The family-owned business has been a mainstay of the American economy since the country’s beginning, and it has many inherent advantages. For every strength a family business has, there are corresponding weaknesses, however. When it’s time to transition the business, these weaknesses can become real barriers to success. Sometimes companies decide to bring in new expertise or investment to grow or strengthen themselves. Involving outsiders can have very positive effects. Let’s discuss what these are.
Family Business Transitions
There are many different types of transitions, and not all of them involve transferring power or ownership from one generation to the next. The company may choose to bring in new management from outside the family. It can decide to take on investors or expand through acquisition or by entering new markets. Finally, the company can be sold entirely to an outside entity.
Because family businesses involve family and business, each of the above options can be more complex and involve more repercussions or drama when it comes time to transition. This means that before any steps are taken, the family has to understand how they will impact individuals and the success of the company as a whole. Family members do not always have good communication or the same goals, unfortunately.
Involving Outsiders
An established family business culture can be wonderful, but it can also stifle innovation.
When a company brings in new investors, management, or younger family members, it can benefit from their new perspectives and ideas. It can be very hard for leadership to change established processes or traditions on their own or to be objective about problems or weaknesses that the company has. Fresh ideas and collaboration can bring about new solutions to entrenched problems which can lead to growth and improvement.
Non-family existing employees can also benefit during transitions. Many companies have knowledgeable and talented key employees who function as “old reliables” but can’t advance in the company under current leadership. These employees can find new opportunities to shine when a company decides to grow through acquisition. A larger company will have new roles that younger generations of family may not yet have the experience or training to fill. Utilizing existing talent is a win-win situation that strengthens the company and rewards experience and loyalty.
Some family businesses with a deep pool of talent do decide to transition ownership to their employees via an employee stock option plan (ESOP). This can be a great option if there are family members who still want to be a part of the business but no longer want the responsibility of running it.
New investors often want to contribute their experience and advice to family-owned businesses in addition to their capital. Family members should understand this and agree before deciding to involve them. The reality is that investors often do have great ideas that should be considered and implemented. That’s how they became successful!
Outside experts can also help to address clear weaknesses or legacy issues in a business that have been covered up or ignored. Sometimes, due to family dynamics, no one in the family is willing to spill secrets or confront gross mismanagement like bad accounting, hidden income, tax issues, employee abuse, or environmental pollution. Problems like these can and will disrupt a sale when they are revealed down the line to a potential buyer or even dissuade family members from taking leadership.
It’s much better to bring in an outside consultant or two to evaluate and discuss problems affecting business performance and valuation early on in the family business transition process. Consulting a good attorney well before a transition can greatly lower the tax burden of a sale. Bringing in a valuation professional to complete a business valuation early and regularly will help leadership to identify weaknesses, address them, and more quickly grow the business.
Family Transitions Need Outside Perspectives
Getting outside perspectives can be vital to growing a company and increasing its success. It adds accountability and can greatly improve communication. If your business is experiencing challenges or you are beginning to consider a family business transition down the line, schedule a meeting with Vincent Mastrovito today.
