3 Phases to Successfully Transition and Grow a Family-Owned Business

Over 90 percent of small businesses today are family-owned. Often, companies begin with one generation, and as the original founders prepare to retire, they must make decisions on how to transition the business to a management-led organization.

Navigating through the transition-consideration and implementation stages of a company transition smoothly requires an understanding of how family-owned businesses work. Let’s talk about the heart of a family-run business and the three phases of transitioning a business.

The Heart of a Family-Owned Business

At the core of any family owned businesses are founders who built the company from scratch. Their initial goals, values, and mission are reflected in the employees who helped them grow the business. It is also the connection between their business and the clients they serve. Understanding that transitioning a business requires more than just saying, “Here is your new leadership” will help founders make the transition easier and more successful for the entire company.

As founders begin to think about the possibility of stepping down, it’s important to meet with trusted, key stakeholders who have a foundational understanding of the business and company culture. It’s also important to meet with employees to get their take on what should happen next. Achieving consensus in how to proceed can help ensure the success of the company’s continued growth.

Phase 1: Implementing the Plan and Building Trust

According to a recent study, 40 percent of family-owned businesses are planning to transition in the next five years. However, transitioning a business takes time and doesn’t happen overnight. The first phase of transitioning a business should focus on gaining the team’s trust. Putting employees’ needs first and thinking about how changes will affect their careers will help gain the respect of team members.

This is often the first big hurdle to transitioning the business: building trust. While family issues and business issues intertwine all the time, it is important to separate those issues and make sure that there are decision-makers who are empowered to help move decisions forward.

Here are some ways you can implement the first phase of transitioning your family business:

1. Love what you do.

Employees can sniff out which family members in the business are in it for the paycheck and which ones are in it because they love what they do. It’s important for all of the family stakeholders in the business to truly want to do the jobs they have. This builds a stronger culture of trust within the organization.

2. Be real.

If you’re not real, then your team—who watched the business grow from a single truck 50 years ago to what it is today—will see that. Be honest, transparent, and open with your employees so they know what’s going on and can buy in to change.

3. Be aligned.

Family members may disagree when it comes to making decisions for the business. One person may want to grow, and another might not. It’s important for all family members and the employees to be on the same page. Work together to achieve alignment on decisions.

4. Stay humble.

Never forget where you came from. That sounds very simple. However, often in family-owned companies, family members get caught up in the benefits that the family company can provide. Don’t forget what it actually took to get where you are. Recognize the hard work your employees put into the business to help it get to where it is today. Never forget the contribution of your customers, vendors, and partners that went into the success of the business. Keeping this in mind will help you appreciate what you have and where you’re going.

5. Identify your founder mentality.

In order to move from a family-owned to a management-run organization, employees need to understand the founder’s original goals. Ask yourself, “How will these principles be engraved into the next generation of leaders?” Over time, you may find that your key principles evolve and end up looking slightly different from what your founders originally started with. That’s not a bad thing; you can still be aligned with their original intent.

Implementing your transition plan will come with bumps in the road. Keeping these “rules” in mind will help your team to gain the trust and respect of your stakeholders as you continue to grow and transition the business.

Phase 2: Growth and Restructuring

In this phase, companies are typically facing growth challenges. If your business has become too large to have everyone report to the core leadership team, it’s time to consider restructuring the company with a management team to allow for decentralized decision-making.

On average, only 30 percent of family-owned businesses survive the first-to-second generation succession. A successful transition requires a strategy that will ensure success. Moving decision-making from the founders into the departments and areas that are affected will help your business grow.

In this phase of transitioning your business, here are some key concepts to keep in mind:

1. Stay lean.

As a company performs and does better, it is easy to get excessive and forget those lean days when every paper mattered and every item on the invoices was reviewed. Understanding the importance of being lean can help you accelerate catapulting the business to the next level. Stay tight to help manage growth and expansion sustainably.

2. Take risks.

As the family and business grow, that growth puts stress on the organization. By taking risks and growing the company, you can support additional family members, employees, and changing needs. Be willing to take risks that match your company values, goals and mission.

3. Keep the identity and culture of the business intact.

The culture of a family business is woven into everything that business does. If someone steps in and tries to be an innovative leader doing the latest and greatest thing, there may be pushback from the team. Make sure that those traditional elements that the business was built upon don’t change so much that you lose your cultural identity. There is a reason why your company is successful—make sure you don’t fix things that aren’t broken.

4. Facilitate dreams.

Your employees have the same dreams and aspirations as you do. Your employees want to take care of their families and provide for their own kids and grandkids. Be a facilitator of that. Make that happen. As you build your family-owned business, keep this in mind.

5. Implement a decision-making framework.

As the organization continues to grow, it’s important to know who will make certain decisions. For family organizations, this is one of the areas that can make or break a company. The right decision-making structures with the right team will empower you to make educated decisions as you evolve as a company. Don’t become handicapped by not having this kind of structure in place. Many companies fail because they can’t make the decisions or they don’t know who is going to make those decisions. Ensuring that leaders and employees have the skills to navigate challenges will be a big part of your success.

If you’ve already begun transitioning your business, you’re likely experiencing some growing pains. Keeping these five principles in mind will help you better navigate any challenges that occur.

Phase 3: Ongoing Growth and Transition

As the company grows, it is super important to identify the core leaders. Who is running the day-to-day operations? These are the people who make the boots-on-the-ground decisions every day. These employees need to be aligned with the founders to ensure that decisions match the organizational goals and strategies. Key decision-makers who aren’t aligned with those goals will create roadblocks for future growth. To maintain growth and continually improve the transitioned business, you’ll want to create a pool of core leaders to support change.

Here are four ways to identify and leverage your core decision-makers:

1. Find a good fit.

Here are some questions you might ask yourself as you consider people for your core decision-makers: Do they want similar things in their careers? Do they like how the organization is run? Do they like scrappy and crazy or structured boundaries and frameworks? Being fanatical about fit is so important. When leaders don’t fit, it can cost the company time and money.

2. Promote from within.

There are people in your business who have gone through everything with you. These employees are aware and committed to your organization and don’t have any ulterior motives. When you have the opportunity, choose to promote leaders from within. These workers fundamentally know the organization, and their strategies will better align with the company’s goals.

3. Look for evangelists.

When rolling out something new, sometimes employees may give pushback. By including one of your evangelists (one who really believes in what you do) in the initial discussion, they become the cheerleader for the change, and adoption is insane. A senior leader who can relate to the operator in the plant helps champion your changes better than even you can. Leverage these employees’ talent for helping others recognize the good in change.

4. Build up a team of specialists.

As you build your core team, look for blind spots and gaps and find specialists to fill those roles. These experts will execute on a level that will make things happen. If you can’t hire from within, use the “good fit” strategy to see if a new hire will work well with your existing team. Attracting the right talent for your team can enhance your success.

Focusing on these four items will help you be successful in your move from a founder-led company to a company led by a management team. A core team with the power to make decisions without leadership controlling them or micromanaging them will help the organization grow. This will be vital as you continue to transition the business.

Transitioning a family-owned business to a management-led company is more than just a structural shift: It’s a sensitive transformation that requires a thoughtful and empathetic approach. The legacy of the family, the values that have shaped the business, and the personal relationships with employees and customers all contribute to the company’s unique identity and success. A transition that follows the guidelines above can help build trust, preserve the company culture, and ensure a smoother handover, leading to a thriving business even in the hands of new leadership.

If you are thinking about transitioning your business, reach out to Amplēo. Our experts can help you through each phase as you navigate the financial and HR challenges that go along with it.

This article features information from the speakers and presenters at the 2023 Ampleo CFO & Growth Summit.