Intellectual capital is key to transitioning the family business
When it comes to the transition of a business, there is much to consider.
Business owners should ask themselves about their motive for transition and their method of transition to address whether an internal or external transition is desired.
While these appear to be simple questions, they may be part of one of the most challenging decisions a family business owner has made in the life of the business.
There are many additional questions to consider when implementing a transition strategy: What is the overall business value? How ready is the business for transition? What will the future look like for employees? Is current ownership ready for the next leg in their journey?
The focus of a valuation before a sale, which includes analysis of cash flow, defining risk and thereby providing a current and objective value, is critical. A difference in opinion of business value is a primary reason why many transitions are not completed.
Organizations should consider how ready and how attractive the company is to the next owner(s). The analogy of selling your house is often used to illustrate this point. The timeframe of the desired transition may impact the preparations and decisions made regarding strategy, leadership succession and employee retention tools.
A thoughtful, objective and clearly defined plan based on facts and action, with assistance from professional advisers experienced with transitions, will ensure continued progress through structured processes, measurements, collaboration and accountability.
Keeping it in the family
Business advisers who have spent time working with organizations in transition will confirm that internal transitions are often more complex and take more time to work through than an outside sale. There are several reasons for this, the primary relating to family dynamics and the desire to perpetuate the family legacy. Additional aspects include the overall communication plan and how to complete the transition in a fair and timely manner.
An internal transition, either to family and/or key employees, requires the organization and leadership to identify the correct individual(s) with the skill set, education and experience that is needed to successfully move the business forward. In some cases, the current leadership may feel pressure to choose one family member over another and may be limited in options for qualified and ready individuals. To ensure the long-lasting viability of the business, it is of the utmost importance to keep the lines of communication open with leadership, board and family members, to proactively address conflict and to set clear guidelines related to the progression of the transition.
When identifying an outside buyer, the current ownership should keep in mind their preferences and motives. They may have a list of other organizations they do not want to purchase the business and a list of prospective organizations that would be a good fit for the existing operations.
If maintaining the company culture is important to the seller, they should focus on the nature of the buyer and the impact on existing structure and people. Eighty percent of family business owners who plan to transition in the next 10 years do not have the price of the transaction as their primary concern. Rather, they focus on the terms and structure of the deal, and more particularly, on the benefit of the transaction for the existing staff and leadership. Therefore, current business owners must have a structured conversation with prospective owners regarding price, terms and non-negotiable items for both parties.
One of the first steps in the purchase of an organization is a signed letter of intent that provides specifics of the transaction in writing and ensures both sides are in agreement with the pieces and parts of the contract. An additional step is face-to-face meetings with those closest to the business. After these discussions take place, the leadership team often is brought into the conversation, and for certain before the announcement is made public.
When it comes to communicating the transition to stakeholders, customers and vendors in an external transition, addressing each group depends on the existing relationships and their specific involvement with the transition. Outside parties often are relieved and supportive in the transition process as they see the benefit to long-term planning and strategy and are reassured regarding their continued interaction with the business.
Regardless of whether a transition is internal or external, all companies place a high value on transferable intellectual capital. In today’s business environment, it is vital to have the right people in place on the leadership team and a healthy company culture to ensure long-term viability of the company. The people who make up an organization are harder to replace than other tangible assets, and they set the tone and define the culture.
The importance of intangible assets is demonstrated not only by successor family members or outside buyers, but also in the new generation entering the workforce. They are over 30 percent more likely to work for an organization with a strong culture and positive brand, and are willing to be paid less to join a company where they can make an impact on society. Communication continues to be a key factor, and it is understood that how a company communicates in the midst of a transition says a lot about what they are. Regardless of the motive or method of transition, the people involved in each organization should be a priority, guiding the organization into the next chapter of success.
Transitioning a business is an uncertain time for everyone involved. To pave the way for a seamless transition once the owners and leadership agree on a path forward, it is important to ensure all employees are clear on the expectations for their current and future role(s) with the company. Owners should also communicate next steps to outside stakeholders, customers and vendors. One such way to provide this information is at an annual meeting or through special events.
This commitment to share information sets the tone for a positive transition and ensures the alignment of interests and outcomes. Transparency is key in any transition to alleviate issues and pave the way for a successful outcome that has long-term, positive effects for all stakeholders.