10 Keys to Transitioning a Family Business
All businesses seek similar goals. Depending on the stage in the business life cycle, some goals may be more relevant than others. However, family businesses have a further nuance. The family business decision makers must be constantly aware of the impact of their decisions on the family. Hence, the following aspirations are more specific to the running of a family business.
STRUCTURE: Set up, from the outset, in a manner to separate the owners’ assets from the business’ assets so the business can be treated as an independent unit and can be moved on to the next generation or to an external party with minimal negative impact on the family.
READINESS: Keep the business in a ‘ready for sale’ state. Many businesses are sold from an unexpected knock on the door. Particularly with the prediction of there being more baby boomer sellers than Gen Y buyers, a sale opportunity should not be lost because you are not ready.
PLAN: Always understand where the business and the family are plotted on their life cycles and plan accordingly. Regularly review those plans to ensure they are still appropriate as circumstances do and will change, particularly when dealing with Gen Y.
TIMING: A multitude of factors influence the appropriate timing of a transition : business trends, innovation, opportunities, age, health, time, skill sets, access to personal and business debt and the funding of retirement. There is no set date. These factors should be closely monitored and regularly re-assessed.
STAFFING: Identify, reward and retain key personnel whether they be family members or not. If the business is kept by the family, it needs appropriate staff to run it. If the business is sold, quality staff running the business, independent of the owner, will increase the sale value.
MANAGEMENT: Another benefit of identifying, rewarding and retaining key personnel is that they may develop into prospective buyers of the business. They know the business better than anybody.
CONTROL: If the business is to be retained by the family, a transition of control should be planned and executed. It takes time for the original owner to pass on his / her skill set. The process may identify a skills shortage that needs to be employed. Alternatively, the increase in control may encourage the future business leaders.
OWNERSHIP: If the business is to be retained by the family, a transition of ownership should be planned and executed. It can be achieved via one transaction or a series of timely transactions. The exiting and entering owners should be fully aware of the funding and tax implications of the transaction/s before the execution of the transaction/s.
GOVERNANCE: Particularly if the transition of control occurs prior to the transition of ownership, regular reporting and strong governance is essential. Family business owners who do not work in the family business are entitled to understand the performance and stability of the business just as the shareholders of public companies (and, maybe, even more).
INDEPENDENCE: The integrity of the financial reports can be enhanced by the adoption of an independent annual audit. Family business owners who do not work in the family business and / or prospective third party buyers of the business would feel more confident with audited numbers.
As you can see, these aspirations apply to all businesses, but they have a further level of complexity and wider ramifications for a family business. Greater care and thought is required.