Tag Archives: entrepreneurial

08/16/17

Toward A Family-Business Exit Plan

In the course of investigating the perceived crisis in business transition planning, U.S. Trust Company collaborated with the Eugene Land Entrepreneurial Center of Columbia Business School to produce a white paper entitled: The Owner’s Journey: Experiences Shared and Lessons Learned.*

The white paper reads as a thorough, in-depth, many-faceted alarm bell. The clarity with which it makes the case for early transition planning—in its multitude aspects—cannot comfortably be ignored—and certainly not by family businesses that wish to survive and transition their mission, vision, knowledge and wealth to future generations.

The authors found that few entrepreneurs started companies with the sole goal of getting rich. Rather they launched companies to fix a problem, to create something new, to act upon an insight that they alone saw, or simply to make the world a better place.

Getting rich or creating a legacy family business may not be the primary motivation of an entrepreneur, but as time goes by:

…capturing wealth and ensuring the sustainability of one’s life’s work becomes, very important.

To attain these goals, broad and careful planning is indispensable. For any business this is a lengthy and challenging process. For family businesses the difficulties involved are even more complex.

Families who have significant business assets need to acknowledge that there are two dynamics: one for the family and one for the business, and these dynamics need to be addressed in coordinated estate, exit and succession planning.

Several exit scenarios are described in the white paper. But for family-business owners, the most desirable among them is to pass the business on to a new generation of family members. However, the authors warn, an owner cannot always count on his/her children to be part of an exit plan. In keeping with the paper’s theme of long-term planning, a list of recommendations are supplied for preparing a family’s next generation to effectively take their places within the business, with a view toward multi-generational success:

  • Communicate your goals regarding the company with family members regularly.
  • Expose children to the business at an early age.
  • Encourage children interested in the business to educate themselves in appropriate skills with formal education and job experience outside the firm. Determine the appropriate person in the family with the right temperament, skills and experience for leadership.
  • Working with a professional psychologist can help with decisions about family succession.
  • Having a board with a majority of nonfamily members can be helpful in professionalizing the plan.
  • Regular family meetings, which can include a third-party expert in family business dynamics, can be helpful.

These recommendations are recognized family-business best-management practices that every family business would benefit from. The emphasis however is on persistence and flexibility through inevitable changes, while preparing for and accepting an unpredictable future.

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*All text in italics are direct quotes from The Owner’s Journey: Experiences Shared and Lessons Learned. Prepared by Eugene Lane Entrepreneurship Center at Columbia Business School in collaboration with U.S. Trust, Bank of America Private Wealth Management

01/20/17

Transition, Transition—How Goes the Transition?

Family businesses offer a unique opportunity to examine what it takes to transition from the entrepreneurial mindset of the founder to that of an established and complex enterprise. The oldest form of business, family firms represent the majority of businesses worldwide. Given that they are ubiquitous, one might assume their best practices are well understood. Yet most fail by the third generation.

One reason for family-business failure may be embedded in their very beginnings. While the founding entrepreneur’s decision to start a business may be intentional, the transition to becoming a family business may be less intention than something that ‘just happens.’ The entrepreneur starts a business, gets married and at some point has children. The children may get taken to work by a parent struggling to balance life and work issues. At some point the children start helping out, providing inexpensive labor, and ‘willy-nilly,’ learning the workings of the business.

Over time one of the children assumes a greater role in the business, eventually beginning to make important decisions. Another child may enter the business simply because there is a job opportunity. A natural hierarchy develops as the business calls forth and accommodates the capacities of each of the siblings.

As the children’s capabilities increase, the entrepreneurial founder spends less and less time working the business, and one day decides it’s time to retire. The children inherit the business with the condition and promise that their parents will be taken care of. A simple, straightforward transition has taken place.

Typically these grown children of the founder will marry and have children who become the family’s third generation. And here lies a critical family-business turning point.

When the time comes for this third generation to inherit ownership and control of the business, their parents look back at the transition model that functioned when they inherited. And it is found wanting. By now things have become significantly more complex. Not just siblings anymore; cousins are now involved. A new model of inheritance, role distribution and governance must be found.

Understanding this inevitable pattern is the first step toward a successful transition from entrepreneurial to multi-generational-family-business success.

04/6/16

Precarious Placement

Positioning the second generation as managers, responsible for overseeing the processes and systems established by the founder is a not-uncommon practice in family business; but this custom sets up a potential problem. The second generation never develops the entrepreneurial skills necessary to take the business into the future during the time of their leadership.