During my years of consulting with family-owned businesses, I have encountered a number of mistakes made by the older generation when they have tried to transition their company to the next generation. During the transition, they were not aware of making any mistakes, only to find out in later years they had wished things were done differently.
In consulting with families today I try to warn them against some of the pitfalls ahead of time by looking at what the future result would be if they do not change their current path.
Here are some of the top mistakes (by far not all-inclusive) faced by small business owners in business transitions.
1. Shares are too widely held.
What we find with most families is there are too many shareholders. Maybe shares have been gifted to a number of family members because of the tax benefits, or, in a start-up situation, shares are sold to outsiders just to raise capital. When these things happen it makes the transition difficult because most of the shareholders usually do not work in the company. This leads to disharmony between the members inside the company versus those on the outside.
2. No outside board of directors/advisors.
Independent thoughts of outsiders are one of the most important sources of advice for closely-held companies. Owners need advice they don’t want to hear versus advice they want to hear.
3. Weak advisors.
Many advisors who have grown up with the current generation are usually approximately the same age. A company in transition needs to take a hard look at the current advisors and ask the question “Can they take us to the next level?”
4. “Hanging on” too long.
The oldest generation is often afraid to give up the reins, and they don’t know what they will do once they give them up. We always say you need to decide to retire “to” something, not “from” something.
5. No succession plan for top management.
This is very similar to the advisor issue. Top managers are the ones that got you here but they need to set up a transition plan of their own. The next generation of owners needs all the help it can get, and often it takes younger, energetic management-level employees to help them succeed.
6. Hiring unqualified family members.
There is nothing that destroys attitudes and culture worse than hiring a family member that is not qualified. Companies have failed because of this because employees will leave as they see no future in their efforts.
7. Lack of family meetings.
There are companies that do a great job on communication among the employees. Too many of these companies, however, have no communication among the family members so they can’t answer major questions, such as: Where is this company going? Who will be the next owners? Who among the family wants to own and/or run this company? When will the oldest generation step aside?
The reason for this is these are the hard questions no one wants to tackle. Regular family meetings using an outside facilitator, at least at the beginning, can be an effective method to get the family over this huge hurdle.
8. Lack of strategic planning.
“Where are we going as a company and a family?” “What will the future look like?” “Is there a vision that is being communicated?” Without strategic thinking none of these questions can be answered.
If you would like to learn more in-depth about any of the above, do not hesitate to comment below or reach out to me directly.
About Les Banwart
For nearly 40 years, Les has specialized in meeting the specific needs of family-owned businesses by facilitating family meetings in helping families through a transition. He is the CEO of Banwart Strategies, and has been affiliated with Aileron since it’s inception in 1996. Prior to Aileron, he served as president of CYMI, Ltd., a family office located in Dayton, Ohio, which hired him to build the business from the ground up. Prior to CYMI, he was a partner at Arthur Andersen, where he served closely-held businesses for 25 years. Find his site at www.banwartstrategies.com