Throughout this series, we have talked about 3 out of the 4 ways to exit your business that can reach your financial and values goals. Before we get into the fourth, a transfer to a family member, we would be remiss to not discuss the fifth option. This one is a position that we would never want a business owner to be in, and that is a liquidation, or closing the doors, selling the physical assets of the business, and leaving the employees to find other sources of income. All the hard work of the Business Owner over the years, the business’s legacy, the Business Owner’s financial security, and the negative impact on the local community is something that we want entrepreneurs to avoid at all costs. Hopefully, we’ve provided you with a glimmer of hope that your retirement doesn’t have to be the end of your business.
The fourth option, and one that 29% of business owners that had a written succession plan have chosen, is transfer of the business to a family member, typically children. There are many resources, consultants, support groups and books devoted to family businesses for one reason: it’s complicated. It takes a plan. It takes getting the family together. Ideally, a neutral and experienced third party, such as a coach, needs to facilitate the discussions as they can get messy. With the right tools in place, this can be an extremely fulfilling experience for the entire clan. Here’s some considerations along this journey:
IT TAKES TIME
If you are looking for a quick exit, or you’re ready to retire tomorrow, a family takeover is not a great choice. It takes time to create a plan that assures that the Business Owner meets their financial goals. It takes time to plan what the Owner needs to live and thrive in their retirement and preserves the value of the business. It takes time to get the family together and create a plan for the Owner’s retirement that everyone embraces. It takes time to train, counsel, develop, coach, and transition the new leaders to assure a smooth, gradual takeover.
We recommend that this planning, development, and execution time take approximately 7-10 years. During this time, experts agree that hiring a coach to guide the Business Owner through the leadership development process is a great idea, added to the team of financial advisors and attorneys that are so essential.
THE EMOTIONAL COMPONENT
One of the biggest reasons that family takeovers are messy is the emotional component. Sales of a business to a third party, an ESOP, or a sale to Key Employees just don’t have the emotional ties that a family relationship has. Family businesses and the retirement of the matriarch or patriarch can amplify any family friction that is already lingering in the background, and cause rifts in family relationships, often un-mendable ones.
When developing your plan, first be sure that the spouse of the Business Owner is 100% on board with the succession plan. We’ve seen this happen many times – the Business Owner comes up with a plan, the child who is going to be the successor is on board, and the other parent gets upset because they were not consulted, or worse, if the Business Owner is gone, the plan goes awry because it was not clearly communicated. Invite spouses to the planning meetings, preferably with a third party facilitator or mediator. That way everyone has buy-in to the plan, understands the reasoning and background of the plan, and can support all the parties in the future.
IS YOUR SUCCESSOR READY?
Business Owners are probably well aware of their child’s shortcomings and strengths as a leader. As parents, we all want to give our kids grace with their mistakes, but future coworkers and employees are not going to do that. Take some time to prepare your successor, preferably a few years. Be sure that their eyes are wide open to the leadership behaviors that they need to work on. Be sure that they are ready to tackle business ownership and everything that comes with it.
Establish performance standards for your children that are working in the business, and tie their compensation and share of the business to it. If the children are not performing at a high level, everyone can see that. The transfer of the business to them is going to be seen as a gift, rather than the child who works really hard and purchases the business over time from their parent. This purchase of the business can be a combination of sweat equity or capital, but be sure that the business is earned.
Assure that compensation, for any child that works in the business, is fair and appropriate for their job title. Leave the inheritance out of the compensation package. If one child is a CEO, and one is a janitor, be sure that the compensation is in line with typical CEO and/or janitor salaries. Look at the market and the typical salaries for their position. Communicate this as a family and the reasons why.
ESTABLISH RULES OF THE GAME
We’ve written about Rules of the Game before, but they are crucial to the operation of family businesses. Get the entire family together, along with spouses, and establish together the rules that will be followed as a family unit with regard to the business. Is Sam going to be the future CEO? Are we going to talk about the business at the Thanksgiving table? Are the grandchildren going to be given a job in the business someday? When? What about divorce? What happens in that unfortunate situation? All great questions to answer through the Rules. Write them down, be sure everyone is ready to follow them. Take it one step further – develop consequences if someone doesn’t follow the rules. Be clear, up front, and set your family on the path to success.
Clearly family businesses are complex, emotionally-driven, and challenging. But they can be a great way for your family to have a long and healthy relationship as they grow the business as a team. Getting a plan in place long before it is needed is the way to avoid most of the drama.
Need help developing a future leader? Are you ready to plan for your retirement as a Business Owner? Are you the leader that you want to be? Is your business value lower than you expected? We can help. Contact us to schedule your no-cost, no-obligation business analysis today.