A few days ago I received a question from a reader who had seen an article in the Greater Fort Wayne Business Weekly titled ‘A clean break: Mike’s Carwash owners reorganise’. The article discusses a local, and obviously well known business, Mike’s Carwash. The business had been founded in 1948 by the Father and Uncle of the current owners, two brothers named Mike and Bill. The two brothers have decided to divide the business into two independent businesses as part of their business succession. Quoting Bill, “We’ve spent many months in discussions with each other and consultants who specialize in family business succession planning. This is a friendly reorganization that will lead to more growth for both of the new companies.”
The reader’s question was simply, is dividing a business as a succession strategy common and is it the best thing to do to break a business into two parts? Wouldn’t it be better to keep the business together as one?
This is a good question and a good example to consider how to grow a business across generational lines as families grow. To answer the question up front, ‘dividing’ the business is a common strategy and yes if done correctly can be an excellent way to sustain and propel business growth across generational lines.
One of the key challenges in succession, and sometimes a strong barrier, is the financial capacity of the business to support a growing family. As a business passes from one generation to another it must be financially strong enough to support the needs of the retiring generation as well as the new generation. Often this necessity has not been considered early enough and growth strategies have not been executed that allow the business to grow sufficiently. The outcome is one generation suffering financially to support the other or the succession along generational lines faltering and the business being sold outside the family.
First key principle, commence succession from the day the business starts and grow the business to support the needs of the growing family.
As the business is growing it is also important to keep one eye on the structure of the business, that is, the legal ownership and how the various businesses (if there is more than one) or the various parts of the business are inter-connected. You usually want to ensure that you separate businesses and assets that possess different risk profiles so the higher risk attributed to, for example, a trading business is not attached to a lower risk asset, for example, an investment property.
But the need for separation is also far more strategic. In building your business up you should try to have an eye to the future and consider various scenarios as to how you may separate and put back together the various businesses or business elements. There may come a day in which you want to sell off one business or business element or importantly for succession, there may become a time when you want to allocate the various businesses /elements across various family members. Just like Bill and Mike did in the article above. There can become a time in families where a greater degree of independence is required and this is best achieved by multiplying the business out. If the businesses are all locked into one structure and no consideration has ever been given how to pull them apart and rebuild them then effective growth and succession across generations can be problematic. This can simply be because no one has ever envisioned the businesses being separated and possibly because they can’t see the separate parts because they are all lumped in one.
Second key principle, build flexibility into your structures and businesses for future adaptability.
Third key principle, you never divide up a business but you may separate its parts so it can multiply more effectively as several related parts rather than one whole.
A final point worth touching on as a general business growth strategy, and an effective succession strategy, is parachuting. A new business being built under a different business model from its parent business can often be so stifled by its parent that it cannot breath and will not survive simply because it is different from the parent business. At times its almost like it is being attack by the parent as if it is a virus that must be killed off.
To allow new and different businesses to survive, find their own feet and grow, a good strategy is often to parachute the business off to its own structure and to find its own feet. Now put your succession hat on and image you have some younger generation kids in your business who are capable and have great ideas but just can’t seem to get anywhere in the existing business. If you have built a flexible business, then finding a part of the whole and parachuting that business off can provide the new generation with the freedom to grow and develop that business and to build their own empire. It is also a great way to allow them to gain valuable experience.
Fourth key principle, parachute businesses off to allow them a chance to create a new future for a new generation.
