Which one is the future of your business?
&
The family office as a succession tool
We define here what the family office is, before we explain the 7 possible scenarios of the future of any family-owned or small or medium sized business.
What is the family office, and how does it come into existence?
The way a family office comes about is when the wealth creator of a family, who is usually a successful business founder, decides to sell his business. After his successful exit, he establishes an organization that in recent years the market calls a “family office.”
Note here that it is actually a private, discrete organization that doesn’t make any noise. It is not what the market now calls a “family office.” The companies that advertise that they are “family offices” are just wealth management shops disguised as family offices.
1) The investment goal of the vehicle is to cover the needs of a family in expansion. That means that the family office produces enough income for the family and for increasing the wealth, more than keeping up with the inflation. While the members of the family increase over time, the wealth must increase to be able to sustain, with its returns, the family members. The family office also takes care of legal issues, accounting, advisory services, health care and insurance matters, the management and care of the family properties, and the personnel of the properties.
2) The educational purpose is to become the training grounds of the next generation in an environment that will not just teach them the mechanics like in any other job in any other organization, but they will also see the results of their actions and decisions as members of the ownership. When you act as part of an organization, that you are not a member of the ownership, and you don’t get the experience in decision making because you don’t see the results of your actions in the Profit and Loss statement. The purpose here is to assist to the emotional maturity of the member of the family in relation with business decisions and the positive and negative results that come as results of the decisions.
3) The charitable purpose of the family office is to support the family’s causes through charitable organizations and to keep the family members involved in this activity and help deepen the family members relationships through this process.
4) The legacy purpose of the organization is to record and preserve, for the next generations, the history of the family, and the values and principals of the patriarch and matriarch who are the founders of the family, and preserve the coherence of the family as an entity while it is expanding.
The successful creator of the family office is called the Patriarch of the family. The woman who selected this man to become her life partner and the Patriarch of their future family, and who contributed, with him, to all the facets of the family’s strategy, business and efforts, is called The Matriarch of the family.
How does a family office come to existence?
And what are the 7 possible scenarios for any business.
The family office comes to existence as follows: A bad ass founder (patriarch to be) starts a business from scratch. He (usually) has nothing, and he knows no one. He (or she) goes out there and he gets his teeth kicked in until he gets good enough that he starts succeeding himself and he keeps doing it for many years. He builds a business, and he grows it. He becomes successful, wealthy, his business plays a vital role in his region or city, he creates jobs, he has tenacity and discipline, he struggles for many years, he works under tremendous stress and succeeds, and he commands respect in the society. After a while one of the following 6 things happen:
A) The rare but dangerous scenario:
Many say that the best scenario is that the second generation takes over the business, and runs it themselves, or hires “experienced and genius professionals” to run it for them or under them or alongside them. But we have seen many personal stories behind the statistic that shows that 96% of businesses die under the management of the second generation. This is NOT JUST a statistic. Behind this is sadness, fighting, feelings of hopelessness and blame on both sides, that both sides set each up for failure, even when both sides did their very best to set the other side up for success. Behind this statistic is feelings of failure, the emotional breakup of families, suicide, broken families, and the leaving of the next generation in a bad place.
What is the reason for this high rate of failure? It is terrible, and we believe it should not be that way. One of the things that Founders Trust does, is, in the rare cases that the Next Generation of the family takes over the business, we can sometimes, depending upon the situation, partner with the Second Generation and work with them toward the success of the company.
B) Achieve a successful exit:
This should be straightforward. Everyone should be able to do it. Why do so few businesses list themselves with a broker or intermediary for sale, and when listed for sale, why do 95% not sell in the first year, and 90% to 95% never sell? This is terrible. Think of the cost to our economy, and think of the cost to the local economy and city, which no longer has the services which previously had been so well provided to the community. We believe that this should not be the case. We believe that every founder and owner deserves a successful exit. See our free report on ways founders accidentally destroy their businesses when selling or retiring.
C) “Die and leave your family to clean the mess” Strategy.
Finally, there is the most popular method that most of the families use for their succession. It is called “Die and leave your family to clean the mess” Strategy. This is the strategy that, statistically, is used by most families, and that is the reason they never materialize as patriarchs. These founders did all the good hard work, they went through all the pains to create everything, but when the time came to put the final brush on their creation, at the end of it all, when the time came for planning, it was just pushed forward. The business dies when the founder dies, or shortly thereafter. Also, the discussion among the family members would be very difficult, very awkward, it would be very unusual. At the end of the day, families are not supposed to talk about money, right? They pretended that there is nothing going on, nothing to be discussed, nothing to be taken care of, nothing to plan for, people never die, businesses never change hands, so they just never did anything about it and the reality is, that they never had to resolve anything on this matter of succession in their lifetime. Because everything was left to be solved and resolved by the members of the family that were left behind when the patriarch who failed to be, died.
D) The founder closes the business down:
This is maybe the most sad, but, in numbers, it is by far the most common scenario. This comes as a result of the fact that businesses follow the age of their founders. They are born, they grow, they mature, they get old, and they die. Most owners fail to perceive that pattern and they end up with an old business in their hands at their old age. At that stage is too late to reinvigorate it and too late to sell it. So, they end up closing it down. Most business owners end up closing their business down because it is not their fault, they do not realize that in many cases, there is an intelligent transition period required after the sale of their business, in order for that business to be able to have any value.
They do not properly equate selling with success, but, they erroneously equate it with giving up.
For medium and small companies, why do less than 5% of extremely genius and successful founders, succeed at an exit? It is not their fault, they just realize too late that a successful exit does not mean giving up: it is a new beginning, on a path they are able to choose, with intelligence, and in advance, before it is too late. A new beginning for them and their business. Or a new beginning in a new and more fulfilling way to lead or manage their business after their successful exit. Or just a new beginning for the business as it continues on, a testament to what the founder or owner has built.
0 Comments