When Family Is Unable to Take Over the Reins

Family-owned businesses are faced with a predicament that is becoming all too common: there are no family members to take over the reins of leadership. This is not to say there are no family members working in the business. Rather, the family members in the business (including cousins, uncles, brothers, in-laws, children, etc.) either are not competent, interested, or available to assume leadership positions.

Business owners in this situation often assume that their only option is to sell the business. In fact, consolidators (i.e. larger national companies looking to merge smaller, local companies) will prey on companies in this situation. Consolidators recognize that these businesses are vulnerable to death, disability, or early retirement of the owners and that these businesses do not usually sell at multiples of earnings as high as comparable public companies. Therefore, they have a real incentive to chase after these companies once they smell a hint of weakness in succession planning. Some offers are so large (because of the huge difference between the “public offering” valuation and the “private” valuation) that the offer almost represents a bribe or extortion. It can be a true example of “an offer too good to refuse”.

These businesses have other options beyond an outright sale of the business. Some of these options are to:

1. Hire competent non-family managers to permanently assume leadership positions. They essentially “share custody” of the family business with family member/shareholders. This usually requires creating “golden handcuffs” so these non-family managers will remain and be loyal to the company…and the family.

2. Hire competent non-family managers to temporarily assume leadership positions in order to develop family members who may have the potential for leadership but are simply too young, inexperienced, or lack training. This is a very viable alternative but requires careful orchestration.

3. Carefully examine the list of family members who do not work in the business (who are already successful in their careers) and determine if they might be good candidates to “recruit”. Then approach them to determine their level of interest in joining the family business. They may still require grooming from non-family managers that have the necessary experience and training, but this is an acceptable alternative if this is early enough in the succession plan.

4. Merge with a “friendly” competitor. While this may, in some instances, be tantamount to a sale, it can also be structured like “a jointure of equals” where the company with the weaker management team is integrated with the stronger company and a new management team is assembled taking advantage of the strengths of all members. Sometimes this works because there is some overlap (and cross coverage) even though the weaker team members might not have been able to carry the entire leadership load by themselves. Similarly, the stronger players may benefit from some backup (e.g. emergencies, long vacations, personal time off, illnesses, etc.).

5. Have another company, who desires participation in your industry, become a significant shareholder in your company who will also supply some management talent as well as financing. This is a common alternative when the family business has significant untapped growth potential and the shareholders desire to tap into that but simply do not have the resources to do so alone. This “gap of resources is often money as well as management talent. Simply put, the family members want to keep the goose that laid the golden egg, but are not able to care for it in a manner that maximizes egg production over the long term.

There are other ways to deal with this situation only limited by one’s imagination, time available to execute the alternative, and the risk tolerance of the family member/shareholders. The goal of this discussion is to simply let family businesses know that they do not have to view an outright sale (often under undesirable circumstances) as the only option when there appears to be no family member to take over.

Family businesses that face this situation would be well served to read the many articles and case studies that have been written on this topic. The experience of others in similar situations is invaluable.

For more information, please click here to contact us or e-mail us at stan@fambizdoc.com

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