Articles Tagged ‘Family business’

The Toughest Transfer: G1 (Generation 1) to G2 (Generation 2)

Monday, July 29th, 2013

Nothing is more important to the long term success of a family business than the transition between the first (G1) and second (G2) generation. Approximately 30% of family businesses make it from the first to the second generation, 70% don’t. One might think that making this transition would be easy, but that isn’t the case. The first transfer is the toughest; and yet, if done correctly, it can become the cornerstone for future generations.

Entrepreneurial founders are typically “type D” personalities. They are highly driven, strong leaders and intelligent. They are driven to success – so driven that they often neglect their family during the early years, causing future baggage. They treat their business as their “baby”, giving it equal status with their other children and being just as concerned with its wellbeing and future. Mind you, as the business goes through its growth phase, these owners believe that what is good for the business is good for the family and vice versa. They frequently express – formally or not – that value to the family and value to the business are one in the same. As success and wealth accumulate, the founders begin the soul searching of what’s next for both the family and the business.

Enter the next generation. They enter the business for a variety of reasons: to remain close to their parents, financial security, fast-track careers, future ownership, family legacy, or just because it is expected. Regardless of the reasons for entry, once employed, future ownership is assumed, as is the ascent to management and control. These topics are rarely discussed and even less frequently planned. Parents remain in control until they either willingly give up part of the kingdom or events (like death or disability) require change. Let’s face it – the path of succession becomes a long and winding road for G2.

As time passes, the children are more firmly entrenched in the management of the business and the founders (G1) are semi-retired. Semi-retirement lacks any real definition – it seems to mean less work, but not less compensation or less control. This phase is very confusing to everyone. Parents don’t understand why their children don’t accept that they have made all this possible and they will control the purse strings for as long as they like. Middle-aged children have been waiting for a chance to really take over and prove themselves without parental oversight. Employees wonder: who is the boss? Outsiders try to define who makes what decisions only to find that it changes routinely. It is very confusing – and still no one wants to come to the table to establish a plan.

The problem is that the stars aren’t aligned and no one is even looking through the telescope. Parents want financial security and what is best for the family. They see that being accomplished through their life’s work – the business. They usually want to remain in control until they feel confident that their goals will be met – financial security, family harmony and family legacy. All three are important and the potential failure of any one is just cause to remain in control.

The children don’t necessarily see it that way. They can buy into financial security for Mom and Dad, but not necessarily for the inactive siblings, or to the extent that wealth bypasses them and passes to the grandchildren. Since Cain and Abel, sibling rivalry has existed in most families with more than one child, and the children aren’t always as committed as Mom and Dad to family harmony. As for the family legacy, frequently the children find working under the thumb of G1 demeaning.

How to align the stars? Try focusing the telescope. Here are some suggestions to get that accomplished.

1. Draft a clear Vision/Mission Statement and gain buy-in from all existing and future players, then focus decision-making on meeting the defined criteria.
2. Address family financial security, family harmony and family legacy directly and transparently and include all players.
3. G1 – develop retirement activities outside of the business so that the business does not become the retirement activity.
4. Empower business decision makers (G2) with real control and formally evaluate the results.
5. Separate the importance of family from the value of the business asset.

Dan Lacy
Growth & Profit Coach, Financial Strategist, Cash Flow Doctor, CEO Mentor
dan@dynastybuilder.com
phone: 765-644-8887

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Choice of Business Successor

Monday, September 27th, 2010

In the two previous issues of The Exit Planning Review™, we discussed the first two elements that must be in place before you (or your advisors) can create an Exit Plan. The first is a Target Departure Date. An Exit Plan has no relevance unless it is situated within a specific timeframe. The second element is a preliminary financial needs analysis. As owners, a sizeable portion of our wealth is tied up in our companies. Therefore, we not only need to know what our companies are worth, (read about that in the next issue) but we must also know how much money we will need upon retirement.

The third element that you must put in place to kick off your Exit Plan is to pick a Target Successor. Compared to the list of possible departure dates or the variety of needs at retirement, the list of possible successors can be quite short:
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Transferring Management Responsibilities Prior to Your Business Exit

Monday, September 20th, 2010

The Importance of Shifting Core Duties Prior to Your Exit: Part One

In the past two issues, we have discussed the importance of transferring management responsibilities in advance of your planned departure date and the roles of your advisors in the process of developing a successful management transition plan. The next two articles will conclude our series on transferring management responsibilities by discussing which areas of the business you should focus on when developing your plan.

To illustrate the importance of shifting core duties prior to your exit, let’s revisit Will Tryon, our hypothetical business owner of a thriving pre-cast manufacturing company. When Will began thinking about who he should transfer management responsibilities to and which responsibilities should be transferred first, he quickly became overwhelmed because the degree of responsibilities he held as the company’s owner were complex and ingrained in his everyday routine.

To help Will simplify this sometimes complicated process, Will’s Exit Planning Advisor helped him identify the top five areas that he needed to focus on to design his management responsibility transition plan. These areas included human resources, sales and marketing, financial, infrastructure/capital investment, and general business duties. The remainder of this article will discuss the critical issues associated with human resources, as well as sales and marketing that need to be addressed in a management transition plan.
To attend the October Indianapolis Small Business Marketing Idol Contest (or participate yourself), link to this page. Marketing Contest part of 10/8 Chapter Meeting.
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Selecting the Right Exit Path: Sale to Other Owners or Employees

Wednesday, August 11th, 2010

TRayPhillips

As discussed in the previous issue of The Exit Planning Review™, it is important to select your successor early in the Exit Planning Process. One of the great advantages of having other owners in your business is that they can be your means for retirement. Especially with smaller businesses, a common Exit Planning technique is to have a younger individual buy into your business while you are still active. Upon your exit, the younger owner will purchase your remaining stock.
This can be advantageous because the younger person learns the business — its structure, employees, customers, operation and management — while you are still active in the business. More important to you, the younger person’s capabilities (as well as his or her weaknesses) are known to you, so you have a pretty good idea of how your business will be run after you leave. And most important of all, the business can be sold to a market you create and control.
The following are additional advantages to selling your business to other owners or employees, as well as the disadvantages of this type of exit path. Take time to compare the advantages and disadvantages of this scenario before picking your target successor.
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