Transitioning ownership of a family business is fraught with risk. Even if your business and your family are running like well-oiled machines, the process is likely to take you into uncharted territory. If poorly handled, the emotional, psychological and business complexities that inevitably arise can lead to squandered wealth and wasted opportunities. Even worse, a business transition can set off a chain reaction that results in a fractured family. Wrestling with these difficult business and emotional issues while surrounded by advisers who are often motivated to “get the deal done” can make matters worse.
The runway for a successful business transition is longer than you think. Many of the issues that need addressing are best dealt with long before investment bankers are engaged.
Get to the heart of the matter
A family business is the embodiment of a family's values and culture. These are the intangibles that make a family business unique. They don't show up on the balance sheet, but they deserve attention. Capturing and communicating these intangibles is the first step toward ensuring a successful ownership transition.
To identify your values, you must talk as a family. This process can be an informal discussion or a facilitated family meeting. The format is not important. An open exchange of ideas and a search for shared values is what matters.
Consider the following questions: What is important to you about the business? What impact has being part of a family business had on you? What role does the business play in your lives, in the lives of your employees and in the community? Are you there to serve the business, or is it there to serve you? There are no right answers. Honesty is what's important.
Interview older generations about the business history. What were the motivations of the founders? What sacrifices did they have to make? What pearls of wisdom have already been passed from one generation to the next, but never written down?
Craft this information into a family mission statement or company history and share it with your stakeholders. Going forward, everyone in the business will have a better understanding of the family, and everyone in the family will have a better understanding of the business.
Values-based governance
Once you have a clear picture of the values and culture that are the foundation of your family and your business, it is important to put them to work in active governance. While the issue of governance is complex, there are two key elements to good family business governance: structure and policy. (See sidebar below for an example of values and policies in action.)
Structure: Structure refers to the “who” and “how” of family business decision making. Is the business overseen by a board of directors? How is the board structured? What is the relationship between the family and the business? What process will the family use for decisions unrelated to the business? Will there be a family council? Will a family constitution be created?
Clearly defined roles for ownership and management are important during business transitions. It is too easy for the process to overwhelm passive owners, and for management to act in isolation for the sake of expediency. The passive owners, who thus far may have shown little interest in the business, might speak up inappropriately because they feel threatened by the process. A governance structure can limit the occurrence and consequences of such conflicts.
Policy: Policies are a set of big-picture, mutually agreed upon guidelines that serve as a decision-making road map for the family or any group acting on its behalf. They are the practical embodiment of the family values you worked hard to define. (It may even serve you well to have one set of policies for the business and another for the family.) Once policies are in place, both the business and the family should have a refined sense of direction, and should be able to deal with change and crisis more effectively.
Well-thought-out policies are useful during ownership transitions because they are developed before the money is on the table, before the investment bankers are in the room and before emotions flare up. Potentially contentious situations can be defused by refocusing everyone's attention on the policies and the shared values on which these policies are based.
The equation
With your family's values and culture defined, and governance structures in place, the stage is set to consider an ownership transition. To construct a business transition that truly serves the family, three more critical issues should be considered: the seller's motivation, the audience of potential buyers and the structure of the deal. By including values and governance and considering each factor in turn, you are essentially creating a business transition “equation” that is unique to your family.
Motivation: Every family considering a business transition should ask, “Why are we doing this?” Families initiate business transitions for any number of reasons—wealth maximization, estate planning, charitable intentions, succession plans, diversification or lifestyle needs. Clear and honest consideration of your motives will turn you into a discriminating seller.
Audience: For any given business there are a limited number of potential buyers—employees, trusts, family, private equity firms, strategic buyers and public markets. That list can be narrowed further if you are an astute seller with insight into your own motivations. You will naturally lean toward buyers and deals that are good fits and away from those that are not. Fit, of course, involves more than price. Considerations include who buys the company, what they will do with the assets and how the deal will affect your family.
Structure: Once you have identified the audience of potential buyers, then it is time to narrow your focus further and consider the actual structure of the deal. Price, timing, proceeds, financing, guarantees and other considerations must be taken into account. You've probably already eliminated many unworkable options, and you can judge every choice against the touchstone of your motivations and values.
Putting it all together
The “equation” is now complete. Your family is prepared for the challenges that lie ahead and has done the work needed to protect your most precious asset—the family itself.
Every opportunity that presents itself can be plugged in, and the output can be considered against the family's values, policies and motivations. If a “correct” answer emerges, then the appropriate structure can be crafted. All of this can be accomplished within the context of a pre-established governance system that has the support and authorization of all stakeholders.
Jay Healy is president of Century Wealth Management LLC in Memphis, Tenn. (www.centurywealth.com).
Values and policies in action
Value: The Jones family has always supported our community, and creating jobs for local families has always been a priority.
Policy: Jones Industries will always consider the impact that our long-term goals have on job creation in our community. Given two choices of equal value, we will choose the one that creates local jobs.