Succession and Competitive edge: Two Challenges Keeping Family Business Leaders Awake

by | Jun 5, 2024

Two issues that might keep family business leaders awake at night

Among the many challenges you as leaders of Family and Founder Controlled Businesses (FFCB’s) face, succession and gaining or maintaining a competitive edge might be the ones keeping you awake. They may seriously impact the future of your business as well as the level of future involvement of the family and founders.

Succession: transferring control of the company to the next generation

The first item that will creep up higher on the agenda over time is how the family wants to transfer the business to the next generation. This step is something that is never taken lightly as it has an impact on the future of the company but also on the family dynamics.

As families attempt to preserve their entrepreneurial legacy, they often encounter a myriad of issues that can jeopardize the continuity and success of the business. These challenges are multifaceted, encompassing emotional, financial, managerial, and legal dimensions. 

It leaves the family with both a significant opportunity and a daunting challenge. How to structure a transfer is now even more topical due to the popular HBO series Succession but also due to less entertaining articles in mainstream media about the ageing of family leaders in a C-suite position. 

According to research from EY and University of Sankt Gallen the average age of family board members (either non-executive or executive) is 62 years and continues to rise 1. The concern is not that this average is currently at 62 years but that it continues to go up. Two years ago, it was 60 according to the same research institution implying that transfer to the next generation is only happening at a very slow pace. 

The urgency for transfer to the next generation is increasing, limiting the opportunity to carefully plan and implement it with a fitting timeline for all parties involved.

An important aspect in making the decision to move the control of the company to the next generation is the family’s vision for the future. The interest of the younger generation to be involved in the day-to-day management of the business and the capability and ambition of the family members who want to embrace a leadership position is also key. A further element to consider is the preference of family members to exchange their shares in the business for cash so they can freely engage with new opportunities and branch out.

Running a business is often driven by “hard” factors. When dealing with your family business we think that there are three key “soft” factors that need to be addressed  ahead of a successful transfer.

  • Family Dynamics and Conflicts

Family businesses are often deeply intertwined with personal relationships. A branch of the family can have a strong emotional attachment to the company, but also historical grievances could complicate decisions. Sibling rivalry, differing visions for the company’s future, and varying levels of commitment can lead to conflicts.

  • Generational Differences

Each generation may have distinct values, work ethics, and management styles. The outgoing generation might prioritize stability and long-term relationships, while the incoming generation might focus on innovation and rapid growth.

  • Resistance to Change

The incumbent generation might be reluctant to relinquish control, fearing that the successors may not be prepared or that their hard work might be undone. Conversely, the younger generation might feel frustrated by perceived micromanagement and lack of autonomy.

Competive edge: maintaining or gaining market share in a cash rich competitive landscape

The second item that is very topical is how to maintain the company’s position in the competitive landscape. According to research from Bain & Company the amount of dry powder at Private Equity firms is currently standing at an estimated USD 3 Trillion 2 and when this dry powder gets deployed the managers of these funds start to generate fees. 

Running a business might require buying competitors to either grow inorganically or defend a market position while PE firms and listed companies are rolling up other entities in your region or sector (either geographically or from a sector perspective). 

Many families are used to a stable dividend stream that supports the family members and the activities they have developed outside the scope of the family enterprise. While this status-quo can be maintained the risk increases of the company becoming too small of a player in the competitive landscape which could result in either a sale of the business or the dividend stream coming under pressure in a less fragmented environment. It is key for families to maintain an open mind to M&A to extend the longevity of the company.

The option of a non-family minority shareholder

To position a FFCB for both growth opportunities and/or for transferring the business one generation to the next, it is important to explore the option of working with a minority shareholder. This approach could help the family keep control of the destiny of the business they have been building for decades while having the ability to grow and engage with the younger generation on the family’s terms.

Selecting the right minority shareholder is a choice that shouldn’t be taken lightly. It is important to have the right type of partner alongside the family who will adhere to the vision developed by the family.

One of the key drivers in this selection is the horizon of the investment partner. Generational enterprises are known for outperformance versus listed or Private Equity owned peers to maintain this outperformance the family doesn’t need the additional pressure of a prefixed exit due to fund constraints by their investment partner. 

Another key driver in the selection of the right partner or solution is the level of privacy that can be maintained when getting outsiders on board. The publicity surrounding an IPO puts the family and all its members in the spotlight and could limit family members in continuing their daily activities and exploring opportunities on their own without the stigma of suddenly gained wealth.

When you and your family embark on this journey the first step is finding an advisor who can provide you with your options but who also provides you with an objective assessment of what these options require from the family as well as the business. 

The most important issue is ‘how’ this change is being effectuated. A family benefits from an evolution not a revolution. To move towards the next iteration of your business, it is important to follow the right process.

There are many important stakeholders who might not be part of discussions in listed or Private Equity owned companies. Dynamics between family members, non-family management and others require, in a lot of cases, a more nuanced approach.

Bob Rosman and Jeroen Hietink are the co-founders of Leyster, a vehicle focused on investing in family businesses that are going through generational transition or are embarking on the next step in their evolution through growth investments.

succession

Jeroen Hietink

Leyster
succession

Bob Rosman

Leyster
  1. https://www.ey.com/en_gl/insights/family-enterprise/family-business-index[]
  2. https://www.bain.com/insights/private-equity-outlook-liquidity-imperative-global-private-equity-report-2024/[]