In August, I’m doing a 90-minute talk entitled, “Perpetuating the Family-Controlled Business” at a Society of Financial Service Professionals meeting. This multi-disciplined organization includes insurance and financial advisors, attorneys, accountants and other professionals. With such a diverse and talented group, what is it I can say that would have universal appeal? They each have their own unique areas of specialization and ways they interact with business owners on succession issues.
I’ve decided I can help by stating the obvious and then supporting my conclusions with examples of current best practices. As multi-faceted as the process is for perpetuating a family-controlled business, there are five bedrock activities that can define the difference between success and failure. Yet, determining how to most efficiently accomplish these activities is where the hard work occurs.
- Make Sure the Business Succeeds At the risk of sounding like an Uncle Scrooge, what good is a great succession plan if there’s not much of a business to pass on? Success and profit must be precursors to succession and perpetuation. I once worked with a family-owned media business that was so focused on family succession they missed responding to the digital revolution. In another instance, I’m aware of a family-controlled agribusiness that executed a successful ESOP conversion, but failed to build successor management bench strength. In both cases, the companies ended up shrinking and were ultimately sold to larger, public companies.
- Get Advice Later this year, I’m speaking at the Exit Planning Institute. These members also come from various fields and backgrounds; from legal and financial orientation, to family therapists and accountants. Business owners should rejoice. Particularly because of the wide-ranging issues involved in perpetuating a family business, there’s a lot of truth to the adage “no one is as smart as all of us.” We all are good at working in our businesses, but business continuation advisors offer a way for us to work on our businesses. I’ve never heard a business owner lament, “I wish I’d just handled this myself!”
- Get Buy-in In “Every Family’s Business” by Thomas William Deans, the author makes an impassioned plea for family business owners to institute an ongoing contract within the family. The core idea is that a family member in the business deserves to be treated as other employees would be treated. To be served a position in the family business on a silver spoon is really depriving that family member of the skill sets needed to succeed. An actionable family contract is a way to get buy-in and provide feedback. It is not easy for an owner to think in terms of discussing instead of demanding, but without buy-in from the family, the succession plan is nothing more than a wish. A company I’m aware of created an elaborate succession plan using various legal entities to assign wealth to the next generation while avoiding transfer taxes. The children, who were not brought into the planning process, used their newly discovered ownership rights to deprive their parents of the many perks they created for the business. The plane was sold and the board meetings in Europe ceased.
- Commit Financial Resources Three weeks ago, my column referenced Chris Mercer’s idea of “The One Percent Solution.” The concept is that a business commits 1% of its worth each year to the actual management of the business as an asset. Since a family-owned business wants this asset to stay in the family, the annual contribution could be used to create and execute the succession plan. And, because family succession plans usually doesn’t involve a lump sum buyout of the departing owner, there is no “liquidity event.” There needs to be a cash flow plan in place so that the exiting owner can succeed personally, while the company continues to prosper. Additionally, this may include the need for life insurance to complete the transfer of the business in the event of the owner’s death. The simple truth is that it takes time and money to obtain the desired outcome.
- Execute This step seems obvious, but I can’t count the number of buy-sell agreements my colleagues and I have seen that are drafted, but not signed. When a family is involved, the feet dragging compounds. We hear, “I first want to see whether our daughter works out in her new position,” or “we want to see if our son will join the business when he graduates.” If you own a family business, you know nothing in business is certain. The same applies to a succession plan. Do your best, and pull the trigger.
Business owners, financial advisors, family members and all those involved in the process of a succession plan, know the process can be challenging. Stay focused and put your hard work in today, to help prepare the business for tomorrow.
