Transitioning from a family business to a business family can bring a lot of uncertainty.
The last thing on young family business owners’ minds is what to do when they’ve finished running their businesses. In the majority of cases, the thought that this may ever be a reality may never even cross their minds until they prepare for retirement. At this juncture, most envision handing the empire they’ve built down to the next generation as part of their family legacy.
While this is often the general plan, there are times when life and business do not proceed accordingly. A family may face certain situations that prompt them to sell their primary business or investments outside of it may grow more substantially than the company itself, necessitating a shift in strategy and a fundamental transition from being a family business to becoming a business family.
Factors that spark this transition
- The development of destructive family dynamics
- Inability to support a viable business under the current ownership
- A loss of passion for the business
As family businesses are dependent on the family members who run them for survival, these parties have a unique influence on the organization. When intense conflict and dissent arises between family members, this affects not only the family personally but professionally too, spilling over into daily business operations, which ultimately suffer. If the situation remains unresolved, even with the help of professional advisors and family dynamics counselors, the only option may be to sell.
Even when owners of the family business get along, the preservation of the organization under their leadership may become problematic. The inability to support the business may originate from several sources, from changing business environments to capital requirements and even concerns over the ability or desire of the next generation to sustain the business.
In companies that require the owner’s full attention and enthusiasm to survive and thrive, the owners need to maintain their drive and passion. If this wanes, selling the business may be considered, or the owner may opt to keep the business and maintain it by employing non-family management.
In other instances, investment savvy individuals may find that investments of the proceeds from the primary business in other areas grow more rapidly than the company itself. This poses a unique situation in which strategic decisions must be made regarding what the most effective and lucrative way forward for the family will be.
Decisions, decisions, decisions
Whether a family experiences a liquidity event or finds themselves in a situation where their investment capital has grown more significantly than their primary operation, they are generally launched into somewhat unfamiliar territory. The family is often left with substantial liquid wealth and a myriad of decisions.
At this juncture, independent of their primary business, the family needs to determine how to preserve and grow its wealth, retain its societal influence, continue to benefit all family members and foster a shared identity. Without a clear, strategically implemented plan to preserve both its wealth and legacy, the family faces a progressive dispersal and dissipation of its assets along with the loss of family unity, identity and influence. For many, setting up a family office is the answer.
Within these organizations, business families can pursue a myriad of activities, while handling everything pertaining to their wealth in-house. Capital can then be used to pursue new passions within investments or through co-investment. According to John Veale, Deputy Head of Investments for Stonehage Fleming Investment Management, sometimes investment interest is driven by the investor’s view of a particular industry or sector. Co-investments enable them to feel when investing in a specific company or deal rather than a fund where they feel far more removed.
Family offices also help these families to retain the advantages that lie within being a family and leverage these in investments.
Entrepreneurs prefer working with family offices because, unlike VCs, there is no alternative interest and outside pressure for exits. Also, families have deep networks for entrepreneurs to tap into.
Business families also can focus on softer incentives such as purpose and sustainability, which also helps to engage next-generation family members. Mehta notes that there was a correlation between the investments made in clean technology and sustainability projects and family office investments.
Embracing the challenges and advantages of being a business family
While being a business family has significant differences to running a family business, many of the same fundamental principles for success apply. These include a clear purpose, vision & mission, open and transparent communication, a clearly defined organizational structure, and considerations around everything from finance to HR.
Within some family business, the nature of the company may dictate that members be focused on a specific area of business or industry, and the family’s identity is often forged in this arena. When the family exits their primary business, the evolution of their identity must continue and be found in new ways. This can be daunting and challenging. Still, just as building a strong brand is vital to a business, so developing a shared family identity is essential to the success and continuity of the business family.
This can often be found in pursuing new opportunities, and business families have a unique advantage in doing this due to their often agile nature and ability to take long term views. This means that they can not only pursue lucrative opportunities in multiple areas of personal interest but also seek deals in avenues that help them to remain relevant and engage future generations in the business of the family.
The transition from a family business to a business family is not always one that is anticipated by many entrepreneurs or family business owners. Still, it is one that bears consideration. Both scenarios present their unique challenges and opportunities. However, the transition to becoming a business family, when planned for and managed effectively, can not only help to keep a family connected and working towards a common goal but also agile and resilient enough to build a legacy for generations.