Transition of Family Owned Business

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(Thursday, December 17, 2009)

Succession Planning for Family Owned Businesses

Around 90% of all businesses in North America are Family Owned Businesses; as the baby boomer generation faces retirement more and more of these businesses are facing transfer of ownership issues. The basic choices are few: Close the doors, sell the business to outsiders or employees, retain family control and hire managers, or retain family control and management.

A family owned business has many dynamics not faced by other business in the corporate world. This makes transition of Family Owned Business to the Second Generation particularly difficult and in fact only very small number of Family Owned Business succeed transfer to the second generation and even smaller number succeed passage to the Third Generation. The four major reasons for failure in succession of a family owned business are:

Lack of viability – the business is actually totally dependent on the founder, and cannot continue without his or her active participation.

Lack of planning – no planning for business succession has been done, and therefore the successors are not prepared, trained, or experienced enough to be able to take over management.

The owner does not want to give up control of the business

The offspring have little or no interest in taking over the business.

Planning for succession in family businesses must consider aspects such as:

Vision for the business
Reluctance of the founder to transfer control
Resistance of offspring to join the firm
Family politics interfering with business policy
Viability of the business
Cash flow on buy out
Valuation of the business
Lack of management training of offspring
Compensation of management
Attracting non-family management

The planning can involve four distinctly different plans:

Strategic plan for the business-to establish the vision and direction of the company, allow offspring to grasp the vision of the founding parents and ensure that everyone has a clear picture of the future.
Succession plan for the business-which would show how the succession would occur and the timing of the plan.
Estate planning for the founding parents-addresses issues such as estate taxes, inheritance of both corporate assets and non- corporate assets.
Family strategic plan-different from the strategic plan in that it addresses issues specific to the viability of the family business as it relates to running the business such as policies relating to compensation, performance measures for management/owners, job descriptions. The family plan will also address other issues such as the treatment of family members who might not be involved with the family business, or other areas that are specifically important to the family. This plan if implemented properly should avoid such issues as sibling rivalry and management control issues.

Transferring of a family business to a second generation is often more difficult than other methods of transferring ownership such as outright sale, and is not for every business owner. The dynamics of the family often play a major factor in the success of the transition and it takes co-operation and a commitment by all parties involved.

Good communication is the key element and it is recommended that a family retreat be set up in the early stages of the transition to craft an overview of the planning and test the will of all parties involved. It is highly recommended that the meeting be planned and structured and an independent facilitator be used. . This is where a planner can help. Trained in the six step approach of financial planning which is:

1) determining the outcome or strategy

2) assessing the present situation,

3) developing a plan,

4) discussing and reviewing with clients,

5) implementing the plan and

6) monitor and follow-up

A financial planner is ideal for helping a family work through the transition. At the family meeting such topics as who will be successor, timelines for transition, and estimated value of the business should be addressed. Trained in the holistic approach, a planner will usually drawn in a team of experts such as insurance agent, financial planners, bankers and tax accountants to help the family in the implementation of the transition.

If the company has not already developed a strategic plan this normally should be the first plan to be creating and should include business mission, goals and the strategy for achieving these goals. The family business plan would normally be next step and would address such issues as the code of conduct within the family business, policy of who is entitled to join, expectations of management etc.

Next would be the retirement, and estate plans, which would incorporate the valuation of the business, how the buy out would be funded, how the retirement funds would be paid out, taxes involving in the estate would be calculated. The experts such as insurance, lawyers, bankers and tax accountants should be used at this stage of planning.

Finally a succession plan should be created which would incorporate such items as setting the date for succession, training for new management, funding and timing for retirement, management of cash flow, and involvement of founding generation in the on going business.

A planner with their expertise in many areas can be an essential advisor to help the family balance both personal interest and business interest. Communication, planning, co-operation of all parties and effective implementation procedures are key to successful transition.