As one generation of management approaches its end, the life of the family business is jeopardized. According to the Exit Planning Institute, only about 30 percent of family businesses transition to the second generation. Twelve percent make it to the third generation, and only 4 percent make it to the fourth generation and beyond.
When a company is ready to evolve, leadership must adapt or bring in new management. If the growth is not transitioned correctly, the business will suffer.
In addition to business changes, some companies must also successfully handle the family transition. These family problems are not included in business school courses, but ignoring these realities can be ruinous for the family and the company.
Pandemic. Recession. Changing consumer preferences. Global competition. Even considering those factors, one of the most harrowing experiences that any business must face is moving from one generation of top management to the next. The challenge becomes more difficult in a family business.
Often, the owner overshadows the next generation for too long, as older and younger generations pretend to coexist in top management. The next generation impatiently waits for Mom or Dad to step aside and get out of the way of progress.
As the founder of three companies myself, I understand the business owner’s perspective. It’s hard to move on. The business is our baby. It’s our identity; without it, we feel as if we have no purpose. Letting go of the reins feels like signing their death warrant. The next generation doesn’t always understand this.
Kate, who is the No. 2 in her father’s Agawam-based promotional goods company, experienced this firsthand. Kate explains: “I drew up the papers to buy my father out. For years, he said he didn’t care about the business anymore and was ready to hand it over. But, when the lawyers got all the papers together, Dad reneged. Everything was done just the way he said, but he admitted that he couldn’t do it.
“He said that he felt he had more to give to the company. But, truthfully, he just wasn’t emotionally ready to give up the company.”
I imagine that feeling might resonate with some owners. But, you must make a decision — do you want to do what’s best for you, or what’s best for your company and your family? The two may not be the same thing.
Whether it’s on our terms or not, every owner must exit their business. The company can live on without us. An unwillingness to face the inevitable stalls the two types of transitions — family and business.
A gift, or a burden?
Many business owners feel that they are handing their children a gift when they give them the business. For the children, it may feel more like a burden, especially if the company has been lingering between the three stages of corporate transition.
The first stage of a corporate transition can last decades. The core problem for the early stage of a family business is survival. Leadership in the first stage is highly personal and is dominated by the founder(s). The company moves beyond merely being a way to sell your craft. It evolves into a “real” company with lots of people doing busy things. The management structure is informal and typically only has two management levels — the founder and everybody else.
During the second stage, the company experiences predictable deal flow from a nonconcentrated customer base. The business has documented workflows and access to capital, and requires specialized functions such as marketing, legal and operations. Management matures to three levels, including quarterbacking specialized managers.
The third stage of company growth could see a division of separate units within the company, such as cross-selling opportunities of different product lines. Each of these units could be run as independent organizations. Management has four levels of management, including overseeing general managers.
To cross the fractured lines between growth stages, companies need to respond to transitional strains and partially reorganize. The best time for the company to respond to these strains is between periods of growth. Slower periods force management to examine what the company has grown into and what must be done to lift it to the next level.
This doesn’t mean that the response should be performed hastily. Time is required for the company to realign itself with new management systems.
However, family and corporate transitions often occur at different times. That means there are more precarious bridges to cross, making it more likely your company will veer off and end up in the ditch. This is a time when headstrong owners may argue, ‘If it ain’t broke, don’t fix it.” But, the horse and buggy wasn’t broke, either.
Development from one stage to the next cannot occur if top management doesn’t allow the company to take the critical next steps. That’s when an ambitious younger generation can step in and move beyond the firm’s traditional practices. There are advantages to the family and business transition occurring at the same time as Bruce did.
Bruce started a small motor repair shop in Melrose 50 years ago. He expanded and started selling the used motorcycles he repaired. Then he started selling new motorcycles. Then accessories and other small-motor vehicles.
Bruce was navigating his company right up to its second stage. It wasn’t broke, so he had no intention of fixing it. Bruce was content to hold on to and keep working at the company until he died, at which point he’d hand over ownership and control to his son, Ron. But, at that point, Ron would be ready to retire!
Family transition aside, Ron saw threats to the business. Bruce was OK with stagnating sales, but Ron was concerned that robbed employees of advancement opportunities, which meant staffing challenges. Also, profit margins were smaller than those of larger dealerships.
Ron wanted to address these threats by acting on the opportunity of opening showrooms in untapped markets in the region. Through thoughtful dialogue and a handful of concessions, Ron convinced his dad to step aside. Ron opened two additional showrooms and concentrated management at the original location.
Economies of scale boosted gross profit margins. Upper management was able to delegate to specialized roles, allowing for workflow efficiencies. The company wasn’t going to move to the next corporate stage if the family roles didn’t transition at the same time.
The most important consideration is that the owner of the family business acknowledges that the best thing they can do for the company — and the family — is to allow for a proper and timely transition. A successful family transition can mean a new, more prosperous beginning for the company.
This article originally appeared in The Berkshire Eagle on March 13, 2021