Time to Startup!

The BizFilings blog covering business tips and trends.

Should Junior Take Over the Family Business?

Published on Feb 4, 2011

Summary

Read our article, 'Should Junior Take Over the Family Business?' at 'Time to Start Up,' the small business blog by BizFilings.
Is entrepreneur and author John Warrilow right when he said he believes, "business owners are engaging in a twisted form of child abuse when they pass their companies onto their children?"iStock_Blog_Image_2_ppl_gardening_opt There's one to ponder. But in reality, there are few experiences as rewarding as building a family business from the ground up and watching it grow into a proud legacy. But there are also a few things as potentially painful and emotionally draining as the retirement or death of the founder if he or she did not put a clear succession plan in place before heading into the sunset. When a small business is a key component of family wealth, the owner usually has a strong desire to perpetuate it in one form or another. But passing control of a family business from one generation to the next is the ultimate management challenge. The owner must deal with business, family, tax and estate issues when planning for the succession of both management and ownership. Any transition must preserve the continuity of leadership and it is most important that the succession of ownership and management be perceived as a process rather than an event. Much as some successors might hope otherwise, it's not a matter of deciding to retire at 4 p.m.next Tuesday and hand the reins to Junior. Succession is a process requiring planning, teamwork and constant reevaluation. Only 30 percent of family businesses survive into the second generation and fewer than 15 percent of them endure into the third - and the principal reason is the lack of a solid succession plan. A typical succession plan has two elements: the transfer of power and the transfer of assets. Though the assets certainly inspire more than their share of intrigue, it is the struggle for control that dooms many family business transitions. The major issues confronting a family business owner seeking to transfer power to successors include selecting a successor, resolving the inevitable intergenerational conflicts, reconciling the different agendas and goals, training the candidate and timing the transition. In every case, strategic planning in advance of the transferis the key to success. The two generations must sit down and define the mission of the business as well as that of the family. Differences between the two can be dealt with best when they are identified during planning sessions. Left until a transition is underway, conflicts will generally balloon out of control - and you begin to see why only 30 percent manage the transition at all. Sometimes the choice of successor is clear. Most family businesses will have one member of the next generation who is more active, qualified and interested in the business than his or her siblings. If succession has not already been determined, a group effort in choosing and grooming an individual is one way to proceed. Key employees who are not family members can often be recruited for a transition team. If your valued, long-time key employees can participate in the selection and initiation of a successor, the entire team will benefit over the long run. Involving key employees is a good way to retain them, and retaining them is essential for continuity and credibility in dealing with outside sources such as banks and suppliers. If there is competition between your children for the position, a decision to divide the power between them is not likely to be successful. Ownership may be divided but management should be clearly delineated. Often ownership can be split into passive and active shares, giving the active successor the necessary control over the business but providing an equal economic benefit to the inactive shareholders. In some cases the business can be divided along functional lines, so that different family members can assume control over well-defined functions or business units. In any case, a transition plan or timetable should be roughed out initially to assure continuity of management and should be reevaluated periodically to see if goals are being achieved. The transfer of power can be seamless and subtle if good communications and careful assessment are practiced by all parties to the transition. Much depends on the unique personalities involved and their past histories. But even the best of family and business situations can be brought low by a lack of planning in the most delicate of transitions. So plan early, revisit the plan often and communicate at every turn so a great family asset can remain so well into the future. For more on this topic visit Tookit.com: Transferring Power Intergenerational Conflict