Know the Tension Points of Family Business Transition

By Kathleen Hoye, CExP, ACFBA, CFWA

As family businesses transition from one generation to the next, they experience common “tension points” that, unless proactively addressed, can impede long-term sustainability. These tension points account for why succession rates are so low (and are actually dropping) for family enterprises.

To survive, family firms need to progress from a purely entrepreneurial culture, through professionalization, toward a managerial culture. Hopefully, this can be done while keeping alive the entrepreneurial flame that ignited the company to begin with. By the third generation, however, the goal should be to establish a company that is so professionally managed, it would be hard to tell that it is family-owned except for the name on the door and the positive morale shared by everyone involved.

First-generation founders as entrepreneurs
The first-generation founders of a business are purely entrepreneurial and driven by either necessity (“I have to put food on the table”) or personal goals. They tend to use their gut instincts and even trial and error to make decisions and are informal in their approach. This is what makes start-up companies so exciting to work for. There no formal roles, processes or “rule books” established; everyone does whatever is needed to keep the lights on and the motors humming. Decision making is generally concentrated in one person, the founder, who tends to adopt a “command and control” approach to management. Everyone is accountable to one person, “The Boss.” Ownership and management control are generally concentrated in one or two people.

Second- and third-generation leaders as professional and collaborative managers
The primary goal of the second- and third-generation family business leaders is to begin to professionalize the business so that a platform for growth and expansion, as well as a merit-based, professional culture, can be established. As the founder exits the business, decision making may no longer be concentrated in one person. Collaborative decision making is often a foreign concept to companies that have  been led by one person for many years. Nevertheless, in order to scale up and grow, an entire company cannot report to one individual. A professional management team and collaborative culture must be established.

Suppose the goal is to build a legacy family business that will endure for multiple generations. In that case, a dual family and corporate governance infrastructure should be in place by the third generation. Policies should be developed to govern the interaction of the family and the business. Independent directors should begin to make their presence known on the board. There is great separation between family and business issues, and even management and ownership, by this stage. Research has shown that the establishment of certain best practices is essential to long-term family business sustainability.

Be proactive with transition planning
The need for succession or transition planning is often identified too late in the process, leaving a short period to make many important decisions. Long-term succession planning, determining the next generation of leaders even 10 years before a transition, can prove crucial in allowing future leaders to prepare and develop their skills before accepting a significant leadership role. More importantly, it allows the family to develop shared agreements and policies concerning the integration of the next generation of family leadership. A family business advisor can be especially helpful in creating a succession plan, related policies and assessing potential successors. Third-party advisors can also provide unbiased feedback when building the transition plan and shaping the company’s future. If family members are interested in running the company in the future, there are many questions to consider. Will the company be run by one person or a group of people? What will the balance of power look like in the next generation of leadership? These decisions are complex, and approaching them proactively will allow you the best opportunity to be confident in your planning.

Understand where you are in your family business transition
Depending on where your business exists along the family business generational continuum, it may be time to begin these tough conversations. What transitional stage do you find yourself in? Are you aware of the tension points ahead, and do you have a plan to address them proactively? Family business advisors are vital in answering these questions and helping your business move forward. A trusted family business advisor will take the time to learn about your company and your unique family values, developing a succession strategy and transition plan suited to your long-term objectives with your legacy in mind.

Kathleen Hoye, CExP, ACFBA, CFWA, is Consulting Principal and Family Business Advisory Team Leader at MCM CPAs & Advisors.

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