Five Planning Mistakes Family Businesses Can Make When Planning for Transition

Five Planning Mistakes Family Businesses Can Make When Planning for Transition

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“It is a wise father that knows his own child.” – William Shakespeare, The Merchant of Venice

The people closest to us – be it emotionally and/or physically – are typically the ones who know us best and for many, those people are family. Years of living in close quarters and growing together through experiences have a way of fostering what we might call a kind of pseudo-omniscience; the feeling of knowing someone better than they may know themself.

When it comes to family businesses, there is no “switching off” these deep relationships. People can only separate the personal and professional so much and as a result, the family dynamics – the familiar and comfortable patterns of behavior – at play during the evenings and weekends are present, to a degree, during business hours.

Proximity though can be a funny thing. It can be revelatory, but it can also be misleading and the people we might think we know best can end up being the ones we understand the least. Owner parents can easily fall into the trap of thinking that because they know their child(ren), they also know what they want in life and from the family business. In these instances, years of closeness and relationships enable parents to make assumptions that are less a reflection of the child as they actually are and more so a reflection of their own beliefs.

What do these kinds of assumptions look like and what kind of mistakes can they lead to, you ask? The answer is:

  1. Assuming that the next generation wants to own the business
  2. Underestimating the complexities of intergenerational transition
  3. Not testing transition plans against the financial requirements of the exiting generation
  4. Allowing entitlement thinking
  5. Undervaluing family governance

Avoiding these five planning mistakes isn’t rocket science, but it does take intentionality and clear communication. Instead of just assuming your kid(s) want to take over the family business, ask early on if they’re interested in succession and if they are, create a plan for future transition.

Rather than assuming everything will just come together and happen one day, recognize how complicated and emotional family business transitions can be and start planning early. Doing so will involve having conversations about what the realistic financial requirements of both generations will be so there are no surprises when it comes time to transition. Predecessors should feel like their past financial sacrifices are recognized at exit and ultimately, that their choice to be entrepreneurs was a worthwhile one. Likewise, successors need to be comfortable in knowing they have enough resources to carry on the family legacy while still making their own mark on the business.

Conversely, family owners must intentionally prevent successor child(ren) from assuming they will inevitably inherit the business one day. Make education and life experience a requirement for takeover by encouraging them to go away and acquire skills that they can bring back and use to add value to the business.

Lastly, take seriously how family dynamics will play a role in your transition. Too often, when a child buys the family business, the transition is complicated by predecessors who have a hard time relinquishing authority. Successors who are truly ready to take over the family business need the authority to make decisions and follow through with them so they don’t end up as inconsequential figureheads. Letting go of the reins is incredibly difficult but can be made easier with proper long-term planning.

Predecessors typically have concerns about things like whether their child is emotionally ready to inherit and if they have the competency and experience to do so. Another concern is whether their successor has forged important (client) relationships that will be sustainable when they are no longer in the picture. But despite all these concerns, or perhaps as a result of them, some owner parents make another critical mistake, which is thinking their kids are ready to take over when they may only be mimicking their predecessors.

Now, making mistakes is a part of life and especially a part of being a business owner. But just because mistakes happen, doesn’t mean all of them should. Successful transition planning relies on knowing what both generations – owner and successor – want from and for the family business. It also requires the successor generation have all the tools and skills necessary to inherit the business when the time comes, if that is truly what they want. So how do predecessors ensure this happens?

The best approach to take is a programmatic one. Expose successor children to all aspects of the business so they have a healthy, robust understanding of what it takes to actually operate that business. See how they do with finance, with production/operations, and strategy. Run them through every position and see what they’re really good at and what they’re not so good at. You might find they are capable in one area and not another.

Thankfully, when it comes to determining your child(ren)’s strengths and weaknesses, familial intimacy likely works in your favor. A lifetime of knowing someone means chances are excellent that you have a clear idea of what they are and aren’t good at. Take advantage of this knowledge by helping successors cultivate the skills needed to address potential weaknesses. Before you make a decision to have them own and run a business, you – and they – need to understand if they’re truly capable.

Keep in mind however, a child can own the family business without necessarily having to work in it. They don’t need to be CEO or a financial genius to be a suitable owner/successor. There are opportunities to implement a family governance structure or have them sit on the board of directors. Transition planning explores all options and determines suitable roles for predecessors and successors alike so both are set up for success and fulfilled in the part they have or will continue to play. Be creative and use your strong foundation as a family to develop and implement strategies that meet your needs.

You can find more information about building value on RFN Advisory Group smart ideas page.

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