream of passing your family business down to the next generation. And yet you know the statistics aren’t good – most businesses don’t survive the transition from the founder.

We’ve found you can improve the odds of a successful transition by following some key steps. You don’t have to put your life on hold or shut the factory down for thirty days – just a few small steps, consistently taken over time, can make a big difference.

Over the next few posts we’re going to be talking about these steps as a sneak peek of our new book coming out later this year. There are so many tools and techniques and concepts out there (each with its own acronym – ESOP, EBITDA, APA) that it’s easy to get lost in the weeds and forget what you’re trying to accomplish in the first place.

So before we head to Acronym City, let’s look at what we’re after – a successful transition (sounds better than the alternative, doesn’t it?).

What is a Successful Transition?

By successful, we mean a transition that meets the following criteria:

  • Value loss is minimized.
  • Family harmony is maximized.

Keeping the Value in the Business

You’ve spent years building your business; you don’t want half the value to go out the door because you’re no longer around. Value can evaporate with the loss of key relationships/customers; loss of expertise; taxes; and business running to a competitor. Key questions: if something were to happen to you today, is there someone who knows what you know who can immediately put that knowledge to use? Or is it all (tapping your forehead) up here?

Maximizing Family Harmony

A family business should be a source of pride, not a burden. It’s a place where the people you choose can make fresh decisions to respond to the current market while acknowledging the legacy of those who’ve come before.

Every business has its challenges. But, you want to make sure that your chosen successor is willing to face those challenges on a daily basis, not shudder at the burden of it all. In other words, is this how she wishes to spend her life?

So, there’s a couple of takeaways – first, you want to make sure that your chosen successor is qualified. And the most important qualification is interest in the job. Impart as much wisdom as you can, let her take as many risks as she can so she can get the experience she needs. Wisdom + enthusiasm = power formula for success.

Second, the successor needs to know that not every decision is going to be challenged by her brother (or brother-in-law). As you know, running a business means making tough calls. You want to make sure your successor has the power she needs to make things happen without the constant sniping of others. This means designating someone to be in charge.

It also likely means that the one in charge is going to need to be the owner. We’ve found (and you’ve probably seen) that one of the biggest challenges in a second-generation business is when those who are running the business (insiders) share ownership with those who work outside the business (outsiders). Wherever possible, don’t split the ownership between insiders and outsiders – it just creates bad blood for everyone involved. The insiders feel like they’re doing all the work, the outsiders feel like the insiders get all the perks. No one is happy. Centralize control and ownership.

You have every right to make your decision in private. But, once you’ve reached a decision, don’t keep it to yourself. Let your family know your intentions so they’re not finding out when the will is read. Better to have some tough conversations now so that people know where they stand.

As you go through this analysis, you may find that for your situation, the best transition is actually a sale of the business rather than handing the reins down to the next generation. Next time, we’ll look at the process of selling a business before returning to recommended steps for your successful transition.

Some suggested resources:

If you’re wondering how you can transfer what you know and do to something more widely shared and transferable, check out Michael Gerber’s book, The E-Myth Revisited.

For thoughts on choosing and training your successor and easing the travails of transition, look at Marshall Goldsmith’s book, Succession: Are You Ready?

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