Every small family business faces unique challenges and unusual choices unlike other small businesses. This is particularly true when the founder(s) or current business owner(s) decides to explore if they can transition away from a management role, reduce their ownership share, leave the business (and/or perhaps consider even consider selling it to a non-family member).
However, in order for a smooth transition of management oversight and/or business ownership from one family member to another, there are some important considerations that everyone needs to face.
- Is the current owner willing to give up “control” of the business?
- Will this existing owner be open to the business changing under new management?
- Is the potential new business owner(s) sensitive to the founder’s needs related to control and change?
- Will the new family member(s) taking over the business be as passionate about the business?
- Will the new owners have the commitment and competency to manage this type of business?
- Can the business “pay” any price/value of the business requested by the departing founding owner?
- Is there a transition plan that both the out-going and in-coming owners can create together?
These are several considerations that all need to be addressed and solved. No small feat!!
Transition is a process
First, it is essential to understand that effective ownership succession is a process. It takes time to ask all the key questions, gather all the critical metrics and develop a plan – and for everyone to feel comfortable phasing in or out of the business. Unless there is a reason why a transition must happen in a hurry, it is preferable that the current owner take time to slowly phase out of their role, and the new owner(s) slowly phase in. The most successful ownership successions happen over years not months.
Communicating about the business to all generations
If you plan to pass your business on to the next generation, consider engaging them in the business in positive ways – from an early age. It can start just by talking about the business in ways that will give them an appreciation for the work that is done and the impact that it has in the community. There may be times when they will see you and your business struggle. So be sure they also see what you love about this business and why they might, too. When they are ready and able to work in the business, can you frame it as an opportunity instead of a requirement or a burden? (Just because someone is your close relative, does not mean they want the business as much as you do.) Ideally this starts with a relationship built on trust. You can both be honest about what you want for yourself and for the business.
Setting up the next generation for success
How do you reach a point where the next generation is passionate about the family business and you feel comfortable putting them in charge? Each family business is unique and there are many paths to answering this question. Here are some ways to get there:
- Give the next generation important opportunities to work in the business. Ideally years before an actual succession takes place, the next generation should be getting experience in the business, perhaps even working different jobs and in different departments. You want your family members to develop their skills. You want them to get hands-on experience as well as learn about the culture of the business and start understanding the business inside and out.
- Encourage the next generation to follow their outside interests. You want the next generation to want to be a part of the family business. Though it might seem counterintuitive, there can be a lot of value to the family business in having the next generation explore their passions and get work experience elsewhere. They will gain skills and build their confidence and get the chance to create their own identity as a working person in another business environment. If and when they decide to return to the family business, they will bring those skills and that confidence with them, and the family business will be all the better for it.
- Key tasks and delegation. Each family member wants to find their own place in the operational structure of the business. This will help everyone understand how they fit into the business and to each other. This is especially important in a family business with both family and non-family employees. Existing employees also want to understand how the incoming family member fits into a particular role in the business. Will a new family member have goals; will they too have to listen to and take directions and also need to create metrics to measure progress.
Key roles and responsibilities are also important for you as the current/departing owner. The exercise of writing down your responsibilities can be a great way to take stock of all the things you do. What are the responsibilities and critical skills necessary to run the business? What parts of your job play to your strengths? What is most challenging? Writing out this “job description” can help clarify the job/roles for the family member joining the business, including what aspects of your current role you want to pass on first.
- Give the next generation specific areas of responsibility. Are there specific aspects of the business where the eventual new owner of the business can sink their teeth into and make their own? By taking responsibility for one aspect of the business, they will get to develop their skills and implement their ideas within certain parameters, and you get to practice giving up control. New members can take on new areas of growth; can become the head of technology or could apply their skills in financials analysis and/or making meetings work.
- Share the challenges. It is important that you don’t shield the next generation from discussions about the challenging aspects of the business – when there is a loss of client; a production error or employees who must be re-trained. This will give a more complete understanding of the business. You would hope that they may bring some fresh ideas or new perspectives. Invite them to share their ideas on ways to help the business in the short-term and over the long-term. Apply their solutions and see if it can be implemented and measured.
A changing business – timing is everything
The next generation may want to make changes to the business that will affect the way business is done or how technology is used. They may want to add new services or products to match a changing target market. You as the departing owner may see the value in certain changes and at the same time, it can be difficult to watch the business going in a different direction. This is a common tension for family businesses. The timing of how to “control” different aspects of the business get shifted, needs to feel comfortable for both the outgoing and incoming owner. If changes feel too fast, you, as the departing owner, may resist implementation and/or sabotage the change. If change feels too slow, the incoming owner may decide that this is not the right fit for them as nothing will ever change!
Letting go – moving on
This may be the hardest step you as an existing owner will ever have to take. It is understandable that after pouring your time, energy, sweat and heart into your business for years it can be very difficult to let go and let others take charge. The business has most likely been central to your identity for decades. The owner of this business is who you are in the business, within the community and within the industry in which you travel. This “letting go” will be a very, difficult process. It will require honest discussion with you and all others. Then, there may need to be a written agreement on the stages of a transition and a timeline for getting there. Yet, once these decisions have been made, you will be able to create a framework for a successful transition.
Creating a succession plan – a peaceful transition
You and your family don’t have to stumble through succession planning alone. It should be a team effort with support from an accountant, an attorney, and a business advisor and/or mentors. They can help you set a reasonable timeline, guide you through the process, help you create a framework for the transition and understand how this leadership change will impact your business. Learning about other family business’ experiences with succession planning can be invaluable as well. Become a member of the Gellert Center to connect with other family businesses and get access to additional resources to help you on your succession journey!
The changing of the guard can be peaceful and very empowering for all concerned. This is always an essential step for the long-term success of any business. Drop the reins and let other family members take up the slack. With a careful and in-depth plan, you will all be ready. You will have people who are qualified to take over; they will bring energy, passion, and new, exciting ideas; the business will continue and grow. In the end, you will not regret it. You not only started and have grown a successful business but determined how it will continue well into the future.
Good work, boss!
About the Author
Paul Terry is a Gellert Family Business Fellow. Annually, Fellows are selected by the Gellert Center because of their expertise working with family-owned firms and their recognized positions as leaders in family enterprise theory and practice over many years.
Paul Terry is a successful entrepreneur, a results-oriented business consultant and a dynamic entrepreneurship teacher committed to helping San Francisco Bay Area small businesses thrive. Paul has owned and managed small businesses for over 35 years, including a wholesale distribution business, two retail food businesses and a training seminar business. Paul founded Paul Terry & Associates to provide expert guidance to other small business owners.