Business transition: addressing the right issues from the right point of view
Strategic decision making is more complex for a family business than for a non-family business, writes Jurgen Geerlings.
The directors have to take into account that their decisions will affect the business, the family and the owners at the same time. Some consequences will have to be dealt with shortly after a decision has been made, other decisions will have a long-term impact.
Managing these challenges could be the difference between success and failure of the family business in the long term. It is worthwhile making this extra effort: it will pay off in terms of a stronger commitment from the family and the owners. But how do you cope with this labyrinth of decisions and consequences related to very different sub-systems such as business, family and ownership?
The idea is to make a clear distinction between different matters of policy and to identify the relevant issues related to each of these matters from the point of view of the business, the family and the owners. This process will result in a sharp and comprehensive view of all issues to be addressed.
The usual matters of policy that will appear on the agenda of the directors' meeting regularly are strategy, finance, transparency, risk management, remuneration, management development and resource management. Furthermore, there could be specific matters such as a succession, an ownership transfer, a strategic reorientation or a business takeover. The challenge is to capture the various issues related to these matters of policy in a map.
Let's take as an example the following case. A family business is about to takeover another business that is nearly twice its size. As a consequence, outside management is needed to support the family directors. Not all family owners are employed by the business and, because of a recent business transfer, the former generation still has a loan outstanding with their successors.
The different issues rising from the upcoming business takeover could be mapped as follows:
Strategy
Business: organisational consequences of the take over
Family: tension between old and new generation
Ownership: slow down of process of ownership transfer
Finance
Business: higher leverage, more severe terms of credit
Family: lower liquidity level of family assets
Ownership: postponement of dividend and/or of installments of intergenerational loans
Risk Management
Business: results of the due diligence, integration costs
Family: tension between employed and non-employed family owners, escalation of existing tensions within the family
Ownership: erosion of ownership commitment
Transparency
Business: increased need for information on behalf of owners and bank
Family: reformulating commitment, need for higher level of knowledge of business and finance
Ownership: increased business monitoring
Management Development
Business: redesigning the profiles of management and directors, attracting and bonding of outside management
Family: family members will have to meet higher competence levels
Ownership: equity stake of outside management may be taken into consideration
Governance
Business: reformulating the roles and responsibilities of executive and non-executive directors
Family: supervisory duties of the family
Ownership: increased responsibility of the family owners
Business takeover process
Business: installation of a business transition task force
Family: guarding the culture and identity of the business, sharing control with outsiders
Ownership: redesigning the ownership structure in case of equity stake of outside management
The matters of policy and various issues as mentioned above are a mere illustration of possible subjects. Every business and family will have to identify its own issues, depending on the specific circumstances.
The process of exploring, identifying, sharing and prioritising issues related to these matters by representatives of the business, family and owners will result in better preparation for an upcoming transition and a stronger understanding between the different stakeholders. It helps prevent the transition becoming a threat to both business and family and even more it will serve to strengthen the unity of the family and its links to the business.
Jurgen Geerlings is managing partner with MESA Family Business Consultants and academic director at TiasNimbas Business School in the Netherlands (j.geerlings@mesa-fbc.com).
