Passing the Torch Without Burning Down the House: How to Master the Art of Family Business Succession
You might hope for an easy transition, but your children could have different ideas about who gets what. Talking about it early could head off possible family divisions.
Many closely held family-owned businesses don't have well-architected succession plans.
Children often choose to go in different directions, building lives outside the family business, and unaddressed succession issues can create uncertainty and family stress.
Even when there are apparent successors — such as adult children who grew up in the business — there's still a distinct need for open communication and careful planning.
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Take the example of Tom, a septuagenarian sole owner and CEO of a sales representation and distribution business, who learned the business at the foot of his father, the founder and original owner.
During his tenure, Tom landed exclusive relationships with several powerful national brands and grew the business into a locally well-known brand with more than $20 million in annual sales, one year reaching more than $5 million in EBITDA.
Tom's sons each showed interest in working alongside him. They nurtured and developed sales contacts, met with the company's accountant, hired and fired employees — they learned the ropes. Tom's daughter expressed no interest in the business; she became a successful professional and moved across the country.
Tom expected one of his sons would eventually emerge as the clear leader, fall away or become interested in something different. Tom also thought that his daughter, busy with her own successful professional practice, would have no real interest in any of it.
He decided he'd figure out the business's succession "when the time comes."
In retrospect, what eventually played out was foreseeable, avoidable and not at all uncommon.
What wasn't going to work
The brothers devolved into rivals. Each son had important valuable skills that could help the business, but dividing leadership in a shared power arrangement wasn't going to work.
Then, as it turned out, Tom's daughter and her children had quite a significant interest in the business. While she never had any interest in running the business, it became clear that Tom's daughter had always carried an interest in what she perceived as "her share" of the finances. Her perception of fair didn't necessarily align with anyone else's.
The results? First, customers heard of possible uncertainty in the ranks. Management saw there was no clear designated leader. Tom's daughter? Things devolved to the point where she threatened to sue unless "her rightful share" of the business was clearly delineated.
This was not only a terrible mess for this family's relationships, but also a very challenging set of facts for the business and a clear threat to its continued success.
With closely held businesses, especially those that are family owned, it's rare that the primary owners haven't at least thought about succession.
But knowing the possibilities for difficult conversations, trying to avoid "playing favorites" and having a parental desire to see healthy relationships among their children all encourage procrastination.
Dodging issues postpones the inevitable
Unfortunately, avoiding the issues doesn't make them disappear; it just postpones facing them — and frequently, there is a very real cost.
Not only do unresolved issues tend to worsen and positions tend to entrench during periods of silence and no communication, but the business at the heart of these situations incurs substantial additional risk from the banked uncertainty.
There are several obvious problems:
- When family is involved, whatever happened at dinner last Christmas inevitably gets inseparably intertwined with why someone made a particular strategic business decision for the company.
- The company — which technically only speaks through its officers, directors and owners — suffers from the uncertainty and the potential picking of sides among key stakeholders.
- Instead of uniting a family around all the work that was done and the successes created, uncertainty in succession planning fosters divisiveness through infighting over control and economics, and legacy suffers.
Avoiding procrastination
The most successful family-owned/operated businesses share one common characteristic: Its key stakeholders communicate openly, honestly and often about the business.
These families openly acknowledge that they might have differing — often competing — interests when it comes to the business, and doing so can successfully compartmentalize these business issues. A few tactics can help.
Leverage the advisers. A trusted lawyer and a trusted accountant can carefully explain to all involved that they're working for the business. When representing the company — not any particular individual's — interests, they can be present to put the business first.
Having these advisers present and speaking for the business is a great way to encourage individuals to openly voice their own personal interests, knowing that it's the advisers' job to represent the company.
Focus on distinct business roles. Trying to avoid amorphous, subjective perceptions such as "That's not fair!" and instead relying on objective qualifications, skills and the business's needs can be very helpful.
Considering what characteristics the CEO should best display vs perceptions of "what's fair" to each of the owner's children can help with this. The subjective outcome of a scenario will always be present, the soft issues will always need to be addressed, but that's much easier to do after conducting a clear, logical, defensible analysis on the objective issues.
Once parties agree on the characteristics defining the best qualified candidate, they can then address the implications. "What's fair" has a place in the overall discussion about the business, but it should not be the guiding principle.
Write the plan and share it. Writing down conclusions and consensus — even directional consensus if the group hasn't finalized every specific detail — can be effective for some. The act of meeting with advisers and writing down outcomes goes miles toward the perception of a shared, well-vetted solution.
An experienced business lawyer partnering with an experienced accountant makes a perfect team to help closely held businesses navigate and address succession issues.
While every situation is unique and challenging — especially when family is involved — there's a common thread among successful ones: open, early communication.
Assembling professionals, scheduling a meeting (or a series of them), encouraging open and frank conversation, and documenting the progress and outcomes can help families work through succession planning effectively, considering what is best for both family and business.
Don't wait to figure it out later.
Related Content
- I Found Out What It Takes for a Family Business to Thrive
- Succession Musts: Thoughtful Planning and Frank Discussions
- The Secret to a Seamless Business Handover: Combined Estate and Succession Planning
- The Entrepreneur's Exit: How to Sell (or Pass on) Your Business Without Losing the Family
- Financial Planning Tips for Business Owners Raising Kids
