A family business can be fraught with tensions that don’t exist in other organisations. In this article, we take a look at some of the issues and how they can be overcome.
Generational differences
Running family businesses can be smooth and satisfying but over time the founder’s influence will diminish. Either during the tenure of subsequent generations or suddenly and catastrophically.
They can also be fraught when the next generation, rightly or wrongly, sees a new paradigm. Often new opportunities are outside of what others are able or prepared to see. People don’t easily resign and walk away from a family business they have always aspired to be part of. Even though doing so and working for someone else, could help them avoid these tensions. Consequently, these problems have the potential to linger. They must be resolved efficiently and to bring some relief.
Transition to a new generation, a new focus, a new leader, or new owners, presents specific challenges for many family businesses. Especially given the ongoing and deep financial and emotional investment on the part of those affected. How the shareholders collectively handle such times will ultimately determine the future of the business and their own financial security. In some instances, it will affect the next generation as well.
Closure or sale
One option, if there isn’t a clear and clean way forward, is to simply wind down the business over time. By this we mean, selling the assets and cashing in on outstanding funds as they are realised. However, if the shareholders wish to eventually sell the business as a going concern, they must entice a buyer at the price they want. This means they must be able to showcase a self-sustaining business capable of functioning successfully without a patriarch or matriarch at the epicentre of operations and strategy.
Cultural change
One of the core transition requirements is to wean the culture away from being ‘founder centric’. This is where everyone looks to the founder as the source of wisdom and knowledge. Instead, creating a culture more focussed on structure, roles, responsibilities, delegation, and accountabilities. Of course, this has its challenges when family members want to participate at a meaningful level when there is no easily identifiable place in the structure for them or their skillsets. The need for family-participation should be accommodated outside of the operational and governance, systems.
It may seem like an elegant solution to put a disaffected person in a ‘less important’ part of the business. However, it violates one of the core principles of a sustainable competitive advantage. This requires excellence and alignment in every aspect of the business. A world-class business in whichever direction you look. This is critical as it’s quite possible that poor performance even in low turnover or low yield in a strategically less important part of the businesses operations has the potential to create significant damage to the brand and reputation. This could create a drag on the whole business and the success of core operations.
The untouchables
Family and shareholders aren’t the only challenges. In a long-standing and stable family business, there will also be staff members who have been in the business ‘forever’. They become so embedded in the life of the business that, at some level, they feel part of the family.
In some second and third-generation businesses, these individuals become ‘the untouchables’. A sense of loyalty prevents their removal. It’s as if these individuals are also members of the extended family. Often these people are the ones who have key external relationships and are holders of the internal culture. They are therefore critical to the immediate performance of the business. Some may have been neglected in terms of their ongoing professional development. Perhaps to the point at which they are unable or unwilling to morph into what the business requires following a transition to new ownership or a new operating model. Some may also unwittingly be a choke point and constraint to the business. It can be unhealthy to have ‘indispensable’ people in any organisation. Often, when they are removed, everyone else steps up, releasing significant energy into the business.
It is critical that you deal with these de-facto family members in a generous and dignified way regardless of whether they are to remain in the business or exit. Because the way in which you treat them becomes the defining act that establishes employee and client understanding of the organisational culture in the new era. Other employees will intuitively understand the need to treat these people with dignity and generosity. They won’t expect such treatments to become the norm.
Implementing a transition plan
Herein lies the most significant risk in transitioning a family business to a more formal and delegated operational and governance structure. This might be as part of modernisation or an acquisition. However, you can mitigate the potential for a roadblock at this point by developing a staged transition plan early on. This should incorporate a strategic plan responsive to the external environment. Also, a parallel internal plan that focusses on the transition to structured competency and skill-based operational and governance structures.
If part of the plan is to divest the business, then advance the transition well before the sale. Alternatively, the new owners need to be sensitive to the probable transition issues. This will prevent them from undermining the very things that have made the business worth acquiring in the first place.
Of course, it is possible that the real agenda of the acquiring party may be simply about gaining market share or pushing the business out of the way. That’s a bit cynical, however. If the acquirer was capable of performing at a higher level than the acquired business, they wouldn’t have needed to do the acquisition. Consequently, business continuity is usually in the best interests of all parties.
If you need help preparing a transition plan or would benefit from a fresh pair of eyes able to offer an unbiased external perspective. Have a chat with one of our advisors.