Transitioning the family-owned business

April 1, 2007 By    

Family-owned propane companies are significantly more complex in their organizational dynamics than the traditional “mom and pop” label often used to characterize them.

Carl Hughes
Carl Hughes

In fact, with three types of stakeholders of family, shareholders and management, the family-owned business is often more complex than the investor-management makeup of private or public investor-owned organizations.

A simple way to view the groups of a family-owned company is in the following diagram. It shows distinct and overlapping stakeholders of management, shareholders and family. The areas of common interest vary widely between family-owned propane enterprises. The more aligned the interest of the group, the more the circles overlap.

Watch for transitions

As family businesses evolve and change, the interest of the three groups change. These are times of conflict, struggle and stress. They may come as a long-term trend arrives (e.g. the aging of the founder) or when a key stakeholder takes some form of abrupt action (e.g. a large shareholder demands changes in the business).

For the sake of this discussion, I have identified four key stages of change for the family-owned business to offer insights to the next transition in your company.

Stage One – Propane startup with a single entrepreneur: In this simplest structure, the management, ownership and family are one. It is a launch phase of intense growth gaining customers and building a base.

Stage Two – Continued growth adding customers, setting tanks, adding employees and beefing up delivery capabilities: This is a maturing management team with family – possibly sons and daughters – included. It is more complex, with diverse family member interests involved. There is greater potential for family and management issues.

Stage Three – Continued wealth creation and stable growth: This stage may also include retirements for the founder and identification of successor management. More added complexities. Conflicting shareholder needs arise. Some may want liquidity, while others want to reduce risk and pay down debt. Yet management still wants to grow and take on more risk. Issues arise between family and non-family leadership.

Stage Four – Multi-generational family ownership: In this stage, the founder has passed on, there are inactive investors, partial non-family management and more complex operational issues. Plus there are blurred family lines with some involved, but most not involved. Wealth management has become a big issue. This is the most complex structure. Issues abound on all fronts. Professional management clearly sees a different path from passive risk-adverse shareholders, many of whom have no understanding of the business. Estate and inheritance issues are common.

Often the family business fails to recognize the transitions that have taken place in its company and is not prepared for the inevitable ones ahead. Conflicts linger and are not understood. Productivity falters, motivation and morale decline. Conflict is ignored – not uncommon for families, but disastrous for the business. Momentum is lost and opportunity and resources are wasted. Company values decline.

Typically the family simply attempts to find a replacement for the single leader with a succession search. These mostly fail because they seek to resolve the more complex issues with a simplistic and wrong solution. Others in these situations make rash, emotional decisions that are not in the best interest of any of the three groups.

How to prepare for transition

First, recognize that your family-owned propane company will continue to evolve. Pay attention to the stage you are in and anticipate what future transitions you will encounter.

Second, as you transition, recognize the process for what it is. It will be stressful, but the conflict is natural and part of the process.

Finally, as you go through these transitions, create a process to navigate through the times. Hire a trusted outside professional with experience in aiding family transitions, and be sure to incorporate this process permanently into your company’s strategic planning.

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