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Family Business Transition Dilemma - Who Gets The Baton?

Thursday, March 18, 2010   By Mike Reddy

 

Family business transition planning is frequently predicated on the assumption that someday the parents will be passing on the baton to one (or several) of their own children. What more satisfactory way of crowning their lifelong efforts and hard won success than to pass on the legacy to their own kin so they too can continue to enjoy and prosper from it.

However, children are never clones of a parent and generations also vary one from another so that we can, these days, point to enough commonalties among age cohorts to be able to characterise this person as a baby boomer, that one as a Gen X and another as a Gen Y. Changes in educational opportunity, in affluence, and especially in technology have created a different life style and set of expectations among these generations from that of the business’ founder. This may translate as a lack of any particular commitment to the family business or a desire to take a different career path altogether.Where there is absolutely no interest in the business demonstrated by the next generation, then, blasphemous as it may sound to the senior generation, selling it to a third party could well be the best decision–for the business and the heirs.

Though commitment towards the family business itself has been identified as a key desirable attribute in potential successors, the situation can be more subtle than simply a committed/uncommitted divide. When you think about it, different people may be committed to a situation for different underlying reasons. In some instances a child may feel committed, but based on feelings of obligation to continue on in the family business–that they ‘ought to’. Another may have made a commitment based on their calculation of the opportunity costs and threatened loss of investments or value of not pursuing a career in the family business-this person will feel that they ‘have to’ pursue such a career. For offspring who experience feelings of self-doubt and uncertainty over their ability to successfully develop a career outside the family business, commitment will be based on a feeling that they ‘need to’ continue in it.

These types of motivation may deliver on ‘commitment’ but not necessarily on another vital contributor to business success -  passion. That can only come from a person whose commitment is based on a strong belief in, acceptance of, and an excitement about the business’ goals combined with a desire to contribute to furthering them and confidence in their own ability to do so. The ideal successor ‘wants to’ pursue a career in the family business.

Before attempting to develop a business transition plan based on passing it to the next generation, you must ask yourself this key question: do the proposed successors have the necessary passion for the business that will see them through the long hours and tough times that are part of managing and growing a business?

If you are still some way off the transition point, there may be time to develop a grooming programme for candidate successors including working up through the company to establish their knowledge of operations and their credentials with employees and customers, management training and so on. This provides you with the opportunity to evaluate their aptitude, reason for commitment and level of passion. Creating a family council opens up a formal forum for discussing succession planning openly and assessing the real wishes and passion of potential heirs to the business.

If a child doesn’t want a role in the family business, then it’s no use kicking against the traces. Better to arrange an alternative transition strategy that recognises the fact. This may not necessarily involve selling to a third party though. It may be possible to hedge bets by bringing in external managers or transferring ownership to a trust to delay the need for a decision, at least for a period.


Mike Reddy is a Chartered Accountant, business coach and advisor helping businesses in Sydney, Melbourne, Brisbane and Gold Coast to easily increase their profits and cash flow. He is currently President of the North Sydney Chamber of Commerce, a Regional Councillor for Sydney North East and a member of the Institute of Chartered Accountants Sydney leadership team. As well as advising businesses, Mike presents business development seminars and webinars and is regularly contacted by the media to comment on small business matters. You can connect with him on Facebook, Twitter and Google+.