Running family businesses can be smooth and satisfying but, as the founder’s influence diminishes during the tenure of subsequent generations, or suddenly and catastrophically, they can be fraught with tensions that don’t exist in other businesses. They can also be fraught when some in the next generation, rightly or wrongly, see a new paradigm and new opportunities that are outside 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, so as to avoid these tensions or work for someone else – so these problems have potential to linger and must be resolved efficiently and to equal satisfaction.

Transition to a new generation, a new focus, a new leader, or new owners, presents specific challenges for many family businesses 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 and, in some instances, the next generation as well.

One option, if there isn’t a clear and clean way forward, is to simply wind down the business over time, sell the assets and then cash in on outstanding funds as they are realised. But if the shareholders wish to eventually sell the business as a going concern then, to entice a buyer at the price they want, they must be able to demonstrate it’s a self-sustaining business capable of functioning successfully without a patriarch or matriarch being the epicentre of operations and strategy.

One of the core transition requirements is to wean the culture away from being ‘founder centric’ where everyone looks to the founder as the source of wisdom and knowledge, to 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. This need for family to participate can, be accommodated outside of the operational, and perhaps also outside the Governance, systems.

While it may seem like an elegant solution to put a disaffected person in a ‘less important’ part of the business; this violates one of the core principles of sustainable competitive advantage which requires excellence and alignment in every aspect of the business – i.e. a world class business which ever direction you look. This is a critical aspect as it’s quite possible that poor performance even in a low turnover, low yield, or strategically less important part of the businesses operations has the potential to create significant brand and reputational damage that will create drag on the whole business and the success of core operations.

This issue isn’t limited to family and shareholders as, in a long standing and stable family business, there will also be staff members who have been in the business ‘forever’ and who have 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’ who can’t be removed because even family members may have developed a sense of loyalty ‘as if’ these individuals are also members of the extended family. Often these people are the ones who have the external relationships and are holders of the internal culture and are therefore critical to the immediate performance of the business. Some may have been neglected in terms of ongoing professional development to the point they are unable or unwilling to morph into what the business requires subsequent to the transition to a new ownership or operating model. Some may also unwittingly be a choke point and constraint to the business – it can be unhealthy to have ‘indispensable’ people in the business and often, when they are removed, everyone else steps up and significant energy is released into the business.

It is critical that these de-facto family members are dealt with in a generous and dignified way regardless of whether they are to remain in the business or exit; as the way they are treated will become 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 and won’t expect such treatments to become the norm.

Herein lies the most significant risk in transitioning a family business to a more formal and delegated operational and governance structure as part of a modernisation or an acquisition. However, the potential for a road block at this point can be mitigated by early development and staged implementation of a transition plan that incorporates a strategic plan responsive to the external environment, and a parallel internal plan that focusses on transition to structured competency and skill based operational and governance structures.

If part of the plan is to divest the business then, either it needs to be well advanced in its transition before the sale, or the new owners need to be sensitive to the probable transition issues before they undermine the very things that have made the business worth acquiring in the first place.

Of course it is entirely possible that the real agenda of the acquiring party may be simply about market share or pushing the business out of the way. But that’s a bit of a cynical view given that if the acquirer was capable of performing at a higher level than the acquired business they wouldn’t have needed to do the acquisition – so business continuity is usually in the best interests of all parties.

 

Author

Jeremy Sole
Current CEO of ECTO – The Electrical Training Company – Auckland https://www.linkedin.com/in/jeremysolenz

Written while Jeremy was a business advisor with Advantage Business who worked with clients to improve, better understand, and or transition their businesses.
October 2015