Managing the Family Business:
Preparing to Sell
Most families are loath to
sell the legacy business, but there are good reasons to do so, says John A.
Davis. The key is making the right family preparations and proper wealth planning.
On important occasions, we gather
for family portraits. If you were to take a picture of your family business
today, what would it show?
Family businesses represent the
aspirations, achievements, and struggles of one or more generations of a family.
We would see all those things in the portrait of the family business. The
portrait of the business would also typically represent more than 90 percent
of the owners' wealth.
“If this transition is not managed well, the family has a
higher risk of losing its wealth through bad investment decisions and
overconsumption”
Few families sell their companies,
and those that do sell generally part with them very reluctantly, given all
that selling represents. We sympathize with a family's emotional attachment to
its company. But given how fast industries are changing and other factors, more
families should consider this move.
If you are in a position to consider
selling your legacy business, we congratulate you. You (and all your
stakeholders) will hopefully realize the fruits of generations of hard work and
sacrifices. Plus, selling your family business presents wonderful
opportunities. You can update and reconfigure your ownership group with the
right owners for your next chapter of wealth-generating (and social
value-generating) ventures.
But it's important to understand
that if this transition is not managed well, the family has a higher risk of
losing its wealth through bad investment decisions and overconsumption.
Starting now, before your sale and liquidity event, you need to adopt the
attitudes of those families that endure as high-performing, enterprising
families:
- They know their industry life cycle(s) and get ahead of
the curve.
- They understand the family's cash needs, now and in the
future, along with its true strengths and weaknesses.
- They want to educate themselves about the differences
between families with operating businesses and post-liquidity families
managing portfolio assets.
- They are willing to face the challenges common to
post-liquidity business families that can pose threats to unity of the
family and the owners.
Enterprising families build value through liquidity transitions
The attitudes of enterprising
families that thrive after legacy transitions seem to lead to the following six
key activities that achieve, then propel, their success.
1. Planning. They develop a family
strategic plan—usually with the help of trusted advisors—to specify their
goals and values and clarify how they will achieve those goals. This strategic
plan naturally takes some time, often a year or two, to develop.
2. Redeployment. Consistent with the
family's strategic plan, they redeploy the proceeds of a business sale in
assets (usually more diversified assets) that match the family's talents,
aspirations, and needs. Short term, families usually place their assets in
relatively safe vehicles while they catch their breath and assess their
interests, unity, and risk tolerance. Longer term, they might start or buy
another operating company, while keeping some portion of their assets,
individually or collectively, in other kinds of investments.
3. Governance. They develop
governance mechanisms (forums for discussions and decisions, plus rules,
policies, and agreements) to help the family make decisions and keep family members
informed, united, and hopefully committed to future investments by the family.
4. Talent Development. They develop
family talent to help manage or guide the new business or other activities of
the family. Obviously, with the sale of the family business, the type of family
talent needed for the future will be unclear for a while. As the family settles
into new activities, it will become better understood what family talent is
needed.
4. More Planning. Even if the family
quickly and collectively redeploys its assets in new business activities, after
a sale family members will have more financial autonomy. This necessitates that
individuals develop their own life plans and financial plans in the context of
greater liquid wealth. There are many great resources available to help with
financial planning and asset management. Make the family strategic plan before
you search for investment advisors. And before you do that, take the time
to reexamine individual family members' life dreams, the family's collective
goals, and the role of wealth in supporting them. Then please shop for the
right advisors to help you at the right price.
5. Develop New Context Awareness.
Value-building families also take this opportunity to consider how greater
wealth or more liquid wealth will affect family lifestyle, behavior, and work
ethic. These are all serious ingredients in sustaining an enterprising family.
6. Unite the family. They work extra
hard to develop family unity and commitment to the new family enterprise. We
can't overemphasize how important it is, now on the eve of your legacy sale, to
focus on unity in the family, so you can cultivate and support new family
wealth creators for future generations. The family has been the foundation of
your success, and it always will be.
Remember, businesses come and go,
but business families can last for generations. Maintaining family momentum and
growing family assets are the real measures of success from generation to
generation. Are you ready for your portrait? 
by John Davis and Jonathan Pellegrin
http://hbswk.hbs.edu/item/7757.html
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