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By Serge Ejzenberg
Posted Aug. 18, 2005

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My previous article described from a “theoretical” view the miscellaneous aspects of the “Family Governance” without really taking into account that families are entities built with ….humans!

Some statistics show that only 30% of family owned businesses in the USA survive the transition from founder to second generation
Only 10% of the businesses make it to the third generation and merely 4% are surviving into the fourth generation.

With their “neutral or outside-of-the-family”, advisors can provide the entrepreneur with a more impartial perspective and the clarity of an outside observer

Why so many families fail : The Human Element

Sometimes it’s purely business related: slowdown of market demand, fierce competition from overseas.
The perpetrator in many cases is within the company itself and linked to succession issues.

It’s quite common for parents to, under or over – estimate the next generation ‘s interest in joining the family firm, to properly evaluate the potential contribution to the firm, or inclination to work constructively with one another.

In the same context, business owners are frequently not fully aware of their own role in a succession transition.
There are many instances when the entrepreneurs faced with their succession are taking decisions without any in depth understanding of the “Family Governance” (if there is one…) and become indecisive.
They often, involuntary, undermine the next generation.

While most of the business and legal aspects of a succession can be handled by professional (lawyers, accountants, auditors, …) the human capital, which is the only one able to take the rein of the company is either underestimated or not even considered.
The oldest child will have the knowledge and capacity to ensure a bright future….
A part from his/her diplomas did the entrepreneur really validate his/her willingness to take the rein, does he/she has the willingness to do it…?

Qualify and decide what you (entrepreneur) want:

As a family business owner, it’s part of your own responsibilities to have a clear vision and understanding of what you hope to achieve from a business decision:

  1. Do you want to surrender day-to-day responsibilities in the business, but still stay involved with key customers or contribute to the global company strategy?
  2. Are you either willing to maintain a minority or a majority ownership in your company, or do you seek to divest yourself from business totally?
  3. Will it make sense to your personal insights and believes that if one or more of your children carry the family business name?
  4. From a pure financial perspective and accordingly to your assets goals, does an opportunity to sell the company at a large premium outmaneuver passing the business to you children?

A realistic accession of your children:

Sometimes “good senses” takes over theory and (costly) consulting costs…
If one of your children enjoys your business and has demonstrated capabilities to add value to it… No more questions “HE/SHE is the MAN/WOMEN”!
This is a simplistic example; things are different when two, three or more children are present.
The ability to work together in a view to generate value is another vision to consider.

Manage your children’s expectations:

1. The “pie”

Let’s consider an entrepreneur who was able to build a successful company and provided him and his wife a comfortable lifestyle.

The economics of the company will have to be different when the entrepreneur’s children’s would express interest in taking the leadership when the father will retire.

The revenue to be distributed will have to be slightly more important: feeding 2 or 3 families requires a much larger “pie” than just feeding a single family…

It’s crucial to have a realistic revenue growth and assess that it will be realistic to hand over the business to the children’s.

The most disturbing situation is when you have to discuss the ability of your children to take the seat when you retire

2. The “ability”

It’s quite common to see in large group to see children having an operative activities alongside their parents in the company and some external factors (customer’s satisfaction, other employee’s of the company,…) may encourage the entrepreneur to pass the rein when time will be there.

Be careful, having a “second role” is not like have all the light on you! (a parallel can be find in the movies industries, some actors are perfect in “second role” and are doing poorly when they are acting as the “main star”).

As an entrepreneur it’s the most disturbing situation when you have to discuss the ability of your children to take the seat when you retire.
During this phase it might be wise to have en external professional (e.g.: industry psychologist) discussing ways to solve the problem.

Different solution can be drawn upon the personality of the children’s such he will continue to have a position at the company as long as the family keeps control.
This can be also the opportunity to re-assess the role of the children in the company.

3. Prepare a Generation of Leaders

Leadership is not a genetic inherence, but entrepreneurs have to assess the capacity of their children’s to properly react into difficult situation.

Expose them to all facet of the of your company, put them in position were difficult decisions will have to be make.

Authorize failure with the ability to learn from their own mistakes; too often in the course of the events entrepreneurs continue their activities and forget to enter into this failure’s analysis.

As any employee in the company challenge them to surpass their own achievement and…your achievement.

4. Be aware of your employees and partners

Any major management/ownership changes creates a publicity around the company.

Entrepreneurs who head a family company have to consider the impact on key managers when a new generation of family business enter into the boardroom.

Every effort should be made to integrate the family members into the fabrics of the company in a manner that enables them to earn trust and respect from other valuable employees.

Manage the new liquidity:

Usually a succession plan is expected to “unlock” significant liquidity should always include strategies to manage significant money inflows.

Its’ quite common for entrepreneur to become too focused on the various decisions and details, and paid too little attention to post-succession issues.

Here some hints that an entrepreneur should consider when new important liquidity wealth arrives:

  1. How this will affect your family’s values ?
  2. How this will change your family’s spending habits?
  3. Which impact on the investment plan (real estate, philanthropic ….)

Final recommendations:

When it’s time to begin succession planning, it’s often the best for the head of a family business to solicit advice of a “wealth advisor” or any other trusted counselor.

This is especially true when decisions are impacted by the human element.

Interacting and assessing family members has always emotional overtones, and advisors, with their “neutral or outside-of-the-family” can provide the entrepreneur with a more impartial perspective and the clarity of an outside observer.

They are some many pitfalls when passing a family business to children or to others….

Serge Ejzenberg
Président de l’Association Alexis de Tocqueville

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