Handing over the reins of your family-owned business: the hardest Thanksgiving conversation you’ve ever had.
Family-owned businesses will need to choose one of three pathways in the coming decade - are you ready for the change?
By Alex Teece | April 12, 2024
In the hit HBO series, Succession, the family patriarch is pitted against his competitors, family, and ultimately himself as he plans for, and drags out, the departure from his empire. While it is a dramatization, it is indicative of the experience had by many who have founded and led family-owned businesses - who will take over for me? What is it worth? What will be my legacy?
In the coming years, millions of baby boomers will enter a well-deserved retirement and transition into a life of hobbies, travel, and grand parenting. The U.S. Census estimates approximately 71 million people in the country born between 1946 and 1964. Many have started and owned businesses for decades, working their way through recessions, crises, pandemics, and a technological revolution.
And now, the time has come to look forward, into the future, and consider what exists over the horizon - for themselves, their business, and their families. While some are working into their 70s, per U.S. News (2022), a testament to the work ethic of the generation, many are looking to get out.
At this time, family-owned business founders and leaders face three questions:
How can I pass my business on through my family?
If I sell, who will buy it and what is it worth?
Will I maintain my legacy if I wind down and turn off the lights?
The answer to each of these questions is deeply personal and requires months, if not years of planning and consideration. Only by presenting these questions now can one truly consider the most thoughtful, strategic decision for the future.
1) Passing the business on to a family member, trusted employee, or chosen successor.
In a perfect world, family businesses have generations of ready and willing family members or employees waiting to serve as adequately groomed successors. It is a seamless transition and business moves on as usual with little to no disruption.
But, we know it is not a perfect world. Business operations and day-to-day decisions often usurp the perceived longer-term, far-off decisions of succession planning. And yet, according to Cornell’s Johnson College of Business (2024), only 40% of family businesses are passed to second-generation owners (seemingly correlated with the lack of succession planning), 12% to third generation, and perhaps most significantly: only 3% of businesses are 4th generation and beyond.
Key Insight #1: preparing a successor takes months to execute, and years to plan.
Obstructing succession planning is the time and space needed for stakeholders to arrive at a consensus over the bench of possible successors, the necessary post-succession direction of the company, and the right person for that strategy. Per Harvard Law School (2021), finding common ground begins with assessing key factors most likely to impact the business over the next three to five years (e.g., shifting customer needs, competitive landscape). A deep bench of employees must be put in exposed to decision-making required to take the company forward. A 2020 McKinsey article on building such a bench highlights the need to find, nurture, and grow people internally to ensure multiple executive candidates who will be ready for the role. Moving the company forward does not only happen at the moment of succession - it takes place months and years in advance through the thoughtful, bespoke development of key people within the organization.
Handing down the family business to the next generation is in some ways a fairy tale ending to a life spent building a company. The hand-over requires years of planning and includes significant preparation to happen effectively.
2) Selling the business.
When there does not exist a prepared family member, trusted employee, or chosen successor, a family business leader may have to explore the intriguing, but emotionally complex decision to sell their business. In 2022, Royal Bank of Canada reported that 61% of family-owned businesses do not have a succession plan in place. Another way to look at this: nearly two thirds of family-owned businesses do not have an exit strategy, and a sale of the business (or parts) may be their only option (other than the final point below).
Key Insight #2: A family-owned business sale encompasses value far past the tangible assets of the company, and parting with such will require extraordinary capacity from the leader.
Selling a business is a highly complex, emotional, and grueling process. Beyond coming to business terms, family consensus, and personal acceptance of deciding to sell, the decision often unfolds in a very difficult sequence of events that are unlike any the founder has experienced. What often begins as a highly optimistic starting point of an offer and LOI, fades into due diligence and grinding negotiations that shake even the most formidable founders. According to Harvard Business Review (2011), between 70-90% of acquisitions fail, leaving a small, family-owned business reeling, buried in attorneys fees, and unsure of the path ahead, both personally and professionally.
For those that do sell, the founder is often forced into a chrysalis to transform from family-owned business founder, leader, and executive to a person who was once a CEO. For many, this is difficult. The McKinsey authors of CEO Excellence refer to it as “handing over gracefully” and “embracing what’s next,” which is easier said than done. It is a challenging journey that many former leaders find themselves on, often underprepared and unsure of how to endure and reimagine their new identity.
3) Winding down and closing the business for good.
While most founders do not start businesses to end them, it is a natural part of the business lifecycle to mature and eventually decline. A business winding down its operations and services does not necessarily mean failure - it can mean completion. Completion of a commitment and purpose to customers, co-workers, and a community. Eventually the employees leave, assets are sold off, and the doors are closed one final time.
Key Insight #3: Business leaders can maintain their legacy by thoughtfully turning off the lights.
If closing the business is in fact the best choice of these three, there are steps to take in order to protect the legacy of the business, the leader, and the family. Ultimately, one wants to be remembered for their best years, and how one leaves will have a lingering and lasting impact on people affected by the closure.
The odds are that this final exit strategy may be needed at some point. Given that nearly 70% of family-owned businesses fail or are sold, per Harvard Business Review (2012), keeping ‘close the doors’ option on the table will allow business owners flexibility as their final years near. No one wants their business to wither away into irrelevance. However, a planned, coordinated, and thoughtful wind down can allow the founder, and family, a sense of closure and peace.
One of the most infamous scenes from Succession (season three) was when Logan Roy looked at his three children and said, “I love you. But, you are not serious people.” If you haven’t seen the show, or the memes that were born from this moment, the point is this: handing over the reins in a family-owned business is extremely difficult. It takes years of planning, preparation, and ultimately having a succession plan in place to allow the business, family, and leader to move forward.
The vast majority of family-owned businesses do not have plans, nor do they know which of the three options above will best offer a shot at consensus, success, and a clean exit. Regardless, the generational tide is shifting and the time for these conversations is now. Business leaders and their families will need to decide between a successor, sale, or closure. It is critical for their legacy, and their future.
