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Dan, CEO of his third generation, family-owned food distribution company, is interested in growing his business beyond its base in the southeast U.S. and has available capital. Pete’s business operates in California and other western states; as newly appointed CEO of his fifth generation business, he’s anxious to expand his family’s interests. Dan sees opportunity by strategically investing in Pete’s company. Pete is interested in growing his business but wants to ensure that the next generation—his son and daughter—maintains control of the business after his retirement. He considers another family business in his industry a better partner than the financial investors he has talked to, especially given their relatively short-term investment horizons.

 

Family-owned enterprises operate differently from other companies—business decisions take family dynamics, values, and goals into consideration—but, increasingly, that difference is also a strength, especially when considering investment options. Looking beyond traditional investments in stocks, bonds, or hedge funds, many family businesses are pursuing direct investments in businesses they already know: other family-owned companies. Doing “family due diligence” research can help companies like Dan’s confidently take the next step.

Here’s what you should know before investing in another family-owned business:

 

• Understand your own investment strategy. What are your anticipated time horizons and your return objectives? Dan, the CEO mentioned above, understands that strategic partnerships and joint ventures with other companies offer an opportunity to diversify his business’s operations, as well as expand into other parts of the country, reach new markets, and tap new sources for talent.

 

• Make sure key family members are aligned with your objectives. It’s critical to have open, honest conversations with family members—inside and outside your company—about their goals for the business, often the family’s largest asset.

 

• Understand the target company’s family dynamics, values and succession plan. Develop an understanding of the family dynamics that exist within the target company. This requires an appreciation of its current business and family governance structure. How are key decisions made? How do family members working inside and outside the business feel about another family business investing in their enterprise? Do family members get along? How well are their values and goals articulated and are they in alignment with yours? How has the target company addressed succession in the past and what plans currently exist for the future? Consider bringing in an outside advisor to objectively assess family dynamics in the target company.

 

• Consider the trade-offs you’re making regarding investing in your own enterprise. Are you compromising your company’s long-term growth by not investing in your own human capital, sales capabilities, or infrastructure? Asking this question and evaluating the answer is certainly valid. Investment in another family business should compliment your business plans; it may not limit direct plans for your own business.

 

• Training the next generation. Dan hopes that a strategic partnership with another family-owned enterprise will enable his son and daughter to develop and refine management skills that could ultimately make them more effective business leaders. Will investing in another family business create development opportunities for your next generation of leaders?

 

• Look for deals in an industry where your company already has expertise. How can you immediately leverage your knowledge, experience, and established networks to help your family company investment grow?

 

• Avoid business deals recommended by friends and fellow CEOs. While tempting to explore, these deals may not align with your business’s long-term objectives, family values and family core competencies.

 

Dan and Pete ultimately reached an agreement benefitting both of their family-owned enterprises: Pete’s company diversified into another market category; Dan’s business expanded its distribution power to the western U.S. and his son and daughter took on new responsibilities in the joint venture. Conducting a family “due diligence” enabled them to confidently take the next step.

 

 

Question:

How do I decide whether my family business is ready to be transferred to the next generation?

Answer:

There is no absolute right time to transfer a family business from one generation to the next. In an ideal scenario next generation members have been following a formalized development plan and are well on their way to being ready to assume additional responsibility. Next Gen members have actively participated in setting strategy and have developed the competencies and attributes needed to take the business successfully into the future. Often, timing isn’t perfect. The current leadership is ready to move on to the next phase of their life and the Next Gen is not quite ready. Consider bringing in an Interim Executive who professionally manages the business for the family and has as a key component of their role the further development of the Next Gen members. Establishing defined timelines and deliverables for the Interim role are critical in ensuring an effective transition for the family and the business from the Interim Executive to the Next Gen leaders.

 

Question:

When is bringing in leadership from outside the family an appropriate option?

Answer:

Bringing in a leader from outside the family is a very significant decision both for the family and the business. The decision to do so should be predicated on the strategy for the business moving forward and the competencies and attributes needed to execute on this strategy. If such competencies/attributes do not exist or cannot be timely developed by those within the family and business it is likely the right time to bring in leadership from outside the family. This may occur for a variety of reasons: rapidly evolving markets, new sectors to be explored, growth through acquisition to name just a few. It is also critically important to identify the right external leader not only based on competencies but from a chemistry, passion, trustworthiness and insights into the dynamics of a family business perspective and worthy of the special trust this role requires.  Prepare the exiting leader for their future role and the family as well for such a significant change through effective communication and governance.

Question:

How do I talk to my family about handing over our family business to the next generation?

Answer:

Transitioning out of your family business is one of the most difficult and impactful decisions a family business leader will make. Effecting a successful transition takes careful planning and consideration of what the business will need in terms of core competencies and attributes within next generation leaders in order for the business and the new leaders to succeed. Beginning conversations long before you plan to actually transition the business is wise as it affords you, the business and its key stakeholders, as well as next generation leaders ample time to prepare. Communicating your timeline and assessing where the business stands today, opportunities and challenges moving forward, and competencies needed in next generation leaders are critical.

 

Question:

Why do I need a written transition plan? Things are fine.

Answer:

You’ve put a lot of time and energy into building your business and you likely have a strong vision of its’ future. Avoid risking financial success—and jeopardizing family harmony—by planning ahead, having open, honest conversations with family members and employees, and aligning your planned transition with your company’s strategic goals and organizational needs. A thoughtful, detailed and objective strategic plan that reflects your family’s values and supports its goals helps address potential issues before they arise. No two family business transitions are the same, so following a framework adapted to the needs of your family and your business is best. It can take many lifetimes to build a family business but just a short time to destroy value it if you don’t have a well-articulated transition plan.