Did you know that 70% of all family businesses fail to successfully transition from the first generation to the second, and that 80% fail to successfully transition from the second generation to the third? This statistic is alarming.
I work with family businesses in transition. Transition is the active process of passing stock and leadership to the next generation.
I am often asked, “When should a family business get serious about transitioning?” I think there are three situations that call for beginning the transition work.
- When the entrepreneur wants to change his/her role. When this happens, the entrepreneur is in transition. And when the entrepreneur is in transition, the whole company and family are in transition. Planning is critical here.
- When the senior generation plans to pass stock to the next generation within 1-2 years. When stock transfers to the next generation, the next generation becomes owners. What does this actually mean? It means that they will have new ownership roles and responsibilities that need to be discussed and agreed on. Clarity is critical here.
- When owners and managers become different people. When some of the owners are not employees of the company or when the owners bring in professional non-family management, the roles of ownership and management separate. When this happens, owners and managers need to clarify their roles and agree how they will work together. Integration is critical here.
I am also asked, “What do owners do?” Besides electing directors, the main responsibility of owners is to agree on how they are going to own and run their business. They do this by developing an owners’ plan. Just like management should have a strategic plan which spells out their long-term strategy, owners should have an owners’ plan which spells out their vision.
An owners’ plan consists of three parts:
- The values, needs and goals of the owners. This includes things like revenue and profit expectations, distributions, debt and risk tolerance, compensation for owners who work in the business, the culture they want inside the company, etc.
- How the owners will work together. This includes things like what owners do, how they make decisions, perks, how family members who are not owners are involved, updating buy-sells, etc.
- What board arrangement, if any, they want. This includes things like what the board does and how it works with ownership and management.
When the owners speak with one voice, it gives clarity to management on where the owners want to go and what is important to them reduces ownership conflict and allows for a more effective transition.
The Balance Point
by Cary Tutelman and Larry Hause