Forbes reported that 90 percent of family-owned businesses fail in the third generation. It might be worthwhile to examine one such case of a lack of succession planning and see what happened.
When companies fail it is frequently a combination of factors. But mostly, it’s just lack of preparation.
The bank was concerned about the business’ cash flow. The company had used its entire credit line and regularly wrote checks that exceeded its credit line availability.
When a company is short on cash, the first place to look is at profitability, not just overall, but at the unit level. What is the profitability of each product family, even each product that is sold, or each project that’s completed?
The company regularly wrote checks without regard to the amount of money that was in their account, overdrawing their account regularly. This angered the bank and gave them little confidence in the company’s management.
The son was interested in growing the business significantly. Being ambitious, he started quoting jobs with estimates between $10 million and $15 million, well in excess of the company’s annual revenue of $9.7 million. Despite the company’s technical expertise, it was impossible to show prospects that the company could complete projects of that scope. Preparing these estimates and pricing them took significant engineering staff time and yielded no business after a year of trying.
The son had an engineering degree, and was technically capable, but he didn’t understand the financial aspects of business, managing it on a daily basis, or managing staff. The father didn’t prepare his son for his role in running the business, because he felt that he could learn on the job. Unfortunately, he left town when he remarried, and left the company solely in his son’s hands.
Even in the best of circumstances, taking over and running a business is difficult work. If the new leader is unprepared, they lack the knowledge of how to move the company forward. Business management is a learned skill. Whether it be operational, managerial, or financial, it takes years to learn how to run a business successfully.
An experienced CFO has the financial and managerial experience to help run a business. In many instances, they provide mentoring to management to help them succeed in areas where they lack experience.
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