The statistics of family business transition are well known: 33 percent make it to the second generation and only 5 percent make it to the third. Rags to riches to rags.
When they think of legacy, many family owners think of maintaining the business for future generations. But this thinking is probably the No. 1 reason family businesses don't survive.
The purpose of the business is to create wealth, not jobs, for the family. If the business isn't generating profits and leadership is not focused on creating business value, a slow death commences, eroding the business' foundation until all value is gone and family wealth dissipated.
As hard as it is to hear, all businesses have a beginning, middle and end. The goal isn't to have a business that survives generations, but to have wealth that survives numerous generations.
This wealth can be reinvested to create new businesses and opportunities for the family. This is a true legacy.
So, how do you know when a business has reached its end?
It's no different for a family business vs. any other business. The markets will tell you.
The focus of the family moves from “maintaining the family business at all costs” to “maintaining our family wealth at all costs” – by focusing on business value.
Has technology changed? Are new competitors entering our space? Do we need to reinvest or innovate?
Is our product at the end of its life cycle? What are we doing strategically to address these challenges?
The trick to all of this is a mental shift from “the business is here for the family and its livelihoods” to “the business is there to create wealth for the family.”
You create wealth by increasing the business value and harvesting that value one day. The only way to harvest the value is by selling the business.
You want to create maximum value in your business? Adopt the mantra, “our business is for sale every day.”
Now the focus becomes how to maximize the value, not getting into family turf battles, misunderstandings, etc.
There is no preference given to a child buying the business vs. an outside third party. The business sells for the maximum value when the time is right.
The key to making this happen successfully is as old as our ancestors. It's called communication.
Owners and children in the business need to have frank conversations at least once a year about where they see the business going, a review of the markets, if either party is interested in selling or buying stock, etc.
They also need to agree on how the child would share in sale proceeds if the business were sold to a third party, because the child is likely to be a key part of the earn-out and success of the sale. Children should be rewarded well for this.
Tom Garrity is managing partner of Compass Point Consulting LLC in Hanover Township, Northampton County. Compass Point and Legacy Planning Partners of South Whitehall Township will host family business expert and author Tom Deans at an owner readiness workshop 4-6 p.m. Nov. 9 at Saucon Valley Country Club, Upper Saucon Township. Deans will walk business owners through his transition blueprint to protect family wealth and create successful generational transitions, which he has presented more than 500 times in 14 countries. To register, contact Garrity at 610-336-0514 or email@example.com or visit www.compasspt.com.