Family Businesses

Over time I have had the opportunity to consult for many family businesses and have found them an interesting lot, especially when it is time for the second generation to take over.

These businesses often face huge challenges and, as a result, many simply do not survive.

First is a control issue. The founder, no matter what his (usually a “he”) age simply will not let go; does not accept that there is anyone else who can make good decisions; and cannot understand that there could be any way of running the business other than how he ran it for decades. In short, he meddles and does not let the next generation spread their wings.

Second is a succession issue. In some cases no one in the family is interested in the business, and one child or another is pressured into taking over the company. In other cases more than one of the second generation siblings are involved with the business and no clear leader has been selected, leading to fighting, resentment, and poor management. Lack of a succession plan can be especially traumatic to a business when the founder suddenly dies, but can be devastating to both the family and the business even when the founder starts receding from the day-to-day operation of the company.

Successful transitions come about from thoughtful advance succession planning, grooming of the heir apparent, and then passing control to the new CEO at the appropriate time. Can family squabbles be eliminated? Not always. When multiple children are involved, the founder needs to make every effort to be fair to all of them. Only one can be selected to run the business, and the selection should be made as objectively as possible, sometimes with outside help and evaluation. The founder needs to explain to the family why and how the decision was reached, and at the same time offer cash, stock, or appropriate positions to the other family members.

In some cases the best succession plan is to sell the business and to provide each child a proportional share of the proceeds in the form of cash, trusts, or inheritance. As with any succession plan, such action needs to be planned years in advance to maximize the value of the sale.

Careful succession planning and transitioning is good for both the family and the business. And that should be important to the founder, as both family and business are the legacies he is leaving the world.

Lack of planning and inability of the founder to let go most often tears up the family and destroys the business.

If you run a family business, which option do you prefer?

Selling Your Business

With a tough economy, many business owners are thinking that they might be better off to sell their businesses. At the same time baby-boomer-business-owners are arriving at the stage in their lives that they would like to retire from their enterprises.

Of course, the credit crisis is making it almost impossible for buyers to get financing. What to do? One option is financing by the seller. While the seller might like to get a lump-sum payment, financing may provide a steady income stream. But there are risks. If the buyer drives the business into the ground either through mis-management or inability to cope with economic conditions, the seller may be left with an empty bag.

My friend and colleague Ted Hill has developed an innovative succession plan that reduces the risks. His plan requires implementation at least three to five years prior to selling (but maximizing the sales value of any business requires that amount of time.) Under Ted’s plan, a business owner will recruit a bright young person in her or his 30s. The recruiting process will include a battery of tests to assure the right temperament for owning a business, and the aptitude to do so. The protege will work hand in hand with the business owner learning all aspects of the business, and the owner will be able to observe whether the individual really has the right stuff to take over the company. The owner will then retire from the business and will finance the transfer of the business, giving the retiring owner a steady income stream with minimal risk.

I have somewhat simplified Ted’s innovative approach. But it is a fine alternative.

Will Limkemann
440-871-0976
www.neobizadvisor.com