Transferring the Family Business

Have you ever heard about the statistics surrounding transferring a family business? There’s the daunting 30-13-3 rule, which means that 30 percent of companies successfully pass to the second generation of a family, 10 percent to the third, and 3 percent to the fourth. Today we’re going to talk about how family businesses have better longevity than other types of businesses

Our guests today are Carrie Hall, who leads the Ernst & Young Family Business Center, and James Bly, who had a family business consulting firm (Family Enterprise Business Services) that he sold to Ernst & Young. They have some insight to share on how you can raise your chances of success as you transfer your family business to the next generation

In this episode, you’ll learn:

• The backgrounds of both Carrie and Jim and how they led them to Ernst & Young.
• Some of the facts surrounding the transfer of family businesses to the second and third generations.
• Some of the milestones that successful family businesses reach before and during transitions
• The importance of transferring business vision and how families manage it through the generations with governance models.
• How to address the financial reporting as the business grows and changes through the decades
• How to analyze and identify the gaps between the different skill sets represented by subsequent generations, as well as tips on working around these gaps.
• Some thoughts on structuring the actual transfers
• Considerations for splitting the estate and the wages when skill sets are disparate and responsibilities are intertwined.
• One of the key differences in terms of governance between businesses with successful generational transfers and those that do not succeed with transfers.
• Why a framework for decision-making is vital.

Your business was hand-crafted and designed by you. You put your heart and soul (maybe even your blood, sweat and tears!) into building your empire — and now you’re starting to think about passing your business onto the next generation. Or are you? Well, according to our two podcast guests today — Carrie Hall and James Bly — who are well-versed in the area of family business and succession planning, you need to be doing this as early as possible if you want your business to survive the transition and become a multi-generational business.

What’s the Reality of a Successful Business Transition?

The ‘survival rate’ of a business transition is roughly 30% from the first generation to the second, 13% from the second to the third, and 3% from the third to the fourth. While this might seem dismal, and you’ve probably had it explained to you in a negative way, this is actually pretty striking. Multigenerational businesses are strong and have a higher survival rate than non-family businesses. Who knew?

To put this into perspective, the average lifespan of a company today is 15 years compared with 50 years in 1920. So if you have a family business that has transitioned from your parents to yourself, you have already blown this statistic out of the water. If you want to challenge the Japanese (who have 20,000 businesses that are more than 100 years old!), you need to get started on your succession planning. In the US, the biggest piece of the upper middle-market corporate pie (80% of it, actually) is going to multigenerational businesses. So why don’t more businesses engage in succession planning?

Successful Succession Planning

Let’s say you’ve decided you want to transition your business. Have you thought about how you want your business to continue on? Do you want your children to run it, or an advisory board if your children have little interest or maybe you’d prefer to sell the whole kit-and-caboodle to someone else who can really drive your vision forward?

Your first step is to decide what your transition will look like, who it will go to, and why. Once you’ve nailed down the more emotional side of your business, you can really focus in on the numbers. To that end, James and Carrie have found that there are really 11 main points you need to cover which will help you identify the areas in which you are weak or strong before you step out of your business. They’ve termed it the “Generational Transition Risk Assessment Survey” and it covers the following points:

Generational Transition Risk Assessment Survey

1. Understanding the company’s core market
2. Business and economic model
3. Company value proposition (who are your customers)
4. Analyze who additional customers may be
5. Understanding the competitive landscape (who are your competitors, how are they funded?)
6. Understanding the organizational capabilities of your company (map your resources, etc.)
7. Operational capabilities
8. Personnel and talent
9. Financial management and control systems
10. Technology or domain expertise
11. Risk management (including your efficiencies)

Start by analyzing these 11 categories and get a deeper perspective of your business before you start the transition. If you’re going to be leaving the business to one of your children, get them involved in the process!

It’s Never too Early to Involve Your Kids in the Business

EY has developed a one-week program called the “EY Next Gen Program” which takes young members of business-owning families from all over the world and teaches them about business specifics. The children are divided into three groups based on age and experience levels and are taught by academics, EY professionals, and business leaders who have experience in family businesses.

Even if you aren’t starting your kids out at a kindergarten age, you are still going to be ahead of the game if they start to come to work with you (or for you!) and learn the various levels of the business, the family’s role in the business and the type of roles available for them. Maybe your son wants to be more of a shareholder and invest in the community (increasing your public image and goodwill). Perhaps your daughter is a tycoon-in-the-making and will make an excellent CEO. No matter what role your children choose to take, making them intimately familiar with the business will increase everyone’s chance of a successful transition.

Business Governance vs. Owner Governance

Business governance has to do with caring for your shareholders, trustees, beneficiaries, etc. who have a vested interest in the financial success and solvency of your company. Business governance is responsible for operational competence, which means that someone who knows what they are doing is running the show so that the money keeps flowing in and you have a predictable cash flow.

Owner governance, however, has more to do with, as James says, building human capital and spurring emotional development among the owners of today and the future, as well as those who influence or impact them within the business. This prepares the business for good stewardship cooperation.

Using this dual-pronged approach to manage your business will ensure you’re covering all your business bases. You have owners who are invested in the future of the business and a business that is ensuring competent owners. This is a win-win in any kind of transition since, again, it is building value.

If you think of nothing else after listening to this podcast, think of this: succession planning and involving your kids in the business as soon as is practical will help you build value and teach your kids how to see the business as a business, not as a font of money or an excuse for a vacation; it will also generate real conversations about the numbers — the data that makes or breaks a company’s baseline.

Takeaways

1. You can’t start too young when it comes to getting your teens and young adult children involved with your family business.
2. Process eliminates emotions. It’s important to look at your family members as team members when a family business is at stake.
3. Design the organization of tomorrow. You have to consider the evolution of the company as it goes from generation to generation.

Links and Resources:

Solidity Financial
Ernst & Young
carrie.hall@ey.com
Email James: james.bly@ey.com

About Carrie Hall:

As the EY Americas Family Business Leader, Carrie leads the EY network of professionals that provide holistic services to family business, family offices and their shareholders throughout North, Central and South America. An assurance partner of Ernst & Young LLP, with over 30 years of experience, she has been published in national and global publications including The Wall Street Journal, New York Times, Harvard Business Review, Fortune and Financial Times. She led EY’s efforts to conduct and publish a first-of-its-kind global survey of the world’s largest family businesses in collaboration with Kennesaw State University.

About James Bly:

As a leader of EY’s national Family Enterprise Business Services practice, Jim has 35 years of experience working with enterprising families to grow larger, more valuable businesses; secure growth capital for their business while maintaining control; successfully transition businesses from older to younger generations; and obtain liquidity, when needed, for shareholders. Jim has also been instrumental in developing EY’s proprietary tools and methodologies used to help enterprising families grow, finance, transition and monetize their private operating businesses.