Passing the Baton – The Family Business Challenge

[1] and two-thirds of them are expected to change ownership in the next ten years[2]. Whilst nearly 70% of families want to keep the business in the family only 29% have made plans to do so [2]. Having spent six years managing a predominantly family owned business and the last three years working closely with a number of different family businesses in Ireland and the UK what I have begun to appreciate is that family businesses have many advantages and opportunities and can thrive through intergenerational transition when they plan well and avoid the ‘we’ll cross that bridge when we come to it’ approach. In many ways the biggest hurdle for the family business, particularly when it is currently first generation managed, is moving from the more entrepreneurial operational mode to a more managed and devolved approach so that a broader community of managers / family sustain and grow the business value for the future. That change of style requires a lot of trust and understanding by the current leadership and if not dealt with can become a blocker to the evolution required. It is only when the family business gets its head around the idea that it needs to seriously plan its future in a more strategic way, and often in a way not planned before, that it begins to really give itself a chance of long-term survival in the family. Recent research has indicated that [2] 80% of businesses do not successfully pass their business onto the next generation. There are many issues that need to be considered and I’m not going to cover the Legal and Tax aspects but rather look at more of the practical business and family issues I experience which might be insightful for Family Business Owners as well as Legal & Tax Practitioners. The obvious starting point for family business owners is to clearly establish and articulate their ambitions for the business both in terms of it as a family asset and its management. Often these considerations will involve all generations of the family as most families seek consensus and harmony for obvious reasons. Whilst that is virtuous it can also be very difficult as the various ambitions and levels of engagement in this dialogue need to be managed. In my experience the best way of doing this is through good purposeful family dialogue well facilitated by a non family member – often a trusted external adviser / consultant. This process generally takes time as there are often very diverse interests and perspectives at play particularly given that often not all the family is involved in the business on a day-to-day basis and those that are may be holding personal ambitions for themselves as yet not articulated. It is often therefore a good idea to have a facility for family members to work through their own ambitions and issues one-to-one with the external adviser. The bottom line in all of this is that the family has a common understanding (and ideally an agreement) on how the business will be treated in the family estate and a broad understanding for how the family will involve itself in the business for the future. From this point there are two strands of planning and work often happening at the same time. The first is concerned with the Legal and Tax aspects of the decisions made which will typically concern the family estate. As a family business adviser I will typically introduce the family to Legal & Tax advisers, if they don’t already have them, and often assist in those dealings thus making it easier for both parties. Most often the family is seeking to prevent the family shareholding from fragmenting through inheritance down to family members and so putting in place appropriate structures to retain the family control and ownership in central. The second strand of planning will concern the business issues and most notably: Resolving shareholding issues Developing a sustainable business strategy Developing management and leadership strength Facilitating leadership and management transition Resolving Shareholding Issues In second-generation businesses the shareholding is often not held in one family unit but rather a number of related families units. For various reasons these related families may have diverse shareholding ambitions and so it is ideal if there is an understanding of these ambitions and, agreement on realising them. Clearly if there are no changes needed to the shareholding for this to happen then it is not an issue but that is often not the case. So aligning all shareholder ambitions and realising them can be an emotive and difficult process. For example, in this scenario when shareholders die and the shares are left in an estate the surviving families may wish to sell the shares. Valuations on private businesses in this case can be difficult to get agreement on. Needless to say robust, carefully drafted legal documents such as a good Memorandum & Articles of Association and Shareholders Agreement can help but often the softer family issues and history can play a big part in the tone of these deliberations and negotiations and they need managing. There are many examples of issues that can arise between shareholder related families but no matter what the challenges and differences may be they can typically be resolved if they have strong facilitation from a trusted independent facilitator. Developing a Sustainable Business Strategy This process should not be a lot different than for any other type of business. What can often make it different though is that the management group have never done any real strategic planning as they have been operating the business daily on the assumption they are in the right business doing the right things. The entrepreneurial genesis of the business, which may still prevail, can often be less inclined to a collegiate approach to strategy and planning and so the business is, and has been, directed through the strong vision of a single individual. So it is critical to develop a simple clear strategy that is aligned to: what the family managers are passionate about what the company is competent at real market opportunity Developing Management and Leadership Strength It’s no surprise that equity analysts, when assessing a company and thus impacting its share price, will interview, assess and comment on leadership and management strength as well as other more obvious financial and market data. Developing Management and Leadership Strength is often where family businesses fail to invest as they assume that if you’re one of the family that in some way automatically equips you to be able to do what the previous generation has done. The best family businesses however do not make this assumption and often make it more difficult for family members to reach the top by setting very high bars for experience, qualifications (if necessary) and knowhow. In any event, if the family is to bring through strong family leadership then investing in those future leaders sooner rather than later is critical. There are many ways of doing this, for example: Getting appropriate qualifications that set a standard for the business Getting experience outside and inside the business that establishes real credibility and authority Achieving indisputable successes that people will be inspired by Working alongside a challenging coach and mentor to continue leadership and management development Running in-house leadership and management team / individual development processes The development of the top management team is critical and often more critical than in the first generation where it may not have existed, or needed to exist, before. Facilitating Leadership and Management Transition In reality, if a very planned approach has been taken, as briefly outlined above, then the transition issues tend not to be great as the incumbent leadership and management structure is already known and the individuals involved have been acclimatised to the transition idea and the new state. That being said there can be other practical issues in the case of lifetime transition concerning the income provision for retiring management, operational or Board roles and more generally how, if at all, the retiring management will be involved in influencing the business. All of this can be more easily worked through if the dialogue involves all the appropriate family and is strongly facilitated. Obviously in the case where there has been little planning then both the lifetime transition and non-lifetime transition issues can be very difficult for lots of reasons, including: No financial provisions in place No shareholding plans in place No management succession plans leading to family conflict and fall-out All of this can lead to a situation where it is also too late to do anything thoughtful and sustainable and the business becoming one of the 80% of businesses that don’t successfully get to the next generation. [1] Source – CSO [2] Source – BDO Dave Gribben is founder of Enable Consulting a business performance consultancy focused on family businesses. For more information call Dave at +353 85 2548 451, email dave@enableconsulting.ie or Website www.enableconsulting.ie