This post was driven by a client who, in the past year, has slowly been stepping back from the running of their business and letting their children take over. They asked for some general advice during the past 12 months, then they gave me feedback about what they were going through. It was an interesting process that I thought our readers might find equally fascinating.
There are 7 main things you should consider when starting to even contemplate transferring the business from one generation to the next, and while these are only basic suggestions, your legal, and accounting people can certainly give you far better and more in-depth advice than we can here.
1. Planning Together As A Family So EVERYONE Knows Where You Are Heading
This means that the plan of transition must be thoroughly planned out, in detail. As much details as possible, in the open so everyone knows what is happening.
Ideally the family must all meet together and define where the company is now and where it wants to go in the future. By forward planning like this, you will be able to all decide (or at least know about): what new technology it may need, moving forward. What will the capital requirements be (outlay or assets to sell), and what type of human resources will be needed (ie: who in the family will or won't work at the business), among a hundred other other subjects. Once those decisions are clear in everyone's mind, and preferably on paper. Then, no objections can be raised at a later date about what is happening.
2. It Takes REAL Commitment
The new generation must never think that their place in the company is guaranteed, just because they are part of the family.
Working for a family business must be seen as an opportunity, and the new owners must be very clear about the employment conditions of their children - from benefits and access to performance policies - the reason why is to avoid giving the rest of the employees the wrong perception of favouritism. This also solidifies in every family members minds, what it is exactly that they are committing to in the long run.
3. Continuing On As Before OR Trying Something New
There may be existing agreements in place with suppliers, with staff, and with other businesses, such as with advertising - what should you do?
Before the hand over, any and all of the existing agreements should be walked through with the new generation. This helps to uncover why things are done this way or that with those people or businesses is sometimes eye opening. From being able to be contacted after hours if there is a problem; To being the sole supplier at that time, but now the raw material is available elsewhere for cheaper; And why that person works those hours and/or only does those duties. Every aspect of the business needs to be looked at and shared with the new generation so that they understand or can make an informed decision as to why things are the way they are, before they try to change things.
4. Your Business Corporate Governance Structure
Every family business must have a professional management system in place, it's not a dictatorship. That's why we went through the first step, but...
In a medium to large sized family business, you might want to look at the possibility of establishing a board of directors composed of industry experts from outside the family to advise on decisions. This can lead to better decisions for the future of the company. It will cost money, but that investment may well be worth it in the long run.
However, if you are a small business that cannot afford to have a board of directors with paid professionals, you can at the very least have a board of advisers made up of relatives and other members of family business who are closely associated with them, or at the very least, a group of professionals in associated industries to act as advisors. They can be asked for their opinion when you need it.
5. Preparation Is Everything
The new generation taking over must receive the training required to take control. It shouldn't just be assumed that they know what they are doing just because they have watched you do it for years.
The generation giving up ownership needs a plan that clearly defines the conditions of their exit, and whether they will remain as advisers or keep a position with specific and clear duties. The time needed to make sure all parts are ready for a successful transition can usually be between 5 and 10 years, but it may be forced on everyone sooner - so having a plan in place will help in every situation.
6. Management First, THEN Ownership
Transferring any company to the next generation is not only a matter of naming the children as owners. There is far more to consider.
The first step is transferring the management of the company and ensuring that the new generation is trained to lead the business. When new leadership is strengthened, and shown they are competent, then the proper transition process can begin. If needed, professional managers can be hired until the relatives are ready to take over complete control of the business.
7. Resolving Conflicts
Let's face it... all families have problems and conflicts that need to be resolved.
Conflicts can and do not only can destroy families, but also their business, so be careful.
Establish boundaries from the outset.
Including: Those who can sign off on purchases to hiring and firing and other business issues, by deciding up front about who will have the final call, then the clearer the path will become.
It is vital to try to remove interpersonal conflicts from the day-to-day operations of the business and to define ways for the family to resolve differences.
It is fundamental to have a family Charter, this is a document that governs how relatives behave inside the business and within the family, and "how conflicts are resolved among family members."
Phew! That was quite heavy I know, but now that we have covered those 7 aspects of the business hand-over, lets look at some things that can be easily overlooked and that's the key documents of your business.
Key Documents
When changing from one generation to another, the process should also include documents that family businesses use on a daily basis (including bank account names, registrations, leases, gas, electricity, phones, etc), but, at the very least they should also include:
A Family Pact, Agreement or Charter: This establishes the terms and restrictions for any family member to be able to transfer their shares of stock from one to another. It also establishes the rules to join and leave the company, how conflicts will be resolved, educational requirements, and compensation and promotion policies. So, pretty much everything we have discussed above - but in a formal agreement.
Your Will: While everyone should have one, you must, MUST specify what will happen with the stock if a shareholder dies.
Code of Conduct: Establishes the rules of behaviour for family members within the company, and also information and confidentiality matters.
((BONUS THOUGHTS))
Once the business has been transferred successfully, here are three more tips to make sure everything continues running smoothly.
3 Pitfalls Every Family In Business Should Avoid:
1. Not respecting the family hierarchy.
Every family has a hierarchical order, either naturally or due to who is now in charge of the business. By not respecting this order inside the company can and will cause friction that can overflow and destroy a business from inside and out.
So if someone feels they are being disrespected or not being heard, it's a real recipe for resentment and conflict. There must be a certain level of mutual respect and a feeling of collaboration are essential. By leveraging each person's strengths in their different fields, including management capabilities, then, for the business' greater good you can keep the business growing. This should always be top-of-mind when deciding who should do what.
2. Not having enough flexibility.
Members of the family, especially the younger ones, need the freedom to experiment with their own projects, even if other relatives do not agree.
If their project fails, it is a learning experience that the individual will remember for a very long time. If the project is a success, it's a win-win for the individual and also for the business. Don't be afraid to let them experiment and push the limits. Even if that means doing something that is not a part of your 'core business' because you never know where it might lead.
3. Not celebrating victories.
Owning a company with your family behind you is a blessing. Make sure to take time to celebrate the wins and to learn from the losses.
This is vital to maintaining morale in the family, and with your staff, leading to a general positive feeling toward the business from everyone. A family that celebrates and supports one another creates a culture that fosters dedication and success amongst themselves and also leads the way for their staff members. From small to big, celebrate at every opportunity you can.
And that's it.
I hope you found this post as interesting as the process of finding all this was for myself, and for the business involved.
Until next time, stay safe!
