Your Money

What to think about when passing down a family business

Family business expertFebruary 22, 2014 

Henry Hutcheson

The central issue facing every family business, understandably, is succession. The business has been built up, is producing a profit, and you have some family members making a living at the business. But the time is approaching where you realize that you cannot go on forever. What is a family business owner to do?

When thinking of succession, there are essentially four goals in mind:

Treat all the children fairly. This means those in and outside the business. And by the way, fair does not necessarily mean equal.

Ensure family cohesion. As you go through the succession process, there are multiple minefields where misunderstandings can occur, or harsh truths that must be faced. Negotiating through this can leave family relationships fractured permanently, especially if it is not done with care.

Take care of non-family employees. Employees in family businesses many times feel like, and are regarded as, family. Many were there at the beginning, and helped the business become what it is today. Others have a deep personal relationship with the owner.

Planning the estate. Wealth has been built up through the family business, and owners want to take measures that will preserve this wealth for themselves and future generations. In a nutshell, family business owners want to preserve the wealth that has been created by the business and they want to preserve all the important relationships in their lives. It doesn’t do any good to have all the money, but not be able to spend family holidays together. And if there is not enough money to afford a turkey, it won’t be a very festive holiday anyway.

When looking at a family business, it needs to be understood that there are multiple overlapping factors in play: there is the family, the business, and the ownership. The family business founder or owner is at the epicenter of this family business system, in which a change such as a divorce or death can impact multiple other areas.

Ultimately, every family business owner is faced with some very basic options when thinking about succession: I can sell the business for the highest dollar value I can find; I can pass the business on to the next generation; or I can install non-family management to run the business.

The dream in many cases is to have the next generation manage the business. However, this is not so easy. William R. Thomas, professor emeritus at the University of South Carolina’s Moore School of Business, puts it this way: “I have seen many family businesses in my day, and as I used to tell my classes, the first generation builds it, the second uses it, and the third loses it.”

Interestingly, the professor’s perception is shared across the globe that family businesses fail in three generations. However, research has shown that about 65 percent of all family businesses fail from any generation to the next. Still not good odds.

Here are some tips to help you address your family business succession to increase those odds:

•  Recognize the issue and put forth some effort to deal with it. Most family business owners either think everything will work out naturally, or simply ignore dealing with the sticky issues of succession. Yes, it is tricky business. But the consequences can be catastrophic for many people you care about, including yourself.

•  Start early. Studies have shown, and common sense dictates, that the more time spent preparing for succession, the greater the chances of success are.

•  Communication, Communication, Communication. I asked Steve Forbes at a conference why his family business was successful, and he said “communication, hands down”. He was seconded by Frank Holding Jr., First Citizens Bank, and McKay Belk, Belk Department stores.

•  Professionalize the business. Install policies and procedures that everyone must adhere to, including the family. Review financials regularly. Create a family employment policy: What is the hiring and promotion policy, and how much are they paid.

•  Realize that just because someone is family doesn’t mean they are naturally qualified. And also realize that at some point this could include the owner as well.

Henry Hutcheson is the president of Family Business Carolina. Reach him at Henry@familybusiness carolina.com.

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