Family businesses are unique (you already know this). Did you know that what they experience at points of significant transition, be it growth, scale, succession or sale, will also be just as unique?
Ignoring the complexity, oversimplifying, or attempting to take a cookie cutter approach to navigating through change can be appealing - at first. Time and time again, our experience has shown that taking this approach either never fully realizes the opportunity presented or simply fails completely, leaving a load of damage and collateral in its wake.
The following case study is about a family that took the tougher route through the challenges instead:
A family-owned specialty packaging company with an enterprise value of ~$28M was facing its first significant ownership transition. The founders (G1) were a 70 something husband and wife team, who founded the business 23 years ago and bootstrapped their way to success.
G2 consisted of two adult children (Daughter, 53 and a Son, 49) that had worked in the business for more than a decade during which time the business realized its most significant growth.
This was a close-knit family with the children having gained ownership via both sweat equity and by purchasing their ownership shares.
Their initial approach to preparing for succession was to respond to private equity inquiries and view the transaction processes as an exploratory experience. They went as far as signing letters of intent (LOI) with four successive firms without defining their unique formula for transition success.
As a result, the family pulled out of the deals at various points in the due diligence process. When asked why they said, “even though they were costly lessons, we needed to experience them to learn what we didn’t know.”
Our clients pushed pause on responding to private equity firms because they realized something was missing. They used this time for robust exploration using the Orange Kiwi M3 Model.
With a defined formula for transition success in hand, they gained the clarity and confidence needed to engage in a transaction. In this instance, the outcome of the exploration was as follows:
MY BUSINESS DOMAIN
The family realized that over the next 12-months, in order to protect G2’s position, ensure long-term financial health and improve valuation they needed to:
Focus on organizational development and sales to restore the company’s historic growth rate
Bring on a sales team to exploit adjacent markets
Move the tacit knowledge from G1 into the organization
Build out a formal HR process and upskill HR so that we can more effectively manage talent and minimize risk
Realign the org structure to include a family board
Improve performance management by updating success metrics and re-aligning management practices with strategy
MY MONEY DOMAIN
The family identified that G2 had not secured their financial future and were financially dependent on the business. It was agreed that G2 intended to continue to own and operate the business so that they could secure their financial future.
This gave G1 the ability to choose as they were not dependant on sale proceeds to retire. Therefore, G1 could confidently exit the business while allowing G2 to structure a deal that worked best for all parties.
This gave the family the competitive advantage of time to achieve the following:
A target valuation of ≥ $20M within 18-months or less
The right capital partner that brings both money and skills to the table
A tax efficient strategy for both generations
A long-term money management plan that includes the development of a “family bank”
A second bite at the apple in 5 - 7 years for G2 at a valuation of ≥ $40M
MY SELF DOMAIN
Unlike the My Business and My Money dimensions that have interdependent decision-making requirements for G1 and G2, the My Self dimension was unique to each party.
G1 was most concerned with leaving a legacy for their grandchildren, employees and
the community.
With regards to G2, both siblings embraced the concepts of the foundation and setting up a skilled advisory board. As CEO, the son viewed the advisory board as a powerful addition and resource for his leadership. In addition, the son recognized that self-leadership is the hardest form and that he could benefit from executive coaching through transition.
The daughter valued the inclusion of her older children in the family’s philanthropic and legacy activities. She was most concerned about her long-term health and relational changes that would happen as her parents’ roles changed. As a result she developed a work rhythm that increased her opportunity to exercise before work with friends. She also spearheaded development of the family council so that she could continue to work closely with her parents.
Both siblings developed long-term transition goals including projected timelines, business and personal financial goals, and the ideal buyout scenarios they will aim for achieving.
The key to moving forward with a transaction was having the clarity and confidence that comes from exploring life below the surface. Navigating the obstacles to bust through barriers requires a process for stepping back, assessing the big picture, and exploring all of the factors that would allow them to chart the course for a successful transition.
Their family’s advice for other owners: “Make sure you position yourself for success before you spend a lot of time, money, and energy only to realise something was missing.”