Generational transition is the process through which the ownership and management of a business are passed from one generation to the next. This phenomenon, especially common in family businesses, represents a critical moment for the continuity and survival of the company.
What is generational transition?
In essence, generational transition is the transfer of control of a business from the founder or current owner to a successor. This successor could be a family member, an internal manager, an external buyer, or an investor. The process involves more than just the legal ownership of the company — it includes the transfer of skills, knowledge, values, and company culture.
The phases of generational transition
Generational transition typically unfolds in several stages:
Planning:
This is when the entrepreneur starts thinking about the company’s future, identifying potential successors and defining the criteria for transferring leadership and ownership.
Successor training:
The successor is prepared to take over the company through a structured training path, which may include operational experience, mentoring, and coaching.
Transition:
This phase involves the gradual handover of responsibilities, with the successor starting to make key decisions, often alongside the predecessor.
Consolidation:
Once the handover is complete, the successor fully assumes the role of business leader and owner, consolidating their position and potentially implementing new strategies.
Why is it important?
Generational transition is crucial for ensuring the continuity of a business. When managed well, it helps the company continue to thrive while maintaining its identity and competitiveness. If poorly planned, it can lead to internal conflicts, loss of value, and in the worst cases, closure of the business.
This process is especially sensitive in family businesses, where personal dynamics can complicate matters. It's essential to approach the transition with a clear strategy, involve all key stakeholders, and often bring in expert consultants to guide the process.
What options does an entrepreneur have during generational transition?
Entrepreneurs have several alternatives for ensuring the continuity of their business. Here are the main ones:
1. Family succession
Passing the business to children or other family members:
The most traditional option is to hand over ownership and management to one or more family members, usually the children. This keeps the business within the family, but requires proper preparation and careful planning to avoid family conflicts and ensure the successors have the necessary skills. Often this isn’t feasible because no suitable family successor exists, or the available candidate is not considered appropriate.
2. Sale to third parties (M&A)
Sale to external investors:
If there are no family members willing or able to take over, the entrepreneur can sell the business to an external investor. This might involve selling to a private equity fund, another entrepreneur, or a larger company in the same sector.
Sale to a strategic partner:
Another option is to sell the business to a commercial partner or competitor, often with the aim of creating synergies and unlocking value.
3. Recruiting an external successor
Hiring an external young manager:
If no family members are available or capable, the entrepreneur can search for a successor externally. This could be a young, experienced manager who works alongside the owner before gradually taking over. This option allows the entrepreneur to retain equity while delegating operational responsibilities.
4. Management Buy-Out (MBO)
Sale to existing management team:
This involves selling the business to the current management team. A management buy-out can be effective because the leadership team already knows the business and can ensure a smoother transition.
5. Liquidation
Closing and selling the assets:
If none of the above options is viable or desirable, the entrepreneur may decide to liquidate the company, sell off its assets, and close the business.
Conclusion
Generational transition is a pivotal moment in the life of a business. It’s not just about transferring ownership, but also about a shift in leadership and strategic vision. For this reason, it requires careful planning and a structured approach to ensure the business continues to thrive.
The best option depends on the company’s specific situation, the entrepreneur’s goals, and the availability of suitable successors. Planning the transition early and with the help of experts can make the difference between a successful handover and a failed one.
