Successful Family Business Transitions
ERVING CENTRAL MARYLAND'S ACTIVE LIFESTYLE 50+ COMMUNITY
Financial Supplement
by Ross Adams & Patrick Ring
Ninety percent of the fifteen million businesses in the United States are family businesses. Statistically, seventy percent of these firms will fail to make the transition to a second generation of family ownership, and of those that do, less than half will make it to the third. The seeds of success or failure are often sewn before the owner even begins to think of it as a family business. So, if you have a business, start the process.
Some of the common issues that should be considered before and during a transition are outlined below. In reviewing them, keep in mind the fundamental need to balance the needs of the business with the (often confliction) needs of its owners. If this one principle is ignored, a family's hopes for a successful transition are seriously impaired.
The needs of a business are relatively simple: management and capital. Most unsuccessful transitions arise out of a mismatch between management's objectives and the objectives of one or more of the firm's owners. Such mismatches should be dealt with quickly, because they tend to fester and resurface until they're resolved.
Should the business be retained or sold?
Is it an attractive investment? Does it have a solid, sustainable competitive position, or is it vulnerable to new technologies or more efficient distribution mechanisms? Does it offer better returns, after adjusting for risk, than other investments the family might make? Is competent successor management available and interested? (At this point, it's not necessary to identify individual managers; but you must be comfortable that management is available and affordable). Can the retiring generation afford to leave its capital tied up in the business? In many cases, the business is the founder's nest egg, which means that his income requirements during retirement must somehow be met from the business. Depending on the company's position, this may suggest that the business has to be sold, or, if the owner has sufficiently high risk tolerance, retention or an installment sale to family members may be possible.
Leadership Succession
Unless he works for Nordstrom, which has just named six fourth generation family members to the post of Co-president, today's business owner is likely to have to select a leader from a group that may include siblings, cousins, in-laws, insiders and outsiders. The need to make a choice, however, is clear, as is the need to allow time for learning; mentors; and possibly, the establishment of a board of directors.
Finally, the business owner must avoid the tendency to pass the reins and then hang around, thereby allowing employees and opportunity to circumvent the newly established line of authority.
Transfer of Ownership
Many, if not most, families address ownership transfers with an eye toward fairness. In the context of a business, equal share holdings often lead to dissension or even paralysis. Consider, instead, vesting control in the hands of those active in the business, while providing an equivalent economic benefit to other family members. Finally, tax issues can greatly impact the success or failure of a transition. Income gift and estate taxes and the associated liquidity requirement must be addressed thoroughly before the implememtation of a plan. Keep in mind, however, that taxes are a factor to be considered, rather than a driving force in the development of a successful transition.
Summary
Begin planning early for the transition of your family owned buseness. Determine what the business needs to remain healthy and competitive, and balance those needs with the needs of both the current and future owners. If the business is to be retained, focus next on leadership succession and then on ownership succession. Consider your risk preferences, the impact of taxes, and your needs for liquidity.
Ross Adams and Patrick Ring are Principals of The Baker-Meekins Company, which specializes in family business strategies.