SUCCESSION PLANNING
What to do when
the kids say “No”

BY MIKE COHN

You’ve spent your whole life building your business, and although it’s not time to retire, you know it is time to start training a successor to take over. Maybe you dreamed your kids would take over some day but now they have their own successful careers outside the company. Or, the ones who want to take over strike terror in your heart. What are your options when the kids don’t want to come into the business? Is selling out the only way to go?

Many family-owned businesses havefaced this question and have decided they can keep the business as a family investment without being directly involved in day-to-day operations. Is this the right path for you? And, is the business a good long-term investment for the family? Before deciding, examine the following:

Ownership transfer: Consider creating an entity that can hold the family’s ownership of the business so that ownership can stay consolidated in the future. For example, if your company is a C corporation, you could put your stock into a family limited partnership. The general partner of the partnership votes the stock and controls partnership activities.

Or, if your company is an S corporation, a voting trust can be used with Dad or Mom as trustees along with other family members. You will also need to create a governance structure so that future trustees or general partners can focus on the business, not on resolving family conflict.

Profit Distributions: Future owners will want some financial return on their “investment”. Reasonable distributions from the business are a smart way to keep stockholders supportive.

Now is the time to consider making that S election for income tax purposes (if you haven’t already done so) so that profit distributions from the business will not be subject to double taxation (as they would with a C corporation). Distributions to stockholders (even small amounts) are a way to begin educating family members about their investment in the business.

Hire from without or promote from within: You will need a CEO/President to run the company. You may want to use a search firm to find someone who knows your industry and who would want to work for your family business. Bringing an outsider in for a few years before Mom or Dad is ready to turn over day-to-day responsibilities can be a smart move. But it can also backfire. A qualified candidate will want to know a specific date when they will step into the CEO position. And an outsider will likely want to make some needed changes.

If you find a leader, they will want to lead, so be careful of what you wish for. Alternatively, maybe you should promote from within. But be careful that the loyal Number 2 person, may not have the vision and passion to lead the company. Remember, if you and the family are going to own the business as an investment you will want the best and the brightest running it for you.

One client created a search committee and ultimately promoted a regional manager to the President’s role. They carefully spelled out expectations, limits of authority and accountabilities for the exec and for the family.

Information systems: You may need to upgrade your reporting systems so you can get accurate and timely financial and operating information. It may be smart to invest in audited financial statements that provide assurance that adequate accounting procedures are in place and are being followed.

Perhaps it’s time for operational budgeting, and benchmarking, so you can compare actual to expected results and compare performance to industry norms. This is a critical step so that you and others can know how the business is doing regardless of where you are geographically.

Educate the next generation about the responsibilities of ownership: One client adopted a policy of “noses in, fingers out” meaning they wanted to have their noses in enough to know what was going on, but they also agreed to keep their fingers out and not micromanage or second-guess the new CEO they had hired.

Educating the adult children about ownership and creating realistic expectations about the business, its prospects and risks can create a “win-win” situation—informed stockholders who can work with management and make tough decisions together that are in everyone’s best interest.

Coordinating the transfer of stock into a new family entity along with next generation education can be a great way to bring family members into a position of knowledge without turning over control immediately. Maybe it’s time to have a real Board with Mom or Dad as Chair and outsiders with industry expertise who can challenge management to do their best.

Summary : The advantages of keeping a company’s ownership in the family include pride in maintaining a successful family business and having a family legacy. But it is also a financial asset and you can never rest on past successes. The challenge of succession includes taking risks, a willingness to change, and using capital wisely.

When next generation children say “no” to working in the business, it doesn’t have to mean the end of the dream. Next generation children who have succeeded in their own careers may enjoy the ownership challenge of keeping the business while hiring non-family professionals to grow the value of this important family asset.