Apr 01, 2015

Be Prepared

Planning for the future of a family business

The central issue facing every family business, understandably, is succession. The business has been built up and is producing a profit, and some family members make a living contributing to the business. However, the time ultimately will come when the family business owner realizes that he or she cannot work forever, and must figure out what to do with the business.

Given that more than 65% of family businesses fail to transition to the next generation, putting forth some effort to get it right is important. When thinking of succession, keep these four goals in mind:

  1. Treat all of your children fairly. This includes those inside and outside the business. Keep in mind that fair does not necessarily mean equal. 
  2. Ensure family cohesion. As you go through the succession process, there are multiple minefields where misunderstandings can occur or harsh truths must be faced. In navigating this, one can inadvertently bump into feelings and fracture important family relationships. Everyone wants to avoid this. 
  3. Take care of non-family employees. Employees in family businesses many times feel like, and are regarded as, family. Many were there at the start of the company and helped the business become what it is today. Others have deep personal relationships with the owner. 
  4. Plan the estate. Wealth builds up through family businesses, and owners want to take measures that will preserve this wealth for themselves and future generations. 

Family business owners want to preserve the wealth that has been created by the business as well as all of the important relationships in their lives. It does not do any good to have the money, but not be able to spend holidays together as a family—and if there is not enough money to afford a turkey, it will not be a festive holiday anyway. 

When looking at a family business, understand that there are multiple overlapping factors in play: the family, the business and the ownership. The family business founder or owner is at the epicenter of this Venn diagram, referred to as a family business system. A system means that a change in one aspect can impact multiple areas. Imagine if someone got a divorce or died, and you can see how a change could influence many aspects of the business. 

Ultimately, every family business owner is faced with some basic options when thinking about succession: sell the business for the highest dollar value you can, pass the business on to the next generation, or install non-family management to run the business. 

The hope and dream are, of course, to have the next generation manage the business. However, this is not always simple. Indeed, in countries around the world, there are various phrases that all convey the same idea about a family business: “The first generation builds it, the second uses it and the third loses it.”

Tips for the Future

Here are some tips to help you address your family business succession to increase the odds of success.

  • Recognize that running a family business is difficult and the transition process is tricky. You need to make sure the business is running on all cylinders, but you do not want to hurt anyone’s feelings. Many family business owners either think everything will work out naturally, or simply ignore dealing with it to avoid uncomfortable conversations. 
  • Have those uncomfortable conversations. Sit your family members down and explain that there are unique challenges because your business is a family business. Family is about unconditional love and support, but business is about profit. The family needs to be aware of this. Make sure everyone is communicating openly and on a regular basis. I asked Steve Forbes at a conference why his family business was successful, and he said, “Communication is the most important factor.” He was seconded by Frank Holding Jr. of First Citizens Bank and McKay Belk of Belk Department stores, both prominent family businesses.
  • Start early. Studies have shown, and common sense dictates, that the more time spent preparing for succession, the greater the chances of success. This does not mean you need to nail everything down five years out, but it does mean you need to be regularly discussing where you are in the process. 
  • Professionalize the business. Install policies and procedures that everyone must adhere to, including family members. Review financials regularly. Create a family employment policy, including the hiring and promotion policy, determining who gets paid what, etc.  
  • Realize that just because someone is family does not mean he or she naturally is qualified to run the business. Yes, one day your heirs will receive your assets, one of which may be your business. But having the same last name as you does not mean that your children are interested in or capable of running the business. 
  • One of the final issues is the family business owner him- or herself. When someone has spent his or her entire life running a business, it basically becomes his or her life and identity. As such, many are reluctant to step back enough to let the next generation get its hands on the steering wheel. Excuses can run rampant. If you want your business to succeed to the next generation, make room for that generation to take on some leadership roles, make decisions and make mistakes. This does not mean the owner must leave altogether, but rather, give up the day-to-day responsibilities and focus more on longer-term strategic issues. 

Succession in a family business can be difficult. But if you realize this, have ongoing dialogue with your family, and put forth effort, there is no reason your business cannot stay in the family for generations to come.

 

About the author

Henry Hutcheson is president of Family Business USA. Hutcheson can be reached at 877.609.1918.

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