The traits that made owners successful up to this point can work against them when they look to pass on or sell the family business. This article considers what it takes to succeed during a family business succession and the four most common challenges that may trip owners up.
If the thought of transitioning out of the family business you've spent years of your life building causes you to feel a little stressed and anxious, take a deep breath. Relax. It's perfectly normal to feel this way.
The feelings you’re experiencing are likely due to the success you’ve had up to this point. The idea of exiting your business is often in opposition to who you feel you are and what made you successful in the first place.
But why is this? And what keeps successful owners from finding success and fulfillment in passing on their business to the next generation? Even more importantly, how do you achieve a life of significance and satisfaction beyond your role as owners?
The Hidden Impact of Self-Identity on Family Business Succession
The answers to these questions have little to do with the actual exit and everything to do with your success and your identity.
When entrepreneurs start a business or take over an existing business, they put their reputation, career, financial security, relationships, and identity on the line.
Challenges come and go as the business grows. As owners conquer each new challenge, the entrepreneurial traits necessary to build the resilience required for long-term success are reinforced.
Family business owners experience forces that shape their identity in ways others will never know. Every experience, every success shapes an owner's self-identity and etches that identity deeper into their inner being. As the business grows, the symbiosis between owner and business entity grows.
The Unfortunate Truth About Successful Business Transitions
Many family business owners think that they can own and operate their family business for as long as they desire and that they will be able to exit on their timing and terms.
Research, however, tells us that one of the most significant challenges middle market owners face is that 70 – 80% of their businesses fail to sell.
One of the most consistent reasons deals never get to market or fall out during the transaction is that owners are poorly prepared for the psychological experience
In a study of three hundred businesses that sold, three-quarters of the owners were dissatisfied with their life beyond the business twelve months after the sale or succession. Based on this study and studies by other researchers, we learn that only around seven percent of business owners finish well and exit on top.
So, what does it take to beat these odds and achieve this transition success?
An Overview of the 4 Phases to a Successful Transition
Bo Burlingham's book Finish Big: How Great Entrepreneurs Exit Their Companies on Top contributed significantly to advancing our understanding of the owner's emotional journey.
After interviewing a wide range of CEO-owners, Burlingham identified that exiting on top was not just about getting the best terms, maximum value, or even completing a transaction.
Owners who had a successful transition had a multi-year exit process during which they had successfully navigated through the following four exit phases to a life of significance and satisfaction beyond the business:
Exploratory: Investigating the many possibilities, doing the necessary introspective work, and deciding what you do and do not care about in an exit.
Strategic: Learning to view your company as a product and building in the characteristics to maximize its value.
Execution: The process you go through to get a deal done regardless of the type of exit you want.
Transition: It begins with completing the deal and ends when you're actively engaged in whatever comes next.
While all four phases are essential, the significance of the Exploratory Phase cannot be over-emphasized as it sets the stage for the outcome of the CEO-owner's ultimate liminal experience.
Unfortunately, it’s also the stage fraught with the least understood, most veiled, and intangible aspects of the process. This is because it’s rooted in the inner world of the family business owner, and this inner world is the most significant force that keeps owners from reaching their full potential.
The 4 Challenges Owners Face in Business Transitions
The four most common challenges that hold family business owners back from fully engaging in the Exploratory Phase are:
Challenge #1: Strengths Becoming Weaknesses
The things that made owners successful begin to work against them in transitioning the business.
Owners are known for a propensity for risk-taking, tolerance for ambiguity, the need for goal achievement, control, and innovativeness. All these strengths while crucial during the process of building a business, now begin to create blind spots.
These blind spots can negatively impact judgments and decision making, decrease motivation, and cause misalignment of goals. They sabotage the process creating an inability to let go of control resulting in owners feeling frustration due to being in a phase of the business cycle that requires little or no innovation to be successful.
Challenge #2: Problem-Solving Style Implications
The problem-solving style that an owner has used to build their business may not be required as they move towards exiting.
When successful owners consider an exit, their tendency to adapt their problem-solving style could get in the way of essential work needed to maximize the firm's value and prepare for a life of satisfaction and significance beyond their role as an owner.
Challenge #3: Psychological Castles & Motivational Driver Factors
Over time, as success and self-efficacy (or the belief that one can achieve their goals) increases, the harder it is for external voices to convince owners that there might be more to the picture than they see.
Owners are left living in a custom-built, self-reinforcing castle because it satiates their psychological needs for autonomy, relatedness, and competence. This can lead to a paradox of success – an insidious force resulting in the self-sabotaging of an owner's (and their firm's) best interests, goals, and desires.
One of the benefits of not falling victim to this paradox and choosing to go through an exploratory process is that often owners see the business's bottom line improve. As an owner's blind spots are revealed, self-awareness increases, and they experience different aspects of their personality.
Through this process, owners are often re-energized, and firms that have plateaued are revitalized, leading to better valuations. Owners also begin to alter their self-perception and their self-identity, better preparing them for life after the business.
Challenge 4: Role-Identity Fusion
Role-identity fusion is the concept of a person having blurred boundaries between their self-identity and the role-identity as owner.
In extreme cases, the self and role identities become completely fused, and the owner does not have a self-concept apart from their role. Owners with good role-Identity separation can move freely between their experience as an owner and their experience of themselves apart from their role.
Owners will find themselves somewhere along the spectrum from fusion to separation. Those at the end of the continuum who demonstrate strong separation will find leaving their role as owners far less demanding than owners at the fusion end.
Conclusion – The Solution Starts with Exploration
So, where do you begin to address these challenges?
The good news is that you already have. By taking the time to read this article, you have already taken your first step towards joining the seven percent of owners who had successful transitions.
Orange Kiwi understands that the exploratory process is neither quick nor straightforward and that family business owners may need a little help along the way.
Our goal is to give these courageous family business owners a competitive advantage for successfully navigating their exit journey. We do this through translating academic research into accessible, actionable insights owners can use to help them Finish Big.
To find out more, you can download our white paper on The Power of Exploration.