Our guest blog this week comes from Bob Gruber, President of The Rainier Group, a professional firm with concentrated experience in the issues that affect successful private business owners and other successful individuals including business transition services, wealth advisory services and institutional consulting. Bob will be participating in our Succession Planning panel discussion on August 25.
Let me begin by defining a ‘family business’ as a private business in which there are at least two active generations. It is the transfer of ownership between the generations that is the most common type of ownership (and management) succession for established private companies in the United States.
It is not difficult to understand the motivation behind the desire for this type of ownership transition. Predictably the older generation (G1) has spent years building and shepherding the enterprise. G1 usually sees the business as an extension of themselves- their identity and the identity of their business is comingled. There is thus a natural desire to create a legacy and give the adult children (G2) the opportunity to benefit from their succeeding ownership. G2 has grown up with the business and participated in its success through their active role as adults within the enterprise. They also see the opportunity for themselves as represented by the success of their parents. Given these motivations, an intra family ownership transition becomes an obvious objective, and it is at this point that a critical consideration is overlooked.
Regardless of the emotions involved, is the succession of G2 to the ownership of the company a good practical solution? Objectively, does the business have the capability to support the goals of both generations and remain healthy and competitive?
Typical objectives of the older generation include the following:
– Financial security. Subsequent to the transaction are there sufficient resources to effectively guarantee the desired life style.
– An effective governance structure during and after the transition period. Frequently this includes powers retained by G1 at various points in the process.
– A desire to withdraw from or significantly reduce involvement in the day to day grind of business- a loss of experience and talent.
– Tax relief either by actions that shift the burden or a desire to be made whole by additional payments.
Objectives of the younger generation share some commonality with the older generation and also contain considerations that are different.
– Personal cash flow needs.
– The defined roles of family members.
– Governance- how decisions are made and who has what powers.
– Within the second generation who will acquire ownership and in what percentage.
– If inactive siblings, how are the interests of active and inactive family members to be addressed.
– Developing a strategic direction and tactical guide points that are understood and supported by all family members.
– Agreement on an acceptable level of risk.
Any one of the above factors can create an impasse that makes an intra family ownership transition suspect and potentially impractical. Families are complex; families involved in business even more so. So it is not simply the financial issues that need to be tested before attempting a family succession effort.
Let’s assume that we have tested the waters and that no deal- breaker has surfaced. We have one more critical consideration before hitting the go button. We need to assess the future of the industry to which the business belongs and the competitive landscape. A business that has been successful can face an uncertain future due to changes in technology (video rental stores) or by increasing competition from industry consolidations. If the industry is declining or competition is becoming fiercer, an exit strategy other than retained family ownership may be a better alternative for all stakeholders.
As I type this, it occurs to me that the reader could conclude I am not a proponent of maintaining family ownership in the family business. In fact, if maintaining family ownership is a good practical solution as well as a feel good emotional decision, I prefer it believing that the family business creates a significant benefit to the community in which it is located. The purpose of the above content is to simply state it is a good idea to look before we leap, that assumptions can be dangerous, and that good decisions are made when both the emotional and practical are taken into our considerations.