Management or Ownership, What Should a Family Business Owner Transition?

February 2019 | Volume V

It has been mentioned over and over that “Passing the torch” was one of the most (if not the most) important step of succession planning in a family business life. But what does that really mean? What does it involve? What should be considered? Here is a critical factor.

For a Family Business owner deciding to live new adventures, two important aspects must be considered during transition – management and ownership. Often, those two happen at the same time. It is possible for a Family Business owner to take a different approach and decide to transfer either the management only or the ownership as well. No matter the decision, it needs to be managed carefully and actively.

Management Transfer

For many reasons, a Family Business owner could decide to keep control/ownership of its company and only transfer the management. But even in that case, planning and family dynamics are still essential.

Having a clear and well-communicated vision and set of values will be crucial if an owner decides to only transfer management as they keep in mind key people for this aspect of the succession plan. The selection of the next “Chiefs” (e.g. CEO, CFO, CTO, etc.) should be based on who is the person that will not only be able to manage the day-to-day operation of the business but also share the same values.

The long-term vision of family businesses is one of the reasons they have been able to outperform non-family businesses over the years, so the next team of leaders should be able to keep that vision alive, adapt when needed, and turn values into strategies as elements of differentiation. As an example, managers who put their people first often will experience better productivity and improved customer service because they are looked after or not taken for granted.

Some could think that since it’s a family business with the vision and values as an integral part of the family, the leadership should be kept within the family, but it’s not necessarily true. The choice of a new Chief and/or the next leadership team may include both family members and non-family members. Understanding ALL the players and managing that dynamic will be key for the success of the transition.

Related: Transitioning your Family Business

Ownership Transfer

And then there is the issue of ownership. One of the first decisions that a business owner must make when deciding to transfer ownership is whether or not to keep business in the family, which can often be a difficult decision. If the decision is to keep it in the family, then other important and sensitive questions need to take place. Asking a family member who has been active in the business to leave the organization is not so affectionately referred to as “pruning the family tree”.

Related: Questions Family Businesses Need to Ask Before the Transition

In some cases, they might have a delay between the transfer of ownership and the transfer of management. For example, if the new owner is not ready to take on the management of the company, the previous owner can still manage the operation of the business for a certain amount of time and use that time to guide and mentor the new leader.

One trap to watch out for is transferring ownership to someone who may not be ready to lead by example. Leadership by title alone (i.e. “I’m the President so you must listen to me regardless…”) can be very destructive as respect from subordinates will be lacking, making it difficult to continue a legacy or change directions if needed.

While the following is oversimplified – and there is no such thing as a “simple-to-run” family business – we could say that management looks at operational strategy (e.g. increase/improve automation, modify logistics, etc.) and owners look at the overall vision/direction of the company (e.g. questioning if in the right markets, ensuring the right values/culture are created/respected, etc.).

Another key factor involved in ownership vs management lies in philosophy, with the following questions ensuing:

  • Is ownership a birthright? In other words, do all my children get a piece of the company on death/transition, regardless of their involvement, or are only those actively involved in the business entitled to own a share of the business?
  • What defines active involvement – president or janitor?
  • If founders believe that ownership is a birthright, do you equalize or balance this by way of salary, ensuring that active involvement and company success are rewarded annually?
  • Who should work in the business – only those qualified family members, or do you find a place for everyone in the family that wants to work, no matter what their talent and skill level?
  • Who is considered “family”? Direct (blood) descendants? Adopted children? Children from a previous marriage?

The answers to the above-questions are seldom straight forward but hugely important to consider and discuss.

Whether a business owner decides to transition management or ownership to a family member or to a third party, one element that would help the business survive the transition and the next generation, is a solid Corporate Governance which includes a succession plan that must be communicated. Formalizing the structure and the process of a family business is often neglected and might require the help and the advice of an external party, whether another (outside) family member, an entrepreneurial friend/advisor, or a professional, to name a few.

No doubt there is overlap, especially in a family business, but the distinction between management and ownership in the context of a business transition needs to be understood to effect a proper and well thought out plan.

If you want to know more about family businesses, how to manage tangible such as tax and estate planning and the not so tangible family dynamics, please contact one of our advisors or subscribe to our Newsletter.