Ninety percent of US businesses are family owned! Yet only 30 percent of family-run companies succeed into the second generation and only 15 percent make it to the third generation. (Baylor University Institute for Family Business)
The US Small Business Administration has published an excellent resource by Nancy Bowman-Upton titled; “Transferring Management in the Family-Owned Business.” This work aptly describes a complex dual system of business and family. Each system has rules but conflicts abound as both have contractual issues, loyalty considerations, and emotional stress points.
Over the years we have observed and aided entrepreneurs in the transitioning of their life work. There is no standard formula or set template for this process as each industry, business definition, owner(s) and family have varied considerations. However, there are a number of common mistakes we have observed that can be avoided to increase the odds for success.
FAILURE TO THINK PROCESS NOT EVENT – Transition planning is an evolutionary process of wealth preservation, people development, and leadership migration. It will not be done in a day and more than likely the related contractual and financial considerations will span years. Take on the journey in bite size pieces which can include: Selection, Training & Testing, Preparation of the Entity, Extraction and possibly Future Monitoring.
FAILURE TO LINE UP A TEAM OF EXPERTS – In our many presentations about Merger & Acquisitions we continually emphasize the need to build a Team of Experts. Transition planning involves, estate planning, tax planning, and legal/contractual oversight. You or your coach should build and guide the team to insure there is a common understanding of the end goal and a definition of success.
MISJUDGING FAMILY MEMBER DESIRES & TALENTS – Do family members really want the business? Have you asked? Do family members have the technical and business skills to run the business in the future? Are you an objective judge? Assumptions here and paternal/maternal perspectives can be the beginning of a nightmare and financial ruin.
MISJUDGING VALUE – Transitioning is a sale or a gift. It always has a value associated with it that affects the owner, new owner management, and taxes! Be sure to begin with a proper valuation and have your documentation in order. These include and are not limited to: five years of financials, Pro-forma’s, customer lists, vendor lists, legal/corporate documents, contracts and intellectual property rights.
WAITING TOO LONG – We often end our presentations suggesting to entrepreneurs that, “every day that you hold your business – you have made a decision to buy it.” Not planning your exit now may handcuff you and your family into decisions and an investment that will be looked at as your failure in the future.