By: Advocate Brokerage
It is hard to imagine a better legacy than passing a thriving family business on to the next generation. Unfortunately there are often stumbling blocks such as: insufficient preparation, sibling and inter-generational rivalries, incompatible ideas and/or visions. Add in the personal emotions that exist more in family settings and you can end up with a huge blockade to future success. The good news is that the transition can be made smoothly if the planning starts early and the family commits to making it work without letting feelings get in the way. Trust me on this; my family is years into the process and the transition is going well. As the second-generation principal of a 46-year-old family business, I’ve seen first-hand the issues that arise and understand what it takes to make it work. Start Early First, understand that this is a multi-year process. Mom just can’t announce one day that she’s retiring and hand over the keys to Junior. You might as well put out the going-out-of-business signs. Years, perhaps decades, in advance the older generation must take stock of what is to come and start a checklist of decisions and actions that must be made. Among its items:
Planning for the future – Building a Succession Plan The next generation must be exposed to all aspects of the business, early on. Before they can take the lead, they need to learn the possibilities as well as the problems. They need to be let in on the family’s specialties such as Dad’s special way of tracking sales and expenses, and understand Mom’s secrets to closing the deal. The path isn’t the same for everyone. Maybe the starting line comes early in life with a child helping the staff stuff envelopes. Maybe it comes after getting the MBA, when the next generation shadows department heads and learns to think critically and make sound decisions for the business. The key is to get the process moving. I know my brother and I took two different paths on the road to principal. Don’t Avoid the Issues The thorniest problems often are closely tied to the relationships – a couple of your kids really don’t like each other, a younger daughter is more qualified to be CEO than your oldest son, old rivalries and disappointments are rekindled in the transition process. Solve these problems now! Don’t turn over your keys, or do things that can’t be undone, while issues are boiling under the surface. Years of planning and work can be wasted when you head off to retirement and the office turns into a war zone. Your accountant and lawyer are vital partners in making sure the business entity transitions smoothly to next-generation ownership. They can help greatly to minimize negative consequences (such as an inheritance tax bill that would force a sale. Has the older generation gifted the business, or is the next generation buying the business from Mom and Dad?) Get them involved years in advance, so you can avoid hidden financial surprises. Formalization Once you are ready to move forward with your succession plan, you will likely need some outside help to define roles and responsibilities and help you plan and structure the company for the future. We recommend you hire an Organizational Consultant to work with your company to help ensure success in effectively transitioning the leadership among the generations of family owners. That is what we did and have benefited greatly from doing so. A few tips we learned:
Make the Hard Decisions Sometimes as you undergo the Succession Planning/Formalization Process it may become clear that the future you envisioned for your children just may not work. If that occurs, don’t be afraid to make the hard decisions. Maybe a fallback is to split off segments of the business to various children, you may need to bring in unrelated executives for key positions, or even fire one of your kids. Nobody wants to do that, but sometimes it must happen. In my business, the transition has been working well. My parents, the founders, remain active participants and decision-makers, yet they get to enjoy the fruits of their labors on the golf course in Florida for much of the year. Early on, they took stock of us kids, saw our interests, and made us a part of the plan. They became colleagues, mentors, business partners and problem solvers. They set the tone and the example, and both generations together made it happen. This year, the first of my children will go to college. I don’t know yet if he’s interested in the business; probably he doesn’t know yet. But as he and his brother get their education and formulate their futures, it’s a conversation we’ll have at the right time. We’ll see what works and what doesn’t, and if another generation will come on board. But this is a decision that is not up to us. And that’s another vitally important realization that family businesses must have: Those of the next generation may not love the work, and you have to respect that. But if they do, and they have that fire in their bellies that you feel upon unlocking the door every morning, go for it! Watching their success will be a success of your own.