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Ask About Succession -- Part Two

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By | May 20, 2012

Dear Toolkit,

I'm the founder of a pretty good sized business I built up myself over many, many years. My wife is on my case to retire and let one or more of our kids take over. Any helpful hints on how to do this painlessly?

Thanks,

Dithering Dad

Here's the next installment in answer to your question about tips for passing the management torch on to your progeny. (And stay tuned for our last words on this treacherous topic!)

At the conclusion of part one of this series, we stated that conflict between the founder of a family business and his or her successor is a matter of degree. It's normal for some intergenerational conflict to exist.

In the worst cases, a "sandwich generation" effect may be visited upon the middle layer in a family business. A powerful founder's nominal successor is often responsible to and for the generations that precede and succeed him, especially in these days of longer life spans. By the time number one son gets the throne, number one grandson is already bucking for position. And Gramps may be more favorably inclined toward the grandchild since the little shaver (who by this time is already a man) is less of a threat to the founding father.

Founding fathers are more often that not conflicted about their successor sons. (It's too soon to know yet if this syndrome will carry over to daughters.) On one level Dad wants his son to succeed and make him proud and rich, but on another level he may see the son as a threat to his manhood and dominance.

The son who accepts the challenge of this ambiguity should be a well trained manager — of himself as well as others. He'll then be able to manage around the unbusinesslike emotional upheavals that can frequently be generated in power struggles. Leadership and communication skills will win the day if applied consistently. A true understanding of the feelings and motivations of the founder will enable the successor to deal rationally and effectively with them. After all, the founder spent his or her entire life building the firm and sees it as an extension of his or her self, which is only natural — even if it is a difficult act to follow.

The other side of the coin is, of course, the underprepared, uninterested, or lazy successor-elect. Sometimes the founder is willing and eager to give the business to the offspring but the child would rather be a marine biologist. Or, the child is anxious to get her hands on the business so she can get a classy company car and play golf every day since she'll be the boss. Or perhaps the child is interested and willing but hopelessly unqualified for the task.

Between these extremes are the majority of family business successions. Able founders need to pass along a hard-earned creation to able successors who have worked hard to become prepared to take on the task. There will be the usual number of differences of opinion and approach commonly found between generations and between co-workers of the same generation. These can and will be worked out mutually over time to the benefit of the individuals, the family and the business. Planning and communication are the tools these successful teams must use consistently.

Different agendas, which can so often gum up the works of a succession plan, can be avoided by communicating expectations in advance. For example, Fred Founder may have convinced himself that it's time to start handing over the day-to-day management to his son, Successor Sam. Sam's been well educated, has worked for Dad over the years and is enthused about finally getting a chance to run the show. The business is going well and there are no external problems on the horizon. Sounds like an ideal set up for a smooth transition.

Things hum along for a few months and Sam is making plans to refurbish and modernize in order to stay out ahead of the competition and in preparation for future expansion. Fred, on the other hand, has been looking at a string of race horses. He doesn't think of it as a hobby. It'll be an "investment." Who's going to get to set the agenda? Fred says "I earned it and I'm gonna spend it any way I like." Sam says "How can you expect me to keep this business successful if I have no working capital to plow back into it?" Not much of a contest here. Fred's gonna win - he owns it lock, stock, and barrel.

Communication of these apparently mutually exclusive goals could have enabled a satisfactory accommodation of both points of view, had it taken place at the outset of the transition. In this example, both Fred and Sam have good business intentions but the situation is bound to deteriorate into a useless power struggle that will set an irrational tone for all future relations between the founder and the successor.

Strategic planning can prevent situations such as this. The two generations need to sit down and define the mission of the business as well as that of the family. And they should redefine both periodically as circumstances, both internal and external, will change over time. The needs of the family and the needs of the business to achieve their respective goals may conflict from time to time, but these differences can be dealt with or managed around when they are identified during planning sessions.

The first issue to be discussed should be "can this business support all the family members who will be relying on it after the transition?" Then, ways of passing ownership without creating inequities, jeopardizing security or triggering excessive tax liabilities must be addressed.

(Be careful not to let tax planning control your decisions. A tax lawyer can make compelling arguments for strategies that can minimize estate and gift taxes. A CPA can be very convincing when suggesting strategies for controlling income taxes. But no matter how talented and earnest your professional advisors are, their limited specialties should not dictate your choices for your business or your family. There are indeed more important planning considerations than saving on taxes. Don't be bullied into compromising what's important to you and your family just to keep a few bucks away from the IRS. First determine the result you want, and then let the professionals find the most tax-efficient way to achieve that result.)

The agendas of non-participating family members must also be taken into account. The founder's spouse, for example, may feel she's entitled to some say in the matter of appointing a successor, transferring power and particularly in transferring assets.

Unresolved issues or misunderstandings in areas like this can cause severe problems down the road, particularly if the founder dies unexpectedly and is therefore not present to referee. In part three of this series we'll conclude our discussion of succession strategies.

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