Business owners often find themselves stuck between the desire to sell their business or passing it on to the next generation.  While many advisors will point to the dismal statistics of the organizations failing into the next generation, it is still incumbent upon advisors to honor the wishes of the family and help create a path for success into the future.

I will argue that the planning required to pass the business on to the next generation also helps improve the enterprise value of the business and, therefore, makes it attractive to potential buyers.  Simply put, the plan should entail replacing the business owner with a system.

Often, business founders wear many hats, and it becomes hard for them to let go of responsibilities.  This is quite understandable, as they desire to be close to all aspects of the business.  Over time, this leads to uneven growth in various “legs” of the organization.  Broadly, a company stands on the “legs” of product development, production, financial reporting, and sales.

Over time, certain parts of the business get more attention than others.  For example, the Company might receive a very large order, which might cause them to invest heavily in streamlining the production side of the house.  The focus becomes squeezing the product out.  The same company might have trouble producing reliable financial reports in a timely manner.  This is because no one paid attention to the reporting side of the house, and the investment for it remained anemic.

Another reason for the uneven growth might be that an organization has built-in biases.  Perhaps the founder enjoys new product development and pays more attention to it at the cost of other areas.

I would argue that most family businesses face uneven growth, as mentioned above.  The task of value creation comes in the form of harmonizing these areas.  So, how does one go about doing it?

This work takes years and requires investment of time, and it pays dividends far in excess of the required investment.  Most importantly, there has to be a willingness to change.

While planning the future the first step must be an assessment of where the organization stands.  Making an honest assessment is hard work.  While one can try to do this with internal resources, chances are that organizational biases might lead to incorrect conclusions.  I would suggest looking towards third-party resources.  For example, my firm gets engaged on a regular basis to assess the financial reporting function.  Not only do we point to the weaknesses, but we also produce a plan for success.  You might similarly engage with professionals to assess other areas of the business.  While these assessments cost money, they should come up with recommendations that make the business more profitable.

Don’t be surprised if you find out that you need to replace some personnel.  Habits are hard to break.  As a business grows, systems need to change, and I find it hard for people to change.  You might find that your most trusted key employees are the ones holding you back.     

Naturally, you will lay out a near and long-term plan after you have made the assessments.  Hopefully, it is ambitious.  Visioning into the future is always the feel-good part.  You will need to make sure that you are monitoring your progress.

Monitoring needs to be systemized.  This is where you hold managers accountable and help provide the support they need to succeed.  What does monitoring look like?  Some companies create Boards of outside advisors, while others hold monthly meetings.  Not only should these meetings be designed to ensure that milestones are being achieved, but they should also be used to generate a sense of comradery and common purpose.  This will create cooperation rather than silos.

Businesses that operate in this fashion are consistently valued higher than the businesses that don’t.

Creating a system helps the business owner replace themselves with their heir or a third party.  I know I have oversimplified matters here.  My attempt is not to provide a roadmap but to evoke reflection.

The job of transitioning a business to the next generation is not easy. It requires a thoughtful plan, but most importantly, it requires a willingness to change.   

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