To facilitate transition from one generation to another in family-controlled firms is a more critical issue today than ever before. Many leading family-owned firms are headed up by relatively senior family members in the 1st or second generation, so a transition in a large scale will happen over the next few years.
But, how can transition be done in an orderly way? And how can one ensure that this transition process be fair to all, so that some would not end up with more than others, or even worse, the family business ends up in bankruptcy because of a badly managed transition? Furthermore, how can proper preparation and training be achieved?
IMD professor, Knut Haanaes, identifies a two-fold explanation for successful companies: that they search out new business ideas (“exploration”) and that they continuously improve the business models that they have (“continuation”). You can check out his TED-talk here!
Also, please check out his book review at the bottom of this article.
It is critical in professor Haanaes view, and in my view, to find a proper balance between continuation and exploration. It is a matter of “today for today” AND “today for tomorrow”!
Many of the older generation might become relatively more conservative over the years, and this might impact the family business, i.e. relatively more “today for today”, more continuation, more short-term focus! A need for rebalancing might be apparent, and should be part of the “passing of the Baton”.
Let me first provide an example from my own family company, for then to present some conclusions and recommendations. Please keep in mind that I am approaching the issue of transition of a business from one generation to another strictly from a strategic point-of-view in the following, and are not taking legal and/or tax issues into account.
I used to own a relatively large and indeed successful ship-owning company, S. Ugelstads Rederi. Even though a lot of progress was being made, and success enjoyed, there were at least three critical challenges, which eventually led to the sale of the company;
High leverage was key to grow fast which was strategically important, and as an offset for this risk I was taking long-term charters for the ships. But, this debt could not be easily be divided on each ship since the debt capacity would be higher to the firm as a whole.
The ships would not easily be divided in a fair way – some were more valuable than others, due to age, size, quality of the charter party etc.
The value of the assets would fluctuate a lot, correlated with the ups and downs of the shipping market themselves. Thus “in/out” and “long/short” decisions would be driven by market timing and not by the timing of ownership transition issues.
After the sale of the shipping company, properly timed as a function of good shipping markets, by the way, I invested in several smaller activities which fall into 5 areas; 1. Stocks/bond/currencies, 2. Real estate, 3. Minority positions in ships, 4. Ventures/Private Equity and 5. Education. These investments were generally liquid or possible to put a value on, and subject to less violent market-driven factors, and there was no debt associated with any of the investments except for a few real estate investments, i.e. low leverage.
The effect from this restructuring was at least threefold;
It would be relatively easy to split up on investments into more or less equal parts, due to the “smallness” of each of the many investments with no loss of debt capacity.
Also, there would be ample opportunities for members of the next generation to become involved in specific investments, non-the-least to gain experience. The importance of this issue cannot be over-emphasized! The next generation might get exposure to experience this way, by focusing on a specific part of the family firm, initially, without having to take it all over at once. This practical approach of taking over also ensures that the experience-base of the older generation might be drawn on for a longer period of time.
Finally, there would be smaller shifts in values of the various assets as a consequence of fluctuating market factors. Now, to perhaps the most significant issue for a successful transition of ownership to the next generation in family-owned firms: to ensure the maintenance of the firm, and to build its strategic vitality! Here is why and how:
Traditionally, all businesses, family-owned or not, tend to become more conservative over time. The owners are happy with the maintenance of status quo. Success within one’s core business might further contribute to this. So, why change?
By inviting the next generation in, typically with “fresher eyes”, and by allowing the next generation to enter into some of the new business areas, thorough development or/and through acquisitions, one might open up for explorations of new businesses, so as to rebalance the traditional business with more exploration of new. The balance might then become more optimal, as a consequence of the generational transition. Thus, continuously business success would imply a good balance between “today for today” and “today for tomorrow”. Ownership transitions can thus open up for a resulting balance between continuation and exploration in the firm. And, consequently, harmony might be maintained between the generations. While the next generation might become increasingly involved, on exploration – related to newer business activities above all, the older generation might still also be involved, perhaps on more established continuation-related business for the most. Thereby the knowledge bases of both generations might be utilized in parallel!
At best, generational transitions might lead to new periods of strategic vitality in a family firm. And, perhaps it might be exactly this dynamic that best explains the continued success of many enduring family owned firms!
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