Mini Case Study
The husband-and-wife founders (Generation 1 - “G1") built their 43-year-old specialty packaging company from a bootstrapped start up to three profitable locations across the United States. An estate planning valuation led the family to believe their enterprise value was approximately $28M. Now in their 70s, G1 began to explore their options for transition. Their two adult children (Generation 2 - “G2”), a 53-year-old daughter and a 49-year-old son came into the business 10 years earlier and contributed to season of substantial growth. As a result of their effort and closely knit family relationships, G2 gained ownership through a combination of sweat equity and purchasing shares.
The family never really discussed succession until G1 decided it was time to exit. What sparked the sudden shift? An unsolicited offer for $31M. The offer launched the family into a process with the private equity firm and led to tremendous stress as they were not aligned. G2 felt as though they were going to be pushed out and their parents were “selling out the family dream.” Just as quickly as they engaged, the family pulled out of the process. Unfortunately, they took two more turns on the transaction merry-go-round before realizing they needed to get off completely and regroup.
Approaching succession from a reactive posture focused on inbound (unsolicited) private equity inquiries pushes the family to strategic conversations before doing the exploratory work of:
Considering the transition goals of individual family members and the impact of transaction on the family system as whole.
Being able to clearly articulate what matters and what doesn’t for the business and their employees.
Creating shared understanding and alignment about the true enterprise value of the business from a transaction perspective.
Defining the ideal partners for helping navigate the transaction.
The lack of clarity led to competing priorities that drove conflict they had never experienced before. As a result, the family abandoned deals at varying points of the due diligence process without fully knowing why. Their prior experience exponentially increase complexity on an emotional and practical level with each failed transaction. Investing in exploratory efforts could have saved this family time, money, and spared them from the stresses of unnecessary complexity, confusion, and conflict.
How Exploration Helps Owners Avoid Mistakes
One mistake family business owners make is moving too quickly from the idea of transition to execution, bypassing the crucial exploratory stage that involves gaining alignment and testing assumptions. When this happens, there is no room for reflection or proactively solving for potential roadblocks in the business and in the family, leaving both vulnerable.
Going slow and investing in exploration allows families to consider the complexity of overlapping business, money and family systems (M3 Model). These three areas overlap to create a unique set of opportunities and challenges that no other family business can replicate, we call this the Snowflake Effect. The power of investing in exploration before moving to execution is the family gains greater clarity and alignment. Ultimately this translates to greater control as systems thinking expert and author Peter Senge points out, you gain more control when you go slow before you go fast.
The second mistake family business owners make during transition is ignoring the self-domain. A family business culture arises from the interplay of family dynamics (the patterns of interaction among family members) and business culture (how things get done in the business). Families are driven by the nature of power and personality of their individual members. Their businesses shape and are shaped by the interplay of family dynamics and organizational culture.
What does that mean? Personality, motives, generational differences, values, and beliefs of family members will impact results in the money and business domains. While we would like to believe we are strategic and rational at our core we are emotional beings and families are fundamentally emotional units. Successfully navigating transition with less stress starts by understanding how psychological constructs such as role-identity fusion, need for significance, sufficiency of originality, and motivational drivers fuel individual behavior and decision-making.
The M3 Model is designed to help families embrace the unique attributes of their family while positioning the business and financials for the succession strategy that best suits the family’s needs. It creates a flexible framework and dynamic approach that allows crucial conversations to occur, guides the family through productive communications, and fosters awareness of self and others which speeds progress toward goals.
Case Study Outcomes After Doing Exploration Work
Our case study family chose to hit the pause button on their business transition to explore their deeper needs further. Through a 2-day family retreat, the family was able to gain clarity and grow in confidence, creating a smooth path that ultimately led to a successful transaction.
Here is a glimpse of the unique needs this family discovered during their retreat:
My Business Domain
Protect G2’s position in the business
Ensure long term financial health
Improve valuation by focusing on organizational development
Hire a sales team to exploit adjacent markets
Shift tacit knowledge from G1 into the organization
My Money Domain
G2 is currently financially dependent on the business and intends to own and operate it.
G1 is not dependent on a sale transaction to retire.
Target valuation of ≥ $40M within 18-months.
Identified the need for a true market valuation to understand what their business would be worth to strategic and financial investors. (Subsequent to the retreat the family got a market evaluation and realized they already had an enterprise value of $41 - $48M).
Evaluate working with a capital partner that will infuse both money and skills.
Tax efficiency is critical for both G1 and G2.
Establish a long-term money management plan that includes a “family bank”.
My Self Domain
G1 and G2 have very different needs being met by their roles in the business.
G1 and G2 must create solutions that meet both generations’ needs as family cohesiveness is the priority.
G1 realized the failed transaction was not about the money it was about the husband’s need for significance and the wife’s need for relatedness they received from their roles. Replacing these needs outside their role became a priority.
Determined the need to separate governance and operational management decision-making.
G1 (at G2’s urging) agreed to create an advisory board to support missing Knowledge, Ability, Skills, and Experience (KASE) in both generations.
Identified the need to understand how philanthropic work through a foundation could meet needs for both G1 and G2.
This outcome helped the family move together to maximize their return on investment (ROI) through small incremental changes that yielded significant results. Within two years the family realized an enterprise valuation of $63M, established a foundation, G1 exited and G2 continued to scale the business. G1 took a year off and then returned to serve on the advisory board.
Conclusion
Developing a documented transition vision allows owners to move through the strategic and execution phases with clarity, confidence, and control. When owners are aligned about the destination, know how they will get there, and have confidence about their future, transition can become an exciting adventure for all involved. Going slow to go fast gets better results with less stress. To schedule your 2-day family retreat, contact us.