July 2020 Newsletter – Transitioning Your Business to Your Children

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In July 2020 we have been focusing on how to begin the process of transferring leadership of a family business to children in preparation for an eventual transfer of ownership. This process, when done correctly, takes years and provides the next generation the skills and experience they need to successfully continue the mission of the company.

july 2020

 

Family Business Transfers

Not all owners who want to transfer their companies to their children are successful. In fact, only about a third of family-owned businesses successfully transfer to the second generation. Bridging the transfer from the second to the third generation is difficult too, often even more complicated, as more family members become involved either in management or as shareholders. Only about three percent of family businesses make it successfully into the fourth generation. 

Too many owners put off even thinking about transition planning until they are approaching retirement, have a health issue, or some other complication forces the issue. The unfortunate result of that is that their kids are not ready to take over. Any kind of transition planning needs to be done early on to address weaknesses or problems that the business has. One of these would be a lack of training or education of the next generation. 

Even if your children are not working for the family business, they can still be training so they will have the tools and skills they will need down the road. That might mean taking business classes, doing leadership training, or sitting in on board or shareholder meetings. It can also mean bringing them in as a regular worker or in a non-leadership role so they learn the business through and through, including its processes and procedures, products and service offerings, client base, values, goals, and culture

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Is the Next Generation Ready or Able to Lead?

The challenge of transitioning from one generation to another is not solely about preparation, though. People have different gifts and abilities. It can be very hard on a parent to try to decide how to divide or assign leadership roles between his children. It’s harder when people in the business or the family do not agree about who can or should do what as well. 

When there are multiple children who want to take a leadership role in the business, the owner must determine which of them is the most effective leader. It’s important to be objective to the extent that is possible and consult the other people in the business, from employees to the board of directors, to see what their opinions are. After all, they will be directly affected by the transition and will take a part in overseeing continuity within the business.

Here are some questions to ask before determining who might be best for which position, including president or CEO: 

  • Who has created relationships within the company that will facilitate leadership?
  • Who does the staff respect and coordinate with? 
  • Who has a clear vision of the company’s mission and future?
  • Who has the skills and the drive to make that vision possible? 
  • What does their work history both within and outside of the company reveal? 

The last question is important because sometimes children are not only not suited for leadership, they aren’t a good fit for the company at all in any capacity. Perhaps the hardest thing that a company owner can do is to fire an incompetent family member. However, if a child is not capable or not willing to work to capacity, keeping him on will damage the company’s performance and harm employee morale at the same time. 

If you are considering transitioning your business to your children and need advice on how to prepare them or an objective view on whether they are ready or able to be the next generation of leadership, please call us at Prometis Partners. Family and business relationships are complicated, and this is a challenging process. When done correctly, transitioning leadership can set up the business for many more years of success. When done incorrectly, it can negatively impact the company and family relationships. Don’t leave this to chance. Begin planning for transition as early as you can for the best possible outcome. 

Vincent Mastrovito

Vincent Mastrovito

vincent@prometispartners.com
(616) 622-3070
250 Monroe Ave. NW, Suite 400 
Grand Rapids, MI, 49503

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