I grew up in and around my father’s retail clothing business and started working there at the age of 12. While we followed a path similar to most parent-child business relationships, nothing prepared me for the struggles involved with my father’s leaving without a retirement plan and then returning to the business after an extended absence.
After my father moved away, he retained ownership and I paid for his retirement out of ongoing operations. There was no stock transfer when he left the business and during his absence I restructured the company and made several changes in how it was run. In this process we experienced a year of significant but anticipated losses. As a result, he returned after two years to resume running the company, assuming that it needed his input. At the same time, my restructuring returned the store to profitability and my father ran the company as he had in the past, recreating some of the problems I had fixed. This time his departure was based on a conversation we had that ended with, “either you go or I go.” Luckily we eventually mended the damage and had a fabulous relationship for the remainder of his life. But the question always lingered as to why we had to end up with that conflict.
Building a Planning Team
A carefully prepared business plan will help direct the owner and his or her family to achieve many objectives and create a workable and smooth exit strategy. Most family business owners say their greatest concerns include, sustaining or creating family harmony, balancing the interests of active family members and those who own stock but don’t work in the business, protecting the interests of key non-family employees and preserving the fruit of years of hard work. Being able to leave a successful legacy and watching it prosper is a strong motivator to complete this often-difficult process and leave the company prepared for the next generation of owners.
Simply handing over the reins to a favorite family member often results in inadequate leadership, unhappy sibling relationships, confused employees and a weakened organization. If that’s the extent of planning, chaos will almost certainly prevail. Therefore, open discussions with a succession team made up of family members, key employees and advisors as to how and when one will leave the business are almost mandatory.
Because it takes between five and 15 years to properly prepare someone for leadership, the earlier a team is chosen and the process begins the better. The time frame might also depend on how long it takes the participants to gel as a team and whether financial resources exist for hiring consulting advisors.
This team should consist of family members in the business who might be involved in the company’s future management; family members not in the business (more critical than you might think) so they can be educated as to why things are happening as they are and key non-family executives (these employees sometimes have a deeper understanding of the problems and opportunities facing the business). The team would also benefit from a facilitator to help keep the process moving along as well as a legal and tax planning specialist or financial advisor to make sure financial products are properly designed to fit the plan.
Setting the Plan in Motion
Once the team is assembled, it will have to outline the issues involved and define some goals for making the transition smooth and successful. The following is a short list of questions that need to be resolved in order for that to happen:
- Should the business be sold or should it be kept in the family? The owner’s finances, the absence of leadership or an offer too good to refuse could determine the answer to this question.
- How much money will the new retiree require annually, for how long and where is the funding going to come from? The more time one has to plan for the cash flow to support the retiring owner, the ongoing cash requirements of the business and the financial security of the next generation (as in life insurance and retirement plans), the more chance the plan has of succeeding.
- Must every family member be offered a job? By defining requirements for working in the family business, those incapable or unwilling to perform will not end up on the payroll and undermine the rest of the organization.
- How should we evaluate and pay family members in the business? By defining performance and compensation, you avoid the issue of unfairness.
- How do we select the next leader of the business? This is a tough question in some situations as sibling rivalry can come into play. It requires a great amount of thought and working with the right advisors. However, by defining the requirements of the next leader, the personality contest is minimized.
Some other questions that will need to be addressed are: Should in-laws or other family members be invited to work in the business? When and how should leadership transition take place? What are the obligations to the community we do business in? What philanthropic opportunities should we consider and how does this help educate the family about the role of money?
As the succession team moves the plan ahead, the company’s future leaders must know what is expected of them while the retiring owner gets a chance to observe them. This is not to say that siblings should be pitted against one another, but some form of future leadership needs to be defined. Potential leaders should then be guided and involved in a development program.
Resolving Family Questions
In some cases, especially when the family is a large one, there also needs to be a separate process for resolving disagreements so that family discussions don’t turn into feuds and disrupt the business. The creation of a family council independent of the succession team can restore the balance between business and family life. Many family arguments spill over into the business, causing drops in productivity and a loss of respect from the employees for certain family members. To achieve a better balance between family and business, elevate the family to the status it deserves by forming a family council.
The council works to educate family members of their rights, privileges and responsibilities vis-a-vis the business and its succession. And it can be used to develop the family’s investment strategy. Its very existence is a signal that family matters have a top priority.
It is not that many estate and succession plans are flawed. Rather, the business owner should question if there is an opportunity to make the existing plan better. By approaching this difficult process with a game plan there is an opportunity to leave a great legacy and to make it worth the effort. Families that have taken this journey are greatly rewarded in many ways. But most importantly, they’ve avoided the chaos, fights and disillusionment that rage in families that have not planned their journey.
David Cohn is a family business planning strategist in Englewood, Colorado.
