Why Ownership Transition Is Crucial For Family Business Longevity
Prosperous family businesses sit at the very core of a thriving American economy – they are essential to our free enterprise system as we know it. And the most successful family businesses stand the test of time, evolving to meet market needs while smoothly transitioning through generations of leadership.
No matter its area of focus, we believe every family business goes through a similar life cycle – the key to long-term success is putting your strategic energy into making sure your business stays in the healthiest part of that cycle.
For example, every family business goes through an infancy stage, characterized by high risk, negative cash flow and lack of management depth and formal structure. That stage is followed by youth, which represents a time of rapid, often uncontrolled, growth and opportunity that can lead to low profitability if not managed well. The third stage in the life cycle is the prime of life – that magical melding of structure and flexibility. A business in its prime of life embraces change and is well adapted to handle any turbulence such change may cause.
Those that can’t handle change begin to decline, moving into the stage of middle age, characterized by complacency and a lack of innovation, plus a fear of risk. Following middle age, a family business may then move into a senior stage, in which how the company looks to outsiders becomes more important than its internal health. Without intervention, the company then may move into twilight, notable for its focus on cost reductions and silos, often followed quickly by the death of the company.
Through our experience as family business advisors, we’ve found that the family businesses that remain vibrant, generation after generation, have figured out how to remain in their prime of life. Or as we like to call it: the Prosperity Zone. And we’ve found that in order to maximize time spent in the Prosperity Zone, a family business must prioritize ownership transition, making it a key part of long-term strategic planning.
Ownership Transition in Family Business
While many successful business owners dream of watching their organization continue to thrive under future generations’ leadership, the truth is that ownership transition is always a tricky issue, and that’s never more true than when dealing with a family business. Everything from emotion-guided decisions to blurred boundaries between ownership and management can make the process difficult if not approached carefully and with clear intentions.
What to Do Before the Actual Transition?
Family-owned business succession planning should start well before any structural changes take place – transitioning ownership well takes time. It’s important to cultivate a shared vision for the future of the business, along with creating a plan to help the family stay united once the established leader has relinquished that role.
In addition, good pre-transition communication should establish clarity and transparency around key issues like distribution of shares, evolving roles, authority and compensation. In other words, the actual transition of ownership shouldn’t come with any surprises – for your family or for employees and other company stakeholders.
What Happens After Ownership Transition?
It’s important to remember that ownership transition isn’t a one-time event.
When approached thoughtfully and strategically, it should allow for a long on-ramp for the new owner. Once the final steps regarding everything from day-to-day duties to ensuring that appropriate financing is in place for the new owner, it’s important to sit back and trust the process.
Trust that the extensive planning, communication and transparency you implemented will ensure that everything continues to run smoothly and that your family businesses enjoys many more generations of prosperity.
How Can Ferguson Alliance Help in the Transition Process?
When steering the ship of your family business, sometimes it’s helpful to get some outside perspective – that’s where family business advisors like the Ferguson Alliance can help.
You can learn more about our succession planning services here: family business succession planning.
Take These 7 Steps Suggested By Ferguson Alliance for Successful Family Business Transition
Over more than a decade of work as family business consultants has taught us some powerful lessons that can help as you plan for your family business transition. Here are some key factors of family business transition to keep in mind:
1. Consider Family and Business as Different Entities
While they may feel inseparable at times, it’s important to be intentional about separating your family from your business. We typically recommend deciding whether you’re a family-first business or a business-first family.
This distinction simply means that your decisions are guided by whether you’ve decided to prioritize by putting the best interests of the business or family first. If you value the family interests over the business, you may fall into the trap of putting unqualified family members into roles they aren’t suited for or losing other good employees because they can’t see a path forward without being a family member.
On the other hand, operating as a business-first family typically leads to choosing qualified successors, paying equitable salaries and having clear processes and procedures in place. In our experience offering family business consulting services, business-first families are more likely to stand the test of time.
2. Consider All Stakeholders
When approaching family business transition planning, it’s important to consider the needs of all stakeholders – that includes both your family and others who are affected by your decisions. Your No. 1 audience outside of your family is your employees – changes in ownership can create uncertainty and anxiety for many, especially if they’ve been with the business for a long time.
It’s also important to consider the needs and concerns of your customer base – depending on the type of business and their personal interaction with you, they may feel significantly impacted by the change in leadership.
3. Install the Right Family Business Governance Structure
Structure and process are key for any high-functioning business, and yours is no exception. As you plan for ownership transition, make sure that the new governance structure includes leaders who are trained, qualified and ready to take on new roles and responsibilities. This goes back to planning – if you’ve prepared well, you’ve spent considerable time moving people into positions that prepare them for their post-transition roles.
4. Educate the Next Generation
No matter how you approach your family business transition planning, the decision shouldn’t come as a surprise – especially to your family. As part of the planning process, a key focus is educating the next generation of leadership, whether inside or outside of the family, on what it takes to run a successful family business. This process of educating your future leaders ensures that not only are they prepared to meet the expectations of leadership, but they also fully understand what they’re taking on and are committed to doing it well.
5. Hold Family Meetings
Throughout the planning and preparation process, it’s important to establish regular touchpoints with family who are affected by the transition of ownership. This includes not only family members who are employees, but also others who may be financially and/or emotionally impacted by the change in ownership.
6. Establish a Well-Performing Management Structure
Much like your governance structure, your day-to-day management structure must feature leaders who are knowledgeable and well-trained for the positions they hold. If you’ve adopted a business-first family approach, this may include a mix of family and non-family members, or no family members at all.
7. Make an Agile, Relevant, and Sustainable Succession Plan
As leading family business consultants, we’re convinced that making succession planning a regular part of your strategic planning efforts is key. Doing so allows you to be nimble – adjusting and course-correcting your succession plan along the way so that it remains responsive to the needs of your customers, employees and other stakeholders.
Building and sustaining a prosperous family business can be an incredibly rewarding experience – one that’s good for your family and for your community for generations to come.
But that kind of lasting prosperity doesn’t happen by accident – it takes careful cultivation and your full intent.
It also may take the support of a certified family business advisor.
That’s where we can help.
If you’d like to talk more about how to implement a successful ownership transition, please book a free consultation call with one of our advisors. We’d love to help.