Family, Shareholder and Business: Transition from Three Perspectives
Voluntarily or involuntarily, suddenly or strategically — sooner or later, you’re going to leave your business. Are you prepared?
If not, you’re not alone. Surprisingly few businesses, especially family businesses, have a practical plan for transition or sale. In fact, many owners avoid thinking about the topic because it seems overwhelming.
The problem is, without a plan, it’s unlikely that your business transition will result in the future you’ve envisioned, for yourself or for the company.
There are many ways to think about the next steps of family business transition. One framework, borrowed from Harvard Business School’s “Three-Circle Model,” describes three spheres of a family business: the family, the shareholders and the company.
Addressing each of these circles relative to transition or sale provides a 360-degree perspective on the company and its possibilities for the future.
Do you see your business as a multigenerational enterprise or are you more inclined to sell to an outsider? If you’re leaning toward the former, you can’t assume that the business will easily transfer to the next generation. Your children may have no interest in it, or they may not be qualified to run it.
Ask your children what they’re thinking about the future of the business. If there is a child who’s interested and qualified to run the company — or could be qualified with the right training and mentoring — that’s the beginning of a plan.
If transitioning to the next generation isn’t an option, a sale to an outsider or to employees may be the more likely scenario. If so, that’s the beginning of a different plan.
Are you aware of all the ownership nuances of your business, including holding companies, family trusts and other arrangements? You might be surprised when you revisit the legal ins and outs of your company’s ownership, especially if the business is several generations old.
With the ownership picture clearly in mind, you can address the future from the shareholder angle. The ownership circle may have expectations that are different than the family circle.
For example, if you are thinking of transitioning the business to the next generation, consider how that might work relative to all the owners. Do all of the current owners work in the business? Are they all remunerated appropriately relative to their education, involvement and career risk? Do you have employment and compensation policies in place for family members?
Clarifying all of these issues and considering how a transition to the next generation will impact the owners will shed some light on how to set expectations.
This circle seems like the most obvious place to start, but it’s actually the last area you should address — after you’re clear on the family and ownership issues.
One way to enter into a discussion of the business circle is via an organizational chart detailing positions and lines of authority. How will this change in the future given what you now know about the family and shareholder preferences? Who will stay and who will go? What must be done to get people ready for these new roles and responsibilities?
You will also want to look at the business by functional area and unique marketing position. This means reviewing all the areas that drive value — management strength, customers, vendors, R&D and other key areas. It’s likely several of these areas could use some fine-tuning before a transition takes place. Firming up processes and making the business the best it can be will benefit shareholders and family members in the long run.
A Process, Not a Transaction
Remember, transition is a process, not a transaction. The earlier you start thinking about what’s next, the more time you have to prepare yourself, your family, your shareholders and the business for a successful future.
DJB is interested in your long-term success. Contact DJB’s Business Transition & Family Enterprise Advisory Services team for assistance with your transition planning.