Beating the odds: The third and fourth generation family business
Many small to mid-size meat & provisions businesses are family-run, second-generation businesses, with some who have beaten the odds and carried into a 3rd or 4th generation. Not a small feat to accomplish, and many would say the climb to get there was challenging, but with proper planning, it can be done. For those aspiring to pass their family-run businesses to the 3rd and 4th tier, do you know how to get there?
First and foremost, as a business owner you must clearly understand the need to begin planning sooner rather than later and fully comprehend that business exit planning is about the process, not the transaction, and is a positive experience. Now is the time to start thinking about transitioning your business and begin sitting down with your family members to start the conversation.
Ask yourself the question, can my business succeed without me in future generations? As the owner, you need to set your goals as well as set goals for your business. Determine the value of the business today and what systems and procedures would you need to put into place now to lead to your business’ independence in the future.
Next, begin to evaluate your family employees: Who would want to stay, who is capable of staying, and who truly is the diamond in the rough — the one eager and ready to begin and be the pivotal employee when you start your new life, independent from your business. At this point, you need to figure who is really intense and passionate about building the next or 3rd or 4th generation and start brainstorming ideas, expectations and most importantly, what is the true vibe of the family—meddling children, family togetherness, and the hardest of all, naming those children who are competent or incompetent of running a business.
The second generation of owners is normally the founder’s children, with the 3rd and 4th generation being cousins and not brothers and sisters. This creates an entirely new dynamic to the family business. From the 2nd to the 3rd generation is where you will begin to see the breakdown of communication, lack of common goals, more of a negative work ethic and slipping industry skills.
Hence, there is a need to begin communicating with your family members now, before the generation gap is widened. It is imperative to stress, years ahead of time in the 1st/2nd generation to get the attention of the 3rd/4th to fully understand where the responsibilities lie and will they really want to take over in the future.
One topic, not easy to communicate is the importance of not offering stock in the company to children who are not involved in the business. If there is one thing to put in your back pocket, remember this; children not actively involved in the business will have an unrealistic expectation of how much free cash flow the business generates and the amount of money they will receive from their ownership in the company. This will lead to strife and conflict among the children and their spouses.
The issue with some members of a third or fourth generation is the lack of entrepreneurial drive that the 1st and 2nd generations possess. Some businesses are lucky to have the drive gene passed down from one generation to the next, but in reality, many are not. Therefore, if anyone from the latter generation wants to take over, it is the owner’s responsibility to offer effective mentoring and training years ahead of time in order to be certain your business will succeed for the future generations to come.
All generations truly need to understand the importance of mentoring and open communication within your family business. Train the next generation and make sure you convey realistic expectations, the challenges, and the importance of adapting and changing the business model when needed.
For your business to succeed into future generations, you need to prepare the future owners today. Talk with your family and begin the conversation early between the generations. Be honest with what is involved and the complexity of relations while remembering communication is the key component which will help lead you down a path to business ownership independence.
Bob O’Hara, CPA/PFS, MST, CExP™ is a business consultant and founder of O’Hara & Co. PC of Chelmsford, MA. Contact him at BOHara@oharaco.com or through www.exitplanning-edu.com, an educational resource offering a fresh, new approach to exit planning. “Preparing the Business to become Independent from its Owner & the Owner to become Independent from their Business™” – Bob O’Hara