SUCCESSION

Negotiating the family business deal

Aug 14, 2019 10:03:48 AM / by Pavlo Phitidis

We received a long email from a listener who is considering going into his parent’s business. He has a career in a different industry but has worked in the family business before. His folks have an option to get external professional management into it, but they are reluctant because it’s part of the family heritage.

Many businesses are considering succession as a strategy to hold onto an asset that makes money and will grow its capital value. Getting this right begins with an understanding of what the deal and the process would be between the founders or parents and successors or kids. These engagements can become extremely emotional and very complicated. The debates often get dragged into the history of the relationship and personalities involved rather than what right is for the business.

family succession

Here are two negotiating positions worth considering from either side of the fence. The logic holds for family succession, management succession and new partner formation in existing businesses.

Founders

Founders typically hold some of the following emotional mindsets regarding their businesses.

  • History and story about how they started, the difficulties overcome, sacrifices made and unrealised potential.
  • The social fabric of their lives is stitched from the business and this history. As leaders, which all private business owners are, their status comes from the business and the industry.
  • That they existed and left a mark or legacy becomes a key feature for many founders even though they don’t, won’t or can’t admit it.
  • At the later stages of their business life, the sense of defeat or resignation resulting from fatigue after “years in the engine room” can switch to a new lease on life when they see new energy appear in the business, through a trusted family member or younger colleague.

This makes negotiating with founders tiresome. They sway from resignation to regeneration and from withdrawal to “all-in”. Messages about the intent and the relationship between them the successors can be confusing and conflicting. Navigate them slowly and with empathy. Clarity comes from engagement and time and the process needs patience.

Strategically, the founders need and want the following, even though many struggle to express it:

  • Certainty that their years of sacrifice and hard work will yield a pension
  • Confidence that, in the case of a family succession, the kids won’t reverse the gains and collapse the value of the business, since they have no runaway left to step back in and “fix it” again
  • The relationships they have built and the promises they have made will be honoured by the successors. This is often seen from the context of the strange, usually unprofitable deals done between them and their first customers. It’s also seen through the relationships with suppliers and staff.
  • The successors must, need and should struggle to earn the fruits of the business
  • Control over the money since it’s the source of their retirement

Successors

Successors come into this environment opportunistically or reluctantly.

Reluctant successors either have no other options or are driven by family duty and responsibility. In many cases, the  business is simply not saleable, and the founders face a dire economic outcome without the intervention.

Opportunity is often motivated by a respect and admiration of what the founders have built and excitement to be part of the future journey.

If reluctant, the emotional mindset will be governed by impatience and possibly resentment.

If opportunity drives the successor, an enthusiastic mindset and positive approach to learning, engagement and the business sets it for a smoother ride into the future.

Strategically, the successors need and want the following, but may struggle to express it because they are not yet aware of what matters and what doesn’t.

If reluctant:

  • Impatience in getting to the ground and making the changes that they believe will have the quickest impact
  • A view that this is short-term and their objective is to build it and sell it
  • A salary and position that will compensate for the sacrifices made to support the family business
  • Low empathy for staff that have been in the business for a long time and may be part of the problem
  • Disregard for the history whilst focusing on the future alone
  • Getting the job done and minimising sacrifice

 

If opportunistic:

  • Recognition that you start by sweeping the floors
  • Active engagement with suppliers, staff, customers with a view to learn, earn and attain knowledge and through that, respect
  • Patience with the founders and active engagement to understand the history of the business
  • Immersion in the product and service to deeply and quickly understand it.

Both the above scenarios give insights into the backdrop for negotiations between the founders and successors. Understanding this will ease and de-personalise the negotiation between the parties and open the opportunity to get the relationship built right in service of the business. Either way, the following approach has yielded the most sustainable and successful outcomes irrespective of the nature of the successor – reluctant or opportunistic.

  1. Agree to reset the vision of the business after a 3 to 6-month period of the successors entering the business. Until then, status quo must be maintained.
  2. Agree how the successors will accelerate their understanding of the business to support their contribution to the new vision of the business.

This will provide enough time for the successors to understand the dynamics of the business and environment.

  1. Embark on a facilitated strategy session with a view to include the experience and history of the founders with the new energy, perspective and desires of the successors. It must be facilitated since this will allow all ideas to be ventilated and the parties will feel heard.
  2. Concretise the strategy and vision through a few measurable objectives and actions.
  3. Agree on where to start – it should always be in the market first – and where to end in the collaborative rebuild of the business to meet that vision.
  4. Be very clear on the basis with which control will migrate from founder to successor.

This process will not necessarily defy the fact that 72% of family succession efforts fail. But it improves the chances of success dramatically. Family businesses are clouded by assumption more so than management succession and new partner succession. Families tend to hold fixed views on each other, carry resentment because of history and, if conflict avoiding, rely on assumption in the decisions made in succession.

We work with family businesses across all sectors of the economy. With personal history in this space, we have developed and deepened our interest in how to manage the dynamic and more importantly, establish a structured process of engagement that will serve the businesses first and the family as a result. Should your succession efforts stall, reach out to us and we facilitate the engagement to ensure your business becomes an Asset of Value.

Subscribe to the weekly blog. 

Topics: Business Owner, FamilyBusiness, Succession, Strategy

Pavlo Phitidis

Written by Pavlo Phitidis