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One of the most difficult issues now facing family-owned home furnishings businesses is that of succession. The challenge facing these companies is how to turn the business over to the next generation with a minimum of family stress and maximum financial security for everyone involved.
This article won’t take on the financial aspects of this issue. Owners would be well served to employ the services of a professional, registered financial planner to ensure that succession decisions are properly structured financially to meet the best interests of all parties.
Operational business issues that affect successful succession are every bit as important as financial issues. Unfortunately for many businesses, these operations issues can be difficult to approach. For every well-planned retail home furnishings company succession, there are three in which families are headed for difficulty. Here are the essential issues that often stand in the way of a smooth succession:
The business is too owner-centered today and not structured to change.
There is no firm timing for the transition.
The business is not profitable enough to fund a buy-out or to fund the current owner’s retirement.
There is no long-term business strategy to optimize revenue generation and growth to secure future financial health.
The younger generation is not adequately prepared to handle all business aspects.
Owner Centered Businesses
Businesses that cannot operate exclusive of the owner generally have lower sale value than businesses that are structured to operate profitably without the owner’s day-to-day involvement. When owners define themselves by their businesses, it is unlikely that they will be able to easily withdraw under any circumstances. Bringing their sons or daughters into this kind of situation is always fraught with family anxiety.
In owner-centered businesses, all decisions are made by the owner who is often a "beneficent dictator"; a well liked but dominant personality. Children may be in awe of the parent who fit this mold and these parents generally do little to change the status quo. Businesses of this sort operate profitably because the owner is an inherently talented entrepreneur.
Another difficult situation arises in businesses where the owner’s name, reputation and accomplishments are central to the business’s success (a high-profile interior designer, for example). Transference of the public trust to new owners is difficult if not impossible in these businesses. When the original owner withdraws, the business ends.
To prepare these kinds of businesses for sale or succession (could be the same thing) it is necessary to consciously remove the owner from the center. To fill this void, the business must develop (or purchase and implement) systems that operate the business and help control the financial aspects as well as merchandising, sales, operations and marketing. A first step is to develop an operating budgeting process to bring the disciplines of financial control to the company.
There should be a management team in place or in development consisting of all succeeding family members and any employee managers who will be central to continuing the company after succession.
Next, the company organizational structure should be divided into its highest level aspects such as finance, merchandising, sales, operations, marketing and facilities. Each area should be assigned to members of the management team according to their experience and special interests or talents. Once formed, the team will make all decisions and undertake all strategic initiatives under the auspices of the current owner. In this scenario, the current owner consciously becomes the mentor for the management team and the facilitator of the succession process.
Timing the Succession
Planning the timing of succession is most difficult. Owners often feel that the next generation is unprepared to take over; that their sons or daughters don’t have the same work ethic that they do. Often, this goes unstated, laying quiet, just beneath the surface of a cordial family relationship. Usually, on deeper analysis, the cause of this problem is that the owner won’t give up power or authority. The result is that the younger people have little challenge or sense of true ownership, yet they are well compensated so they stay around.
Putting a time limit on the succession – a final retirement date – is important because it brings the need for development into sharp focus. The total amount of time required to get the company and the people into condition for succession depends on the company. It also depends on the true goals of the new generation, their commitment to the company and the financial viability of the business. However, it would not be too conservative to say that a minimum of three to five years might be required to make a financially sound transition.
Owners who cannot put a final date on their retirement are putting the next generation in jeopardy by stringing them along under the illusion of ownership while never truly allowing them to fully develop as leaders or entrepreneurs. Really in jeopardy, however, is the financial stability of the family as well as the funding of the original owner’s retirement. There are a lot of second generation people working as employees for others who could have been in their own business had there been better planning and thought put into succession.
Most furniture stores are low profit operations. The average family-owned, single location store puts no more than 2.5% on the bottom line. While we’ve seen the full range of performance from negative numbers to as much as 15% net profit, it is obvious from the average number that the low profit image is accurate.
In order to successfully fund the old and new generation’s lifestyles, company profits must improve significantly, rising to the 10% range. This level of profits is required to allow for continued capital investment as well as owner compensation. It is this area of management that ensures family wealth for future generations.
Improving profits requires that profitability be made a company strategic initiative and that the three major components of the profit equation, revenue generation, gross margin and expenses be carefully planned and managed. This is a classic responsibility of the management team with each team member having accountabilities in one or more of these key areas and is held accountable by the team (who represent all interests in the company). This issue leads to the next major topic in succession planning:
Strategic Initiatives for Profitability
At any given time there are dozens of possible strategic initiatives a company can pursue to improve performance. They range from opening new stores, remodeling old locations to buying new trucks, computer systems or making human resource investments to improve long-term performance. Most companies have no plan in place to do anything. This is partly due to the lack of profits, but also due to simple inertia by owners who are comfortable with the status quo.
When there is some kind of strategic initiative planning in place, there is too often no tie-in to long-term company profitability and no management initiative attached to the strategy for carrying benefits forward and leveraging investments into profits. It is too often a matter of "let’s do this and see what happens" – even for the most aggressive initiatives.
Establishing a list of possible initiatives and assigning priorities is another good job for the management team. This approach will allow varying interests in the company to gauge the affect on their areas of any initiative. It will also provide an ongoing management accountability system for ensuring future return on all strategic capital investment.
If succession is 5 years in the future the planning period for profitability improvement is clear – it’s 4 to 5 years with lots of reviews and revisions along the way. The profit goals will be clear to everyone and the management team will all be working toward this common goal. The company’s work will be in alignment with the owner’s vision, which should be the underlying purpose of the company in the first place.
Getting the New Owners Ready
Competition in the modern marketplace requires skills that were not necessary, or even heard of, in past generations. Competition is keener and consumers more sophisticated. Today’s newest generation with young families have never lived without being on line, never owned a record, used a typewriter or ordered anything that took more than a few days to arrive. Managing in this new environment requires that new business owners need to know all that their forebears knew plus a whole lot more.
Training the next generation to lead requires deep immersion in all aspects of the business, one at a time. Managers must develop a deep enough understanding and command to be able to train someone else. This kind of immersion can easily take a year or more per aspect. For example, experience has shown that a year is required to master the intricacies of sales management to truly maximize revenue generation and another year is needed to fully understand the science and the art of merchandising.
Leadership skills must be learned, and these are often difficult to acquire. Organizational management and development is a current management art/science that new-age managers must know if they hope to someday either sell or turn the business over to yet another generation.
It doesn’t matter whether you are getting the next generation ready for succession in 5 years or 20 years, it is important to start developing the skills of the people who will be running your company in the future. Only then can young men and women just coming into the family business feel deeply connected to the company and see it as a viable long-term, lifetime endeavor.
To maintain commitment and develop a high performance ethic, give them full responsibility for one area early in their career. Let them "live" there for as long as necessary so they can become experts in all facets of the discipline. Allow them to be responsible and to understand accountability for performance in their area.
Accountability means simply this: Develop a goal, based on quantitative analysis wherever possible, and a time frame for achieving it. Measure along the way and make operational adjustments at the end of the defined time frame to see whether the goal has or has not been realized. If the goal has been realized, then develop the next level goal. If not, then explain the reasons, determine whether or not the goal is still reasonable and relevant, adjust it if needed, remove any systemic roadblocks and develop a new time frame.
In companies where there are effective management teams, each team member has this kind of accountability to the team for achieving company goals. For young owners (all owners for that matter) this sense of accountability is often missing. The result is that important initiatives fail because there is no compelling company structure to make them succeed.
In the furniture industry, where so many companies are family owned, high performance organizations are rare and most companies are mediocre performers at best. These poor performers don’t capitalize on the true potential that exists for profitability and growth. This is evidenced by the fact that it is considered acceptable to make a sale to as few as 25% of the potential customers who shop in our stores.
Bringing the next generation to a higher level of performance requires conscious development and a commitment to training and strategic planning. Planning for a successful succession requires looking strategically at all aspects of the business and ensuring that new owners are ready for the challenges they’ll surely face.