On the surface, it seems like Exit Planning for family businesses hardly requires a second thought. After all, one generation simply hands down the reigns to the next generation as that is typically the desired exit path in these situations. The family transfer process is rarely that simple, and it can potentially cause a great deal of friction.
Business owners face several challenges when it comes to ensuring their company transitions smoothly from one generation to the next. In some cases, transferring to a family member may not be the best option. Under most circumstances, family business owners benefit from the advice of a professional Exit Planning Advisor to ensure a successful business transfer.
Why Family Business Transfers Can Cause Friction
According to the Family Business Institute, only 30 percent of family businesses transfer successfully into a second generation. That means that 70 percent of family businesses don’t survive the second generation taking over, leaving the families to lose control of their business and assets. More importantly, when family business transfers go wrong, personal relationships suffer too.
Exit Planning can help first-generation owners pave the way for a smooth transition of ownership responsibilities and avoid some of the most common challenges.
Challenge #1: Mismatched Expectations
Many first-generation owners started their businesses because it was something they always wanted to do. They are entrepreneurial at heart, and creating a company is the most logical way to fulfil their dreams. Others started out of necessity. Owning and running a business was the best way they knew how to provide for their families.
Most owners of family businesses have one thing in common – a purpose to leave a legacy that they can hand over to the next generation. However, even with the best intentions, there is not always a natural successor and the expectations that the owner has for the future of the company might not match the interests of their children or relatives.
Children may not be interested in their parents’ line of business or in running a family business at all. On the other hand, business owners may have several children interested in the business. The question is, are they happy to collaborate for the good of the company? If not, the business could suffer from lengthy legal (and emotional) disputes.
Family business ownership transfers need to consider all family members who may feel they are entitled to a share of the business. As an Exit Planning Advisor, you can suggest different options to navigate this challenge to the benefit of the family and the business.
Challenge #2: Lack of Exit Planning
As the saying goes, failing to plan means planning to fail. This is particularly true when it comes to successful family business transitions. As a first-generation owner, it is easy to assume that the next generation will take over when the time comes.
This may have been true a few decades ago, but the business landscape has changed significantly. Keeping a business in the family requires careful Exit Planning and succession planning.
Family transfers require open conversations between different generations. Owners not only need to clarify their intention to exit, but they also need to understand the next generation's intentions and how that might affect the desired timeline. Even with complete alignment between the first and second generation, you may need to help owners build in time for preparing the next generation to take over and start running the business successfully and adjust their expectations for what that does to their desired timeline. Whether an owner has several successor candidates or none of the children have expressed any interest in taking over the business, the planning process can take many years so getting a head start is ideal.
Professional Exit Planning Advisors can help navigate these situations. When there is competition for a certain position, professional advisors can mediate to determine what leadership options make the most sense and what resources and training might be required. If there is no natural successor available, Exit Planning Advisors can work with owners to find alternative exit solutions that retain family ownership without day-to-day involvement, as well as focus on other exit objectives important to the owner.
One of the biggest problems for family businesses is a lack of preparation. Hoping that a family member will naturally take over is not enough and puts the company’s future in jeopardy.
Challenge #3: Preparing the Business for Growth
Most family businesses are started by one single entrepreneur. As the company grows, restructuring the management model may be necessary and more decision makers may be needed at the table. Otherwise, there is a risk that when the sole owner leaves, the existing employees or replacement owner might alter the day-to-day operations of the business.
Moving from a “one-man band” to a company with the potential to grow can be tricky. A larger leadership platform is one requirement to prepare a family business for successful scaling. Splitting and delegating decision-making capabilities prevents operations from stalling when one person cannot be reached.
Moving from one generation to the next provides an excellent opportunity for a family business to make this transition. It is a natural time to expand the organization’s leadership team and allow several family members to collaborate.
Exit Planning Advisors provide expert advice and guidance throughout that process. They are well-positioned to suggest a suitable structure that takes growth requirements into account and can provide a roadmap with the steps required to make those changes.
Challenge #4: Letting Go of the Business
First-generation owners have a wealth of knowledge and experience in all aspects of a family business. Due to their longstanding investment in their company, it is often hard for them to let go and move on to their next goals post-exit. No doubt, the second generation can benefit from their experience, but it is important to have a balance in order to reach the exit goals.
There is a difference between occasional advice and unwanted interference during the transition period. Managing this transition whilst keeping the peace in a family is challenging. The best way to prevent problems caused by (perceived) overstepping is to set clear boundaries for the handover of responsibilities.
Owners can ease the transition by proactively handing over key business relationships. Efforts like introducing the next generation to key suppliers and long-standing clients will pay off almost immediately and avoid disruption to the business.
Exit Planning Advisors are best placed to help avoid discord between generations by clarifying the transition process for business owners and their successors. Understanding each other’s roles, respecting boundaries, and keeping open lines of communication are key elements of a successful transition.
Disagreements are natural, both within a family and a business. Resolving them effectively and efficiently is easier when everyone understands each other’s roles.
Family business ownership transfers are more likely to succeed with the help of experienced and knowledgeable Exit Planning Advisors. They will apply a solid, proven process to the transition and manage the tasks of the plan until its execution. Not only will Exit Planners support family businesses in avoiding common pitfalls, but they provide the insight and guidance needed to help build and sustain a legacy that will continue into the next generation.
Family transfers need to be managed well and facilitated by Exit Planning Advisors to avoid discord.
Matching expectations between generations, preparing a sustainable exit strategy, and planning early ensures a company’s long-term sustainable growth.
BEI tools & resources provide you with the knowledge you need to convert one of the most difficult Exit Paths, the transfer of family ownership, into the most gratifying for everyone involved. Schedule a meeting with us today to get started!