Owning a business can be a family’s greatest asset—and its greatest source of conflict.
If you sell your business today you want to make sure you have enough to live comfortably in retirement. MassMutual Advisor Michael Moran shares 5 keys to a successful sale.
Two areas in particular seem to hold the most potential for missteps in the life of a family business: getting family members into the business and working out successions in leadership.
Families who plan ahead and navigate these passages successfully may insure a smoother transition for the business.
What follows is expert advice on how to achieve those goals:
It’s usually easy to see which kids are interested in running the family business. They’re the ones asking questions or making suggestions about it, says Barry Rabinovich, a Somerset, N.J.-based estate-planning attorney.
Encourage their interest, he says. Then, when the heirs are mature enough to make responsible decisions, hold a family meeting assisted by a third party, such as a management consultant, to see who, if anyone, wants to join and possibly someday lead the business. The meeting should be nonthreatening, Mr. Rabinovich says. And parents should have an alternate succession plan so heirs don’t feel obligated to step up.
Jeff Fishman, a Los Angeles-based financial adviser, says the 25-year-old-son of one of his clients went to work in the father’s business in order to please his father. The son made it clear he had no interest in running the business, yet his father insisted he give it a try, Mr. Fishman says. The son did so for six months and decided he still wanted to be a filmmaker.
“If the desire isn’t there, chances are the efforts will be useless,” says Mr. Fishman, who often reminds clients their heirs may not want to get involved in the family business. That can be difficult for many parents to hear—especially if they’ve built their life and identity around the business. Some parents never seem to fully “get over” the disappointment, Mr. Fishman says.
Early communication is even more important when an heir does want to run the business. He or she should have or should be developing the skills the company needs before assuming the top leadership position, says David Karofsky, a Boston-based family business consultant.
One of Mr. Karofsky’s clients is currently rotating the heir apparent through core areas of the business, such as finance, sales and manufacturing. Mr. Karofsky says this exposure and building relationships with employees throughout the organization gives an heir a better understanding of the company. It can also help them figure out what they enjoy and are good at.
The heir of another family Mr. Karofsky advises worked outside the business for several years in a related industry and returned to the business as the heir apparent. He now runs a division of the company and is working with an executive coach to refine his management skills.
Nothing Succeeds Like a Smooth Succession
Smooth successions need a lot of work and understanding. Appointing the new head of a family business should never be a snap decisions—or a foregone conclusion. The requirements of the job, the timing of the transition, and leadership’s far-reaching responsibilities need to be understood well ahead of time by all of the parties involved.
Arturo Giacosa, a Miami-based wealth planner, tells of a client who wanted his son to take over the business. The father prepared his son well and sent him to school for his M.B.A. But in the end, he rushed the formal succession before he or his son were really prepared.
The father decided it was best not to “hang on too long,” as he’d seen other patriarchs do, Mr. Giacosa says. On a Friday, he transferred control of the company and his role as president to his son. But by Monday, the son had not found a new role for his father, who would have liked a temporary management role, and didn’t seem to care that he had cut his father out of the decision-making loop. Family relations quickly disintegrated and the business ultimately faltered.
The father and son should have discussed a formal transition plan, clearly outlining both their temporary and long-term roles, says Mr. Giacosa.
When chosen heirs are in their late teens and early 20s, tell them the business will not be a gift but rather a business that comes with “tremendous responsibility they must earn the privilege to steward,” says Clemens Ast, a Wichita, Kan.-based family business adviser. One family Mr. Ast worked with required all heirs to get a college degree, work somewhere else for at least five years and show progress in their careers, ideally growing into a management role.
Parents can, however, go overboard in having heirs prove their worth, he says. Setting unrealistic expectations or hovering over an heir’s work often can drive away talented people.
To eliminate a sense of entitlement, show heirs how the company is important to the lives of others, such as employees and customers, or involve them in company philanthropic activities, says Joseph Astrachan, executive director of the Cox Family Enterprise Center at Kennesaw State University.
In cases where the family, board or a committee decides to appoint a CEO from outside the family, make sure family issues don’t interfere with the selection process, says Alfred Peguero, a San Francisco-based certified public accountant.
He recommends creating objective criteria for the post, making them known to everyone involved. Using a selection committee that includes objective people and outside advisers also helps maintain focus, he says. All qualified candidates should be reviewed using the same criteria. Once a decision is made, it’s important for that conversation to take place in an office or neutral setting and to be facilitated by an objective, trusted adviser, Mr. Peguero says.