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Gone are the days of simply passing down ownership of your company to a first-born child. This type of monarchic approach eventually led to the demise of many family businesses throughout history. However, sooner or later you will want to retire and, if you own a family-run business, retirement isn’t just a matter of deciding not to go into the office anymore. A host of questions arise – Who will manage the business when I’m gone? How will I transfer ownership? Will the business be able to survive, or will I have to sell it? These are the types of questions we help our clients at Kanaly answer as they face family business transition issues.
Succession planning, while often an uncomfortable subject to address, is an important priority for any family-run business. Unfortunately, fewer than 20 percent of our country’s family businesses engage counsel of any kind to assist them with succession planning, all the while over one-third of our nation’s businesses are forecasting a succession event in the next 10 years. As a result of Sarbanes-Oxley, the overall awareness of succession planning in the United States has risen in importance as a corporate governance issue. Countless financial strategies designed to assist in ownership replacement have given birth to such terms as installment sales, defective grantor trusts, business equity freezes, and voting trust arrangements. Without getting lost in a flurry of acronyms and theories, a closer look at the common myths and mistakes families face when dealing with succession will help shed light on the best way to handle it when the time comes. Determine Your Personal Strategy Often called the “golfing buddy next door” scenario, families can be attracted to the wrong strategy for their succession planning just because it worked for someone else. However, since a family business starts with the family, there is no such thing as an “off-the-rack” succession plan. This transition is not simply a document, rather it is a thought process backed up by documentation and strategies that are tailored to your unique situation – taking into account both finances and family dynamics. Your choice to keep the business in the family and the decisions you make along the way will have a tremendous effect on your family for years to come. It is important to involve them in succession planning discussions early on and to keep sight of the direction you want your business to grow. Family Owned Doesn’t Always Mean Family Run While your instinct may be to pass leadership of the company down to your children, it should not be a given. A family business need not be run by a family member. Leadership should truly be delegated to the best candidate, otherwise it can impact the ownership side of the equation. Be as objective as you can when examining all your possible successors and remember to keep in mind what’s best for the business first. In addition, many of the best family-run businesses have a family member hiring policy that includes requirements for attainment of educational and outside work experience prior to joining the company. However, not all family members are “qualified” to join the family business. Additionally, the idea that everyone in the family has to have an equal share doesn’t always apply. It may be best for the successor you have chosen to run the business to have a larger share of business ownership than family members not active in the business – even if your successor is not part of the family. Don’t Wait for a Life-Changing Event It’s true that people make time for what’s important and excuses for everything else. Common delaying phrases include, “I’m too busy growing my business and the kids are too young to worry about succession planning right now,” or “Dad’s not going to retire, he will just die at his desk.” However, when the topic of succession planning comes up because of a life changing event – heart attack, death, divorce, or simply because the next generation wonders when it will become “the next generation” – the scene is rarely properly set to handle the transition appropriately. The best succession planning starts early, years before the next generation even starts working in the business. Don’t wait until death or retirement, as that is too late to craft the process needed to grow future leaders. By working with us, you can expose your family at an early age to financial education, allowance management and pseudo family business responsibility. Starting early will allow you time to work closely with your potential successors, making sure that they have the proper training necessary and are qualified to take over your role. Avoid Fragmented Attempts Truly comprehensive plans initially separate the ownership transitional elements from the leadership transitional elements. Fragmented attempts over time usually do more harm than good and can create massive problems at the point of transition. You can usually transfer ownership within a family without moving leadership, but you can rarely transfer leadership without ownership. It is important to look at the leadership succession plan and then build the strategic ownership transition plan around it. Key thoughts to keep in mind are: l Your personal goals – What defines your success, hopes and fears about your business? l Review of family members – Evaluate their job performance and personality type, objectively. l Birth order, experiential and environmental forces. l The current structure of the business. The worst thing you can do with your decision to pass along your family business to the next generation is to put off succession planning. We can help ensure that you will have the funds needed for retirement and that the business you have built continues to thrive for generations to come. |
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