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Basic Business Succession

One in four of business owners plan to transfer or sell their business within the next five years. This is according to a 2010/2011 survey by PricewaterhouseCoopers (PwC). Fifty-five percent of these owners indicated that they plan to transfer this business to family member(s). These statistics, probably accurate if not understated for Iowa, mean that Iowa communities are in for a great deal of change in the coming years.  Is your community prepared for this change?

Successful transitions don’t “just happen”. Under the best circumstances business owners are clear about what they want, have good advisors and the transition goes smoothly. Given that only ten per cent of family businesses make it to the third generation it is usually not this simple. Instead the owners and their family get stuck on the “soft side” or “human” issues. These issues include treating children fairly versus equally, evaluating and compensating adult children, utilizing key employees effectively and the ability of generation one to truly let go. Two other questions at the core of every transition process are “how do we maintain family harmony” and “how does generation one ensure their financial security without hindering generation two’s ability to operate the business”?   

To help business owners successfully navigate through transitions we have developed a comprehensive process. Knowledge of this process, and how it relates to key transition issues, may help you work more effectively with the transitioning businesses in your community.

Our first step in the process is to meet with generation one to discover their values, goals, concerns and fears. We repeat this interview process with children and their spouses; we have learned the hard way that spouses sometimes wield enormous influence on the outcome. Depending on the size of the business we may also interview key employees.

We then ask each individual to complete an online assessment which helps us evaluate communication and decision making styles, areas of current stress and other pertinent information that might not surface in the interviews.

Finally, we review key documents to make sure that the documents are up to date and reflect the family’s wishes. It is rare that they do reflect the family’s wishes.

The Phase 1 Diagnostic process identified above clarifies goals, contrasts these goals with existing reality and identifies the gaps that need to be bridged. Phase two then implements the work necessary to actually bridge these gaps. Usually other advisors have work to do in this phase which could include developing legal documents, assessing life insurance needs or valuing the business.  

Addressing the “soft-side” issues helps clients become more willing to start a transition process and also increases the likelihood of success.  By helping your business owners understand what successful transitions require you can play a key role in creating more “legacy businesses” and therefore increasing business retention within your community. 

Written by Lars Peterson

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