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Preparing for Family Business Transition

Clients need to be able to answer the question, “What’s next?”

One of the most challenging issues many leaders face, especially family business owner-operators, is the eventuality that one day their role as leader will end. This could come as a result of a deliberate leadership transition to the next generation, a sale of the business, illness or death. For leaders who gain meaning from what they do or view it as a core element of their identity, confronting and planning for their inevitable separation from some or all aspects of their current role can be difficult and emotional. However, the cost— both financial and personal—of not facing this challenge and devoting meaningful attention to it in advance of a transition is significant. Investing the time to ensure a successful transition can lead to a renewed sense of purpose and personal joy for the leader as well as a bright future for the business and the next generation of owners and managers.

Understand the Barriers to Successful Transitions

Some of the most common barriers to effecting transition include:

  • Fear of being unable to replace the enjoyment and fulfillment felt in current role
  • Fear of loss of identity
  • Fear of the unknown
  • Association between a shift in role/responsibilities and death
  • Feeling overwhelmed by the magnitude of effort required to facilitate a transition relative to other present priorities
  • Concern that there isn’t a “good solution”—meaning a leader feels no one is ready—in the case that an owner seeks to hand the reins to a successor generation

After acknowledging these, leaders can begin growing comfortable enough with what they’ll likely face to at least start the process.

Accept the Challenge of Transition

Beginning the process of ownership transition starts with an acknowledgement and a commitment. Regardless of whether a leader decides to keep the business in the family or sell, they must come to terms with the fact there will be a transition and their role will change. For that reason, the fear of coping with rapid change or an acute loss of identity can be conflated with the fear of the unknown. However, when planned for correctly, the change is typically gradual and informed by the leader. Committing early to taking the long journey—to prepare for the future of the business and themselves—requires patience and ensures the fear of change can be extinguished over time.  

What Does the Future Look Like?

Next, the leader must ask themselves, “What do I want the future to look like?” If the answer is an eventual sale of the business, the leader should begin evaluating and planning for such an exit. That includes appointing people to leadership roles who will sustain the business, providing stability for new owners and employees and creating structure surrounding processes, systems and financial reporting. These efforts go a long way toward what a leader can control in maximizing the value of the business in a sale. Owners should also engage in personal pre-sale planning with an advisor—well before a transaction—to ensure they have achieved optimal tax efficiency.

Alternatively, leaders who seek continued family ownership in the business will have to shift their mindset from operator to mentor/advisor. This requires gaining comfort with watching the next generation rise to the challenge and effectively lead the organization as owners and, in some cases, management. How this shift ultimately plays out, however, depends on the family’s and business’s needs.

Take Steps to Fill the Void

There are generally three outcomes for leaders who undertake a sale or succession process: an ongoing advisor role in the business, an advisor role that diminishes over time or a clean break. Often, leaders can influence the outcome. If sufficient time and effort is invested in preparation, and the leader acts as a mentor to the next generation of owners and/or management, then the next generation of owners (or buyers) will want to continue to leverage that experience. Conversely, there’s a risk that the leader doesn’t see eye to eye with the next generation or buyer, which could end any involvement. Regardless of outcome, there will be a shift in the leader’s responsibilities. When thinking about how to fill this void, there are a few important points to consider.

  • Meaningful “second acts” can be great. Leaders can tackle this challenge by identifying interests, passions and what’s most important in their lives and leveraging their network and expertise to find new opportunities.
  • Exiting the business doesn’t mean the days of adding value to an organization are over. On the contrary, many people are interested in the experience of a leader who has successfully grown and transitioned a business.

Lay Out the Rules of Engagement

Family business owners who are stepping away often want to continue to nurture the next generation and remain involved in the business in some way. Leaders must think about how they will offer guidance to the next generation while allowing them to successfully act as leaders.

No matter the level of involvement, the previous owner’s new role must be clearly defined and communicated so they don’t overstep boundaries. And as uncomfortable as the thought may be, retiring family business owners should be prepared to hear about the level of involvement—or noninvolvement—the next generation desires.

Plan for Liquidity and Taxes

There’s one significant area where succession to family ownership and a sale of the business diverge: generating liquid wealth. Family businesses that seek to remain as such typically seek “patient capital,” though share redemptions and dividends are often present and important. Owners who are transitioning ownership to the next generation will need to assess how much money they will need during retirement. In the partial or full sale of a business, on the other hand, owners realize large inflows of liquid wealth in exchange for their business shares. These sums of money can be life-altering, making preparation critical.

Another consideration is tax strategy. Advisors can help with any tax implications that may emerge when transferring the business to the next generation, maximizing tax efficiency pre-sale and providing guidance on managing liquid wealth. More sophisticated advisors can also partner with owners on wealth planning, next generation education, trust services, philanthropy, direct investing and creating a family office. Underlying these decisions should be the owner’s, family’s and business’s core values.

Make Your Transition a Success

There are countless axioms around failed wealth and business transitions. At the highest level, success involves proactively beginning the preparation process, openly communicating with stakeholders, determining where to start, filling voids left from a change in one’s livelihood and having patience—both with a lengthy process to ready oneself and the business for change and with answering the question, “What’s next?”

Benjamin Persofsky is executive director of the BBH Center for Family Business

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