What could be better than passing on the business you built with your own hands to your children? For many owners, a long-held dream. But how do you make sure it doesn’t become a nightmare for the acquiring generation? 5 considerations that matter when transferring a business within the family.
Is the family business positioned strongly enough?
Every business has its life cycle and where is your business in that cycle? A transfer is a good time to examine the strategic position of the business. Are there sufficient opportunities for the new generation to continue to grow the business? In our practice, we look, for example, at the financial position, market position, competition and required scale. A well-executed strength/weakness analysis gives an honest picture of the company’s strength and the opportunities that lie ahead for the new generation.
Do the successors have sufficient leadership skills?
Before you pass the baton, it is important to consider that times have changed greatly. Your successors are stepping into a very different situation from when you stepped in. The business may now have reached a certain size that requires further (managerial) competencies and expertise. Do the successors have the education, experience and potential to lead a company of that size? You have grown with the growth of the company and have gained your experience along the way. The new generation has to make that step all at once. This is aside from the fact that the world around us has become more complex. Developments in digital are rapid and have a major impact on organizations, and increasing transparency means that competition is on the rise. Help your successors by making an accurate assessment of their abilities in time and with the help of an independent third party.
Is the new generation prepared to make the required time investment?
Most businesses have only grown through persistence and dedication. Many days and also long days with home support. With today’s generation, it often works differently. Their home front has their own careers and the willingness to work (more than) full-time has given way to desire for a healthy work-life balance. Is there room for this in the family business? In all the interviews I have had with family business executives, on the contrary, there is passion and almost blind commitment to the family business.
Is a “new style” family business possible?
If the answer to questions 2 and/or 3 is not positive, what are the options for keeping the business in the family anyway? After all, the family business in itself has a number of important advantages over non-family businesses. Family businesses operate more cautiously than non-family businesses. They have a more long-term strategy. The culture and practices can often contribute to success. Despite the fact that your successors may not have what it takes to run the business, there are opportunities to keep the business within the family. Consider a family board that is assisted by outside members. This can take the form of an executive board in which decision-making can take place. And what are the options if the successors do not want to get involved in running the company at all, but do want to retain ownership? Discuss with a knowledgeable advisor the options for developing good governance and decision-making rules to shape this.
What are the options if an outside buyer is still sought?
If there are no viable options for keeping the business within the family, what are the chances and options for a sale outside the family? In my practice, I know of examples (see other blog: Transaction at the Kitchen Table) that businesses are transitioning to other family businesses that respect the culture and heritage of the family business. Often they are also the parties who best understand and match the informal culture of family businesses. A financial or strategic buyer offers very different advantages, such as support in expanding market share or internationalization. In the end, what matters is what is good for the company and its continuity.
Do you need an informative discussion to find out whether your company qualifies for a business transfer within the family and how governance should be arranged? Or whether an external buyer should be sought after all? Contact us and we will be happy to help you. Clifton Finance advises family businesses and DGAs on succession, governance, strategy and merger and acquisition issues.