Five Key Steps in Preparing a Family Business For Transition

“If you don’t know where you are going, you’ll end up somewhere else,” so said Yogi Berra, the man The Economist magazine named in 2005 as the “Wisest Fool of the Past 50 Years.” As far as we know, he was not talking about family business transitions, but his words certainly apply. Through long experience guiding owners, we’ve found that preparation is the best way to increase the odds of transition success. In this article, we share with you five key steps in preparing a family business for transition.

Step 1: Level the playing field.
Step 2: Install formal business governance.
Step 3: Install formal family governance.
Step 4: Demystify the culture; disarm conflict.
Step 5: Commit to change.

Step 1: Level the Playing Field.

In businesses and in families, there are hierarchies. A company’s organizational chart illustrates its decision-making structure and the relationships among the people in the company. In families, the hierarchy is typically generational: At the top is Generation 1: the current owners / parents. Beneath Gen 1 are the members of Generation 2 and below them, Generation 3.

As children working in a business begin to rise into ownership, members of Gen 1) must shift from thinking of rising owners as children, to respecting them as peers. For example, if your daughter (a potential successor) disagrees with your proposal to launch a new product, (1) she has to know that she can express her opinion to you; and (2) you have to listen to her objections. If neither of you can engage as peers rather as parent-child, your successor won’t learn how to make a persuasive argument—a skill she’ll need as a business owner.

Step 2: Install formal business governance.

If you think formal business governance is a luxury your company can do without or a burden your company does not need to carry, we suggest that, as a family business owner, you consider the enormous benefits of governance. Business governance can:
Preserve family relationships.

Give your successor the opportunity to learn new skills,
Give you the opportunity to learn to mentor.
Protect your business.
Alleviate the worry of losing control.
Minimize miscommunication.

Simply put, business governance consists of: 1) the rules and processes that control both how decisions are made for and within the company and by whom, and 2) the types of decisions people in various positions are authorized to make. The most common form of governance is a board of directors made up of both majority and minority shareholders.

Step 3: Install formal family governance.

Owners are often surprised when we recommend installing formal family governance as one of five key steps in preparing a family business for transition. It’s true that formal family governance is especially critical when businesses are transitioning from Gen. 2 to Gen. 3 and beyond, but family governance is still well worth considering before conflict arises and emotions run high.

When we make the case to owners for creating a “family constitution” that governs the actions of a family board or council, we often begin by asking how, as their families grow and mature, current owners plan to:

Communicate their values and visions to a broader family network so decisions regarding the family’s mission, investments, tax strategies, distributions, etc. are made according to those values?
Ensure that family assets support family members and not become a wedge that drives family members into separate camps?
Communicate to family members what is expected of them?
Demonstrate to all family members—regardless of their involvement with the business— that they are valued, and that opportunities are available to those who wish to make the most of them?

We freely admit that the process of drafting a family constitution can be complex. Values and priorities which may have been assumed or unspoken and taken for granted must be brought into the light and debated. Discussions typically reveal areas of misinterpretation and /or disagreement that must be aligned among individuals and generations. Still, the process of reaching agreement is invaluable.

Step 4: Distinguish between family and business governance.

If the transition of a business destroys family relationships, we—and our clients—deem that transition to be a failure. For that reason, we are advocates not only for installing both types of governance but also for teaching family members how to operate and resolve conflict within each.

Individuals may be excluded from participating in business governance, but all family members are given the opportunity to participate in family governance. Business governance necessarily involves exclusion: not every family member can, nor should, have a voice in every decision related to the operation of the business. On the other hand, all family members are invited to make the most of opportunities that a family might make available, such as tuition for college or advanced degrees, employment of students during vacations, a voice in philanthropic decisions, or serving on the family’s board or family council.

A Word About Timing and Flexibility

The best time to create a family constitution is before it is needed rather than once a conflict has arisen and emotions run high. Constitutions are not carved in stone and family members may change them to adapt to current events or challenges. Still, constitutions are valuable tools that visionary individuals use to establish a foundation for the ongoing success of their family businesses.

Step 5: Commit to Change.

Merriam-Webster defines transition as “a change from one state or condition to another.” In business transitions, change is truly all-encompassing. Business transitions change:

The owner’s and the successor’s life and lifestyle and their relationships to each other and with others.
The relationships among family members.
A business’s culture, operations, conflict-resolution practices, and decision-making structure.

Employees, vendors, customers, and even the community in which a business is located are affected by a transition.