The longevity of most family-owned and operated businesses hinges on one key component: having a plan in place that clearly outlines who will take the leadership role and when the succession will take place. Far too many entrepreneurs are under the misguided assumption that their children or other relatives will be taking over the reins eventually.
If this intention is not documented in writing, then you really don’t have a succession plan.
And the odds are short of family-owned firms surviving past the original entrepreneur. According to The Economist magazine:
Even strong and successful firms can implode soon after a generational succession, which is why so many countries have some variation of the saying, “from shirtsleeves to shirtsleeves in three generations” (clogs to clogs, kimono to kimono). Alarmingly, a study of 2,400 family firms in 40 countries published last month by PwC, a consulting firm, found that only 16% of them had a “discussed and documented” succession plan in place.
I have highlighted the last sentence in the paragraph above to stress a key point: A very small minority of family businesses have a documented succession plan. This is a shocking statistic. Most families that have their own businesses usually have nearly their entire net worth tied up in the company. If the family has not created a plan that outlines how and when the founder will step down and who will take his/her role, then financial disaster could be on the horizon.
Remember that there are six Ds that can detrimentally impact the succession of your business:
If any of these (or several) hit your company BEFORE you have a succession plan in place, the impact on the family’s financial legacy could be disastrous.
All too often we encounter entrepreneurs who assume that their business will eventually pass on to their children but they don’t do anything to make that a reality. Again, according to The Economist:
However, sometimes children do not want to join the family business, or turn out not to have inherited the entrepreneurial genes of the founder. It may then be in the best interests of the firm for a professional to run it, rather than a reluctant or incompetent scion, even if the family retains some control. Letting professionals take over can make a lot of sense. Talented managers are more likely to join a firm where there is a chance of getting to the very top, or at least where they do not have to work under a useless heir. Some 40% of the family firms interviewed by PwC said that professionalising their business was among the main challenges they face in the next five years.
This paragraph points out what many business owners are often far too reluctant to believe: That Junior simply is not talented, trained, and/or lacks the leadership skills needed to run the family company. We strongly encourage every family-owned business that has children that will be taking over the reins to begin training the offspring in all facets of the business early on. The reality is that unless the kids understand each department and how each interacts with other departments, they won’t have a feel for the entire company.
In addition, they need to begin developing the trust of their co-workers that they will be leading one day. Without this trust, no matter who you pick, you successor will have a hard time leading if the employees believe that the only reason your offspring has taken over was simply having lucky genes.
Another great point is that eventually most family businesses will typically need to “professionalize” operations either by hiring talent and/or bringing in outside investors who offer capital, connections, and talent. Quite a few family-run businesses that we work with have reached the peak of how large the company can grow without an infusion of capital. The family and its management, in many cases, have great ideas for growing the company, but they are simply lacking in resources, both financial and otherwise, which is stifling their expansion plans.
If you find yourself and your business at a crossroads with ample opportunity to grow but lacking the means to do so, or if you have realized that your children will not be interested in replacing you, then you need to attend a Generational Equity exit planning workshop. These meetings are educational in nature and are designed to take owners who are in the 84% of the business population that have no exit plans in place and give them tools to at least get the process started.
We fully understand that your family’s financial legacy is closely intertwined with the business you are running. We also respect the fact that if your offspring are not interested in the company, then you need to act soon before one of the six Ds listed above come across your path.
Carl Doerksen is the Director of Corporate Development at Generational Equity.
© 2021 Generational Equity, LLC. All Rights Reserved.
Bruce and I wanted to take this opportunity to thank Generational Equity for assigning Musa Jagne to our transaction. In Bruce’s words, “Musa did one hell of a job for us!”Karen S. Williams, CFO, BW Manufacturing
We thank you Eric and Generational Equity making our dream come true.Larry Moore, Owner, A Company Portable Restrooms
Generational Equity’s assistance was invaluable in compiling and marketing our business.Bil MacLeslie, CEO, ipHouse
Thank you again for all your guidance and support. Any company will achieve what they intend, if they have you on their team!Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
The process was much more involved than I expected and your help, experience and advice was a big factor in making the negotiations go as smoothly as possible.Terry D. Wickman, President, Keytroller
I quickly recognized that Don was working for Sharpe Mixers above all else, and held our interests above others.Jay Dinnison, Owner of Sharpe Mixers
Greetings Mike. Thank you for the captivating and compelling presentation you made at the Phoenix presentation last week. Over many years in business yours was the most informative and well-presented presentation, on any subject, that I have ever attended! Your energy and enthusiasm combined with your concise and captivating support of your positions with easily understood examples and data was compelling.Pete L.
I wanted to write you a quick letter to express our appreciation and our delight on the outcome of helping us through the process of our recent sale. We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.Terry D. Wickman, President, Keytroller
The help you provided us during each step of this process made us feel very comfortable and confident we were selecting the right approach to transition our Company.Andy Graham, Vice President, Modern Heating & Plumbing
We were happy to see the interest in our company and what we cherished has not just a valuable company but an important company to the communities we served in.Larry Moore, Owner, A Company Portable Restrooms
We knew it would be a difficult task to have someone really understand our business and our market, prior to researching a possible buyer, so it was imperative that we found someone of your caliber, with definite proven experience in this area.Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
I would like to thank you and your firm, Generational Equity, for being our valued advisors in our journey.Bil MacLeslie, CEO, ipHouse
Generational Equity educated and informed us – so that we could be on the upside of a good decision (to sell).Bil MacLeslie, CEO, ipHouse
I must say that I have never worked with a more driven, competent and focused individual as Don Ho.Jay Dinnison, Owner of Sharpe Mixers
I am pleased that I was able to work with Andrew Byrd throughout this experience. From the first meeting we had in Minneapolis I felt that I was in good hands. His knowledge and expertise is second to none. He guided the process consistently throughout. I feel lucky that I was pared with Andrew and could not be happier that I chose Generational Equity to handle this major life event. Thank you Andrew and GenEq for everything!Eric Erlandson, Owner, Action Fastenings, Inc.
T.D., thank you so much! You are a great leader! I love how you are using your gifts and talents to better others. You are clearly a GREAT COACH! This 3 day session undoubtedly changed the future of our business, and very well may have been the sole catalyst to save my company, my health and my marriage! A genuine “thank you” from the bottom of my heart.Bryan D. Horn, Owner, Over Under Clothing
Thanks again Phil and feel free to have a future client call me if they would like a referral. You are a true professional!Andy Graham, Vice President, Modern Heating & Plumbing
Dear Chris and Andre, I just wanted to say thanks for all your help. Even though this process was not an easy one, it was comforting to know that I had a capable team standing beside me. You made me feel like we were almost your only client or at least the most important one. Thanks again, and I will recommend your service in the future.Shenille Engelhart, Owner – CLS Technology
I couldn’t have asked for a better team than Michael and Deborah. We couldn’t have done it without them.Robert Evans, President and CEO of Mealtracker Dietary Software
We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
We will highly recommend Generational Equity and Musa Jagne to any business owner about to embark on the same process.Karen S. Williams, CFO, BW Manufacturing
We are extremely pleased with the way Generational Equity handled the sale of our company. Your associates, Tom and Chris, did an outstanding job of getting us (me) through the process.Michael J Polarek, President, Paragon Packaging
I need to say an immense thank you to Don Ho for his stellar work ethic, attention to detail, and tireless effort. Also thank you to the whole crew at GE! Without you, Don could not do such a phenomenal job. We were shooting for closing and funding before the end of 2020, due to the uncertainty of the political landscape and taxes. I am happy to report we closed last week and will be funding tomorrow.Dr. Caty J. Catron PhD, RN, VA-BC – Owner, Vic The Picc, LLC
Your wisdom and experience were invaluable to me during this once-in-a-lifetime transaction.Ralph Noblin, President of Noblin & Associates
Michael worked tirelessly, He followed every lead meticulously and urgently to make sure nothing was missed.Robert Evans, President and CEO of Mealtracker Dietary Software
Tom Staszak is one of the most professional people I have dealt with in my last forty years of business. You’ve got a great group of people and you have built a truly professional organization.Michael J Polarek, President, Paragon Packaging
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