If I Were Taking Over a Family Business Tomorrow

If I had to take over a company, where would I start?

I've come to ask myself whether taking over a family business is a path I'd ever consider. My cousin is on that path right now, in the family business of one of our uncles, a frozen meat and fish wholesaler here in Switzerland.

Since I started Dawn Ventures, where we work with family businesses on new growth, I meet many successors at that point. A lot comes at you at once, and it's hard to know where to begin. A few weeks ago, one who had just joined her family's company told me she had done exactly what you're supposed to do: she asked every department head for ideas and wrote them all down. "I now have an endless project list. And the question is: what, and how?"

One Insight

If I had to take over, I would go through six steps, in this order. What each step looks like depends on who you are, how big the company is and how mature it is in its lifecycle.

1. Define your role before you collect ideas

Most successors end up in one or more of four roles:

→ Operator: you run today's business and modernize it.

→ Builder: you build a new business next to it.

→ Investor: you invest family money outside the company.

→ Owner: you set direction from the board of directors and let others run the company.

Many wear more than one hat, and as an owner that is normal. In the day-to-day operations, though, I would hold only one.

To choose, I would ask myself three questions. What does the business need? What do I really want to do? And what skills do I bring? A role that covers only what the business needs gets done without energy. A role that covers only what you want gets no support. And a role that doesn't fit your skills puts both at risk.

A successor in food retail I met recently wears two hats. She holds an operational role in the family company. Next to it, she invests in food startups deal by deal, as part of a syndicate, with the family's network behind her. Both fit the business, and both fit her.

Then get your role agreed by the family, the board and the generation before you.

Your family will also have expectations of your role. That is a conversation worth having early, and a succession advisor can help. Some of our senior advisors do exactly that.

2. Look inside and outside the company

Here, successors from outside the family have a leg up. Before an outside buyer takes over a company, they do due diligence: a careful look at the numbers, the customers, the market and the risks. Family successors often skip this step, because they grew up with the company and feel they already know it. I would do the same check an outside buyer would.

Inside, I would look at four things:

→ Business: what we sell, to whom, and which products, customers and regions bring the margin, not just the revenue.

→ Numbers: where revenue and margin have grown or declined over the last five years, and how much money we can put into something new.

→ Capabilities: what we do better than others, and what would be hard to copy, such as know-how, customer relationships, assets or brand.

→ People and family: who carries the business today, what the family wants from it, and how much risk it is willing to take.

Outside, five more:

→ Market: is it growing or shrinking, and where is the profit moving?

→ Customers: what do they need today that they didn't need five years ago?

→ Competitors: who is new, how do they work, and what could replace what we sell?

→ Technology: what are AI and startups changing in our industry?

→ Regulation: which new rules are coming, and which could hurt us or open a door?

Then put both sides together. The best opportunities usually sit where something you do well meets something that is changing outside.

How you do this depends on size.

→ In a smaller company, much of this knowledge sits with a few people, but rarely in one place. Bringing it together takes a few focused weeks, and an outside view helps you see what you have stopped noticing.

→ In a bigger company, do it for each business unit, with a small team, and bring in outside help where you lack the time or the distance.

3. Choose your growth routes

Growth usually comes from three routes. Take a food wholesaler as an example:

→ Organic growth: selling more of what you already sell, to new customers or in new regions. For the wholesaler, that could mean supplying restaurants in a neighboring country. It's slower, but the risk is low.

→ M&A (mergers and acquisitions): buying another company for its customers, products or people. For example, buying a smaller importer. It's fast, but it takes capital, and integrating the company takes work.

→ Innovation: building something new. That can be a better process, a new product or a whole new business, such as an online ordering service for restaurants. It can sit close to what you already do or far from it. Steps 4 and 5 are about this route.

Most companies use a mix. The real question is which route leads.

→ A smaller company usually gets one route right before adding a second.

→ A bigger company can run all three at once.

4. Close to the core: renew what you already have

By "core" I mean the business that pays the bills today. Close to it, your experience helps. You know the market, the customers and the work, so you can judge an idea with a business case: a simple calculation of cost, revenue and payback.

Here I see three options:

→ Modernize the current business from the inside.

→ Build your own AI competitor next to it.

→ Add new products and services for the customers you already have.

The second one needs a word of explanation. Building your own AI competitor means setting up a new, separate unit that sells the same things to the same customers, but works the way a new AI-based competitor would: new systems, new people, no old habits. The point is to test, outside the old structures, how your business would work if you started it today.

Böllhoff, a German screw distributor, did this. They took a small subsidiary that makes custom screws and rebuilt its systems from scratch. AI now reads customer requests, so a price quote that used to take one to two weeks should go out almost immediately. The first version took three months to build. We told the full story in No. 63.

For ideas, I would look in three places:

→ From the top: what your strategy says the company needs.

→ From the teams: what employees see every day with customers and in operations.

→ From outside: talk to partners, competitors and startups. Often you can start as a startup's customer before you build anything yourself. Or get someone like Dawn Ventures to look at your portfolio and the signals in your market.

One place is rarely enough. A family-owned industrial company we spoke with first asked its employees for ideas and found it didn't have many good ones.

5. Beyond the core: set aside money for a few bold bets

Some people think they don't need to look beyond the core. They are growing, or they believe their market will never change. Many banks and wealth managers still think that way. Kodak and Nokia thought so too. I would always be prepared.

"Beyond the core" means new markets or businesses where your company has little experience. There, you have no history to judge an idea against, so a business case would be a guess. Building new businesses works more like a numbers game. You start several small, cheap tests, stop the ones that don't work, and put more money only into what proves itself. How to decide when to stop is the subject of No. 62.

The share of money can stay small. A 2012 Harvard Business Review study of large companies found that firms often split their innovation budget roughly 70% close to the core, 20% next to it and 10% far beyond it. That last 10% delivered about 70% of the long-term return. These were large companies, not family firms, so take the direction, not the number.

→ In a smaller company, that may mean one or two tests a year.

→ In a bigger company, it can be a separate unit with its own budget and the authority to make its own decisions.

6. Invest with its own strategy

If the family also has money to invest, that money needs its own strategy, separate from the business. It can go into funds or more classic investments. Or it can go directly into individual companies. We call this direct strategic investing, and it is the more entrepreneurial route: you choose companies that fit your business, your network and what you know, so the investment can also help the core. At Dawn Ventures, we have started looking into it more closely.

Whichever route you choose, the rule is the same. Whether the money comes from the family or from the company itself, investing it needs a strategy, not a series of single deals.

Bottom line: Taking over a family business is a tough job. You take over a history, a legacy and a lot of pressure. But it can also be a great step up: someone has already proven the model, and you get to grow it.

One Question

What is your role, and what is your ambition?

One Opportunity

Know a successor who just started and already has a long list of ideas, or doesn't know where to start? Forward this to them.

Until Thursday in two weeks,

Lisa