Despite their outsized impact on our economy, many family businesses haven’t planned properly — or at all — for a transition in business ownership. One study by MassMutual found that more than 40 percent of respondents expected to retire within 10 years. However, fewer than half of those expecting to retire in five years and less than one-third of those expecting to retire between six and 11 years reported that they had a chosen successor.
There are three main challenges that family business owners typically face:
- How can they pass on the institutional knowledge gained through years of experience so that the next generation can keep the business going in the right direction?
- Do they want to pass on their business culture and values, such as a connection to the community or concern for employees, to the next generation?
- Most importantly, how can the business be strong and sustainable without them?
To address these challenges, an owner must first understand the three key stages of the business lifecycle and what must be done to progress to the stage where ownership can be successfully transitioned.
Stage one: Entrepreneurial. The founder/owner runs the show; the long-term vision is in his or her head. Rarely is there a written strategic plan. While the owner may have the support of key personnel, they are expected to execute while the owner makes the ultimate decisions.
Stage two: Durability. In this stage, an owner is surrounded by other leaders who have the responsibility and authority to make decisions. The business follows something of a shared vision and also has more formalized operating processes; performance metrics; and a semi-independent board, which is either fiduciary or advisory.
Stage three: Legacy building. Here, the owner and other company leaders have done a really good job of capturing knowledge and disseminating it throughout the organization. Few family businesses actually progress to stage three. To get there, owners need to envision what their lives might look like 10 years down the road.
Answering questions regarding successor readiness helps owners clarify what would give them confidence as the transition evolves. The transitioning leader might gain clarity on the current state by asking: “What is working today?”
Embracing a new role helps many business leaders to both add value, due to their vast experience, and to learn new skills that will benefit both the company and the next generation. However, this is not always easy. Owners are generally engaged and entrepreneurial people, and it is difficult to step away from the heady days of making all of the important decisions. Some owners choose to include their transition objectives as part of the strategic plan and may begin to introduce new organizational practices, such as an advisory board or a family council, to help to achieve those objectives.
Because a business transition may not come naturally to the owner, it is crucial to create a formalized process that includes well-defined goals, open communication and frequent feedback. Through this process, the owner gains the ability to move from the power player position to that of a people builder.
Source: Stewart, Lisë., May 4, 2018; https://www.entrepreneur.com/article/312807