This is the first of three blogs written for MarchFifteen by our Strategic Partner, Pierre Gauthier, President of Gauthier-Murtada and Partners. Pierre has a wealth of experience working with Family Businesses and is used as a trusted advisor by many organizations in this domain. We appreciate his insights here at MarchFifteen. We also know businesses and industries outside of Family and Independently-Held Businesses can benefit from his perspectives regarding business transfer and transition.
The Emotional Aspects of Family-Owned Business Succession: The Importance 0f Having “Meaningful Conversations” and “Setting the Stage” in the Right Way – PART ONE
By: Pierre Gauthier
I am writing this blog mainly because I want to share my experience and most of all to invite the reader to react to this topic and invite them also to tell a story of their own…
Why this topic? As an organizational psychologist, I have often been asked to intervene by lawyers, accountants and business consultants and help in ironing out and mediating conflicts of all sorts that arise when family owned businesses initiate some form of transfer of ownership or power. These conflicts are often amongst family members, and often extend to non-family employees. They can sometimes lead to disastrous outcomes if they are not well managed or anticipated. One can say that these emotional issues are often the main reason why family owned businesses have a low success rate when they initiate a transfer of their businesses.
The research shows, that the percentage of family owned businesses that succeed in a smooth transition of ownership drops drastically after the second generation takes over. From founder to the first generation the rate of success is generally around 65%; it can drop to 40% when the second generation arrives; and go to 19% when the third generation is getting on board. This low success rate is often attributable to unmanaged emotional conflicts and unmanaged expectations between family members as they try to transition management or ownership of their business from one generation to another. The other main reason why we likely witness such low success rates has to do with poor planning and focus during the initial stages of the transfer process.
What can we do to improve the odds of success in family business transfer? Or more appropriately what are the winners doing that can help us beat the odds?
A review of the literature on the subject does not provide much insight as to what to do to minimize negative outcomes. Academics only offer anecdotal evidence and most researchers conclude there is no right way to successfully transfer a family owned business to the next generation. Neither does it seem possible to extract a winning formula about a particular effective process that we can all learn from. In a sense, academics are saying that the process is very complex and somewhat escapes simplification. However, some studies do lead to some interesting observations as they looked more closely at what some companies are doing “right” when the transfer process is successful. These observations, although not scientific in format, offer some interesting paths and insights. They are something to pay attention to if one is to prepare well for business transfers and avoid the negative emotional outcomes that affect family owned businesses when they initiate succession.
One of the first things that must be discussed in any business transfer initiative is the timing of transfer itself. Asking:
- What are the “true” intents of the parting owner(s)?
- What are the winning conditions in place?
Going through these questions can help to avoid potential negative outcomes and may actually prevent them. There may be several family members that are shareholders, but often each individual owner can have very different views about who is best fit to take over the business in the near future. So before initiating a business transfer I make sure that all stakeholders initiate significant discussions devoted to planning and setting the stage properly.
Although there is a formal process in transferring a business, there is a world of emotions, human attachments, and family dynamics that need to be uncovered before initiating transfer. In my experience, most founders or entrepreneurs, although they come across as very rational and understandable when they comprehend the importance of the “mechanics” of succession, they are totally unwilling to relinquish any form of control. As a result, they end up sabotaging their own succession initiatives! Founders as well as entrepreneurs have a hard time letting go of their businesses and as such only consider the rational side of the transfer process. But the real answer lies deep within the feelings of attachment they experience towards their companies. So my initial discussions probe heavily into the “triggers” that have led them to initiate a transfer process:
- Family pressures?
- New horizons?
- Change of lifestyle?
In essence, what I try to do is to get them to really probe deeply into their motivations and “reality test” their intentions. It really comes down to:
- Do I stay or do I leave?
- If I stay what do I do?
- How will I share my powers?
- What is my new “job description”?
- Is this what I want in the long term?
- What are the critical steps of a successful transfer initiative and how can I make it work?
This set of questions, when properly asked, is the key to ensuring that later parts of the succession process work more successfully, because family members are now in touch with both the reasons for the transfer and the idea of what they themselves may do next.
In the next blog I will continue to discuss the questions that need to be asked during the transition process and uncover more factors contributing to the success of family business transfers. Questions I will answer include: “What is the timeframe for transfer?” and “How will successors be chosen?”