Many entrepreneurs in the prime of their businesses can be beset by an important question which answer discourages any delay: who’s next? For some, it might be an easy puzzle to solve—the eldest son or daughter, definitely, or the business-minded brother perhaps. However, entrepreneurs know better. Regardless of the industry, the size of the business, or the perks of being an instant boss is, not all sons, daughters, or brothers are enthusiastic to take on the boss’s role. Family businesses also face the constant struggle of sibling rivalries, family conflicts affecting professional functions, and vice versa.
Thus, business owners may have a hard time deciding how to create a succession plan to save the business from a sudden halt in case something untoward happens to the owner. In this case, there are certain things that can happen to a business. An internal succession may be planned, however difficult it may be to choose the right person. External successions may be planned as well, though this may welcome unsolicited violent reactions from the family. Selling out is yet another option that liquidates the business and takes off the succession worries.
Whichever way a business owner chooses, there remains the fear and apprehension of leaving the business unprepared for the worst. Thus, it is important for the business owner to assess the options and choose the one that works right away. If an internal succession is chosen, there are ways to minimize the conflicts. If an external succession is agreed on, there are ways to protect the family enterprise. Finally, if the business chooses to sell out, there are private equity financiers who can bridge the gap between the business and the prospective buyers.
Review of Literature Maintaining a family business has its advantages. Because a family shares values and grew up in the same setting, it is easy to create an atmosphere of trust which is an important element in growing a business. Family members will also have more understanding of business situations such as working hours and business issues because they are part of the business. During a crisis, a family business also enjoys support from the family that external co-workers cannot give. Most importantly, it is cheaper to maintain a family business.
Family members often work with no regard to pay, and if ever they receive fees they are more likely to do more for what they received. (Family run businesses Anon nd) As an example, survey shows that CEOs of family-owned businesses are paid at least 10% lower than CEOs of non-family businesses. This is because family members are often more concerned with what goes on in the business, knowing that whatever happens to it will greatly affect the family especially the main entrepreneur. This is also truer if the business is the bread and butter of the family.
Studies show that 30% of family-owned businesses are handed over to the next generation successfully. Only 12% can survive the third generation, and the probability of a fourth generation family businesses is only 3%. (Facts & Perspectives on Family Businesses Around the World Anon 2007) This is an alarming fact. This means that despite the concern of the other family members in the business, more and more family owned businesses are not continued. There are many reasons behind this. Again, family members may have the enthusiasm and interest in taking over the entrepreneurship, but there are families who do not have this luck.
Moreover, even if a family member is interested in carrying on the legacy of the founder, it may be without the same foresight and spirit of the founder. Thus, it is important for entrepreneurs to have a plan in mind, just in case a turnover is suddenly needed. In a 2003 survey, 19% of family-owned businesses do not have a firm planning for their business’ future. (Facts & Perspectives on Family Businesses Around the World Anon 2007) With this statistic, it is understood why many gamily-owned businesses face problems when the founder dies or retires.
The only way to solve the issue is by deciding who will be the next of kin to lead or, if there is no one to take over, the decision to close down or sell out. Yet the better way is to avoid this problem, and there is nothing better than planning. Succession Questions Should an entrepreneur decide to elect someone to take over in the organization, certain qualifications should be set and met, and careful consideration of different factors should be made. The usual problem of succession in family-owned businesses is the differences in perspectives by the owner, the family members, and the employees.
However, these fears should be faced and solved so that a succession planning can be made without any problems. This may include the fear of the owner to pass on the business because of the lack of trust with others, or simply his or her fear to lose control; the competition of the family on who will be selected is also an important consideration, as well as the lack of members who are interested to take over. Finally, the employees themselves may fear change, thinking that it will affect the comfort zones that they have learned in their work with the owner in charge.
All of these fears can affect a smooth transition in the family business. To take away these fears, there are stages that families can take one step at a time to prepare for the ultimate goal of succession. First, owners should initiate the members of the family who he or she views as the next of kin. This includes allowing the members to feed suggestions on company decisions, and making them familiar with how the business operates. After the initiation phase is the selection process, where in the owner shortlists the members of the family.
This may require a careful consideration of the interests and characters of the members of the family. Then, a leader is selected. When a leader has been selected, it is important to train him or her as well as the family members who will work under him or her. When the time comes, the transition shall be made. (Your Business Succession Anon 2003) Internal succession of family members Eighty five percent of family businesses prefer to select a member of the family to be the next in line for managing a business, studies show.
This may be accounted to the interest of the original owner’s preference to keep the business affiliated with the name. There is also the expectation that family members will have the same concern for the business as the original owners had. Burkrat, et al. (2003) agrees. Control is an identifying factor when business owners decide who will next manage their businesses. The fear that the family will lose its control if a non-member takes over is an important reason for businesses to resolve transitions within the family.
Internal succession of non-family members However, there are instances when a family business will need the help and leadership of a non-family. Of all business transitions for family firms, this would be the most difficult. In this case, the family remains owners of the business but the leadership and operation is depended upon another person. Many families are not comfortable with this because the family, while the owners, may loose control over important decisions and operational procedures.
With this consideration, many owners of family businesses will find it difficult to appoint deserving persons because they are not members of the family. Sharma & Manikutty (nd) points out that all family businesses have non-functional units. Yet, owners cannot move on to a non-family transition because conflicts and issues within the family may arise. It should be noted that families often have a say on who may be the next best leader for the business. If for the owner it is not a family member then it will create instability within family relationships. Avoiding problems
For a smooth transition, it is important for family firms to have a realistic and practical transition plan that will work well for the owner, the family members, and the employees. Knecht (2008) affirms that strategic planning is an important aspect of business. Firms with a strategic plan comprise the strong part of industries. With a plan, the business and the key people making up the organization will know their goals—where the business had been, where the business is, and where the business is heading. This will allow any innovations to become easily intervened to the company operations.
Communication is also essential for family businesses. Expectations must be laid out, and family members should be open to these expectations. Decisions should also be made with family members considered. It is recommended most especially with finances and planning. (Knecht 2008) Communication is also necessary in the transition phase itself, in which time the owner has to ensure that a timely firm, and effective transition is put into order. (Your Business Succession Anon 2003) Emotions should also be managed properly. Smith (2005) states that emotions get in the way when families decide on important matters about the business.
It should be accepted that families will always have emotional attachments with each other. While it is difficult to make this happen, it is essential to try so. If this is not possible with just the members of the family, say no member assumes the role of an intervener, an outside person or an external agency may be the best one fit to intervene. Families should also be prepared for a sellout at all times, however unlikely they think selling out is. It is not a sign of pessimism. Rather, it is a well-worth preparation that families will thank themselves for in the long run.
A feasible sellout plan takes years to develop to ensure that there will be the most minimal glitches. Thus, it is important to consider making one as soon as the business takes off. (Selling your business Anon nd) It is wise to have a written prospectus of the company, one that contains general information as well as a definitive profile of the details. The purpose of the prospectus is to give the reader a bird’s eye view of what the company is and what it has to offer. The valuation of the company may largely depend on this when the time for value statement finally comes.
It should be considered that when the family business is in the process of being sold, the more impressive the prospectus then the higher the value of the business becomes. Needless to say, the price bar can be higher with a better prospectus. (Selling your business Anon nd) Many companies, not only the family owned, appreciate a professional to intervene in case of writing a prospectus. This should be a welcomed idea. To begin with, professionals know what buyers may be looking for, and what sellers should be able to show.
They also know how and what to highlight in a company prospectus, so that the little glitches can be justified. Thus, though not necessary, a professional in private equity is the best person to ask for making a good check for the company’s valuation. (Selling your business Anon nd) Whether it will be a transition within or without the family, or a sellout in the end, business owners should take account the needs of the business and each person involved in it. After all, a family-owned business is still a corporate entity and not a family affair.
Thus, best judgments should be made according to what is right and not what is agreeable for the family itself. While it is difficult to do so without the emotional influences within the company, it is important to know which is best to save: the family or the business. Only the entrepreneur will know in the end. Selling Out: The Private Equity Financing When the company decides to sell out, there is a popular and time-tested way to do it with the maximal liquidity for the business owner and the continual opportunity for the business—private equity financing.
Private equity financing groups are designed to be on the look for businesses on sale to create a plan which is best for all those involved. Often, the role of the private equity financing group is to help sellers of businesses meet prospective buyers, though they also play several other roles including recapitalization and advising. According to Smith (2005), private equity financing groups are the capitalists of the modern times. This is a true statement at that the way private financing works are similar to the old-time business tycoons—they sustain firms from an eventual closure.
However, most businessmen and analysts feel that private equity firms eat up small companies to capitalize on them and in effect they are destroying the micro businesses, leading to loss of jobs and monopoly. Nothing can be farther from the truth. Businesses who are engaged in private equity financing really help out businesses to select the most viable option for their business equation. Private equity firms believe that family businesses have the strength to stand industries and the potential needed to make it big in any situation. This is why private equity financiers are open to family-owned businesses.
Whenever most family businesses face a sellout option, it is usually the first option that comes to mind. As said, professional help is the best way to create a practical and realistic plan for valuing and selling the business. To make the best out of consulting with a private equity firm, families need to know what they need and want when they approach a private equity group (Smith 2005) It should be noted that private equity financiers do not always want a sellout arrangement, it will still depend on the business owners which way they want to go.
However, most businesses on the point of approaching a private equity firm are already decided on a sellout. This is when a company prospectus will be most useful. A private equity firm’s role in a sellout is to bring out the best in the assets and find a suitable buyer for it. This is easier said than done. To begin with, not all businesses are easy to sell. Buyers also need to be screened, especially in a scenario when the private equity firm itself is the one financing the buyer.