What's the best way to transition a family-owned business?

The entire American population and economy have a stake in the smooth transfer of family owned businesses from one generation to the next, or out of the family altogether. USA Today reported, 

Family owned small businesses are the backbone of our economy. They provide 55 percent of all jobs in the U.S. and 54 percent of U.S. sales according to the U.S. Small Business Administration.”

Let’s explore some of the issues involved in generational transfer:

THE PERSONAL

A family-owned business is a disaster in the making if the family members either don’t like each other or have trouble working together. And it happens all the time, when money, authority, responsibility and how all are divided become subjects of conflict.

An example: In 2016, a West Chester, Penn., family-owned construction company saw a TV script-like wave of charges and counter-charges flying between family members. The chief executive of a 90-year-old construction company was arrested and charged with felony theft for allegedly stealing from the company. He turned around and sued his brother, the company’s CFO; his father, the company founder’s son; and the company itself.

Family relationships sometimes don’t survive working together. That isn’t to say there must be universal agreement on everything at all times. But there’s a difference between differences in approach and animosity stemming from familial jealousies or strains.

Before any generational leadership or ownership transition is undertaken, these questions must be answered, honestly: Can we work together well? Do we share the same vision for the company? Are we in sync in terms of a strategic plan and the tactics to fulfill the plan? Can we overcome differences of opinion, position, or authority?

Knowing the answers can determine a company’s future before it arrives.

THE MANAGERIAL

Start early, with  a plan. A plan goes beyond grooming the next generation to take over. Grooming is pointless if the individual being shown the ropes either can’t do, or doesn’t really want, the job. Take time to ensure the person-to-assume-command truly understands the micro and macro aspects of the job. Just having the same last name isn’t enough.

Assuming the next generation wants the role and appears to be capable of the task, put in writing an agreement that spells out the who, what, when, where, how, of a company’s generational leadership transition (more on this below).

This protects the now-in-charge offspring who doesn’t do things the way daddy might still want them done. It protects siblings from each other. It theory it should establish a situation in which everyone understands and accepts their roles, thus also protecting everyone from each other.

OTHER KEY ELEMENTS OF A PLAN:

  1. A phase-in of transitioning relationships with customers, clients, vendors, and other business-related publics with which the company does business.  For most small and medium-sized businesses, business relationships are fundamental. An abrupt change creates uncertainty: is the company in trouble; is the founder ill; did someone win or lose a power struggle? People who have money on the line want to feel confident in the choices they make. Enabling the next generation to demonstrate – with a strategy at work - its capabilities will build such confidence.   
  2. Define organizational structure. A single individual taking the reins is less problematic than several family members having roles within the corporate hierarchy. Take this to the bank (or the courthouse): anything left undecided will very likely become the fault line on which the relationship cracks. Who will be in what box on the organizational chart, and how will that be decided, is an indispensable aspect of this process. The higher the level of agreement on whose name is where, the better. Another element is a succession plan that will move names from one box to another, with acrimony or argument.
  3. Have an outreach component to employees. It’s important that employees look at the incoming leadership generation with optimism about where it will lead the company on which their livelihoods depend. Financial considerations: how will family members be compensated? Money, along with power within the company, has the greatest potential for constructive collaboration or destructive dispute.

This extends not just to the generation taking over the business, but to the person or persons passing it on as well. How much do they want for the work they put into the company over the years, and will it financially handcuff the successors? Clearly, a generational transition is more complicated than it might immediately seem. Find yourself a lawyer experienced in this field. Talk to financial advisors and accountants about the nuances of the financial parts of such a transition.

The sooner you begin the greater the chance the changeover will work, or not. Either way it’s better to have the answer sooner than later.

 I have a family-owned business and   I'd like to talk to a CPA about future ownership planning.

 You may also be interseted in reading more about succession planning for your business

Tagged Business, Family Business, Small Business, Small Business Accounting