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Where and when do you start planning the succession process for your family business? You may not think about this while under the “bulletproof” age of 50; however, when you reach your 60s you may wish you had been making plans. Often official planning may not begin until you realize you want to spend a little time on the golf course instead of in the office.
Family businesses often are built with succession in mind; however, this is not always the case. Regardless, the rules are the same. Whether you operate a business for 40 years or 18 years, you must plan for its future.
It has been reported that 43 percent of family-owned businesses will change hands within the next five years. This could have a major impact on the rental industry, since according to the American Rental Association’s July 1999 survey, 79 percent of rental businesses are privately owned. How do you ensure success when passing control?
Although planning should begin very early in the life of the business, for most it doesn’t start until much later.
The following are some notes, based on my experience, to help you with the succession process.
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Begin early. Succession is not an event, but an ongoing process and may take 10 or more years to complete. Involve family members affected by changes in the business and establish a family council or board of directors. Involving children helps initiate interest and excitement in the company and encourages participation as they grow older. A family retreat, away from home and the business, is the perfect setting for beginning the process. Be consistent. Hold meetings on a regular basis and always schedule them in advance. For example, our family council meets monthly and holds an annual retreat in a different location. With no disruptions, you can begin to work on your long-range plans.
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Create a business succession plan. Don’t assume your company will pass smoothly from one generation to the next. The first step is to envision the company’s future in order to identify family values and establish a common mission. For instance, in our family business we agreed, “We won’t participate in anything unethical or immoral.” A solid principle bonds family members and secures the endurance of a business legacy.
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Develop a strategic plan outlining the business direction and learn the legalities. Attorneys, accountants, banking trust officers and consultants can be extremely helpful in explaining tax laws, stock options and transfers and estate planning. It is important to keep accurate records in order to develop plans to maintain the financial security needed to retire and distribute assets.
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Divide the business. This may be the most difficult decision you face. Show equality between children who embrace the family business and those who do not get involved. For example, my two sons will inherit substantial stock and become co-owners of the family business on my demise, while my third child (who does not want to participate in the business) will inherit other assets of equal value. My sons have put in a great deal of “sweat equity” and set their own salaries and draws, purposefully keeping them low to help the company grow. Both sons view this as a joint venture and can take control in the other’s absence.
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Train your children. Outside work experience is the best teacher, enabling them to gain insights into the business world without mom or dad looking over their shoulders. Your children will profit by gaining self-confidence and independence. The rental business focuses on first-rate customer service, so jobs providing public contact and services are an excellent training ground. If the opportunity for outside work experience has passed, pair your children with mentors from other companies or require them to join boards of other organizations.
Investigate local universities that offer business education programs and encourage participation in leadership training or relevant academic courses. Customer service and sales training are a definite must.
The best training can be provided on the job. Allow your children to work their way through the ranks and learn the ropes as employees of the company. It is in the best interests of the company and the children to circumvent attention as the CEO’s son or daughter. Each month, begin to share different aspects of the business, including financial information, with your children, and provide opportunities for firsthand experiences in employment decisions, customer service and team building.
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Help foster relationships with important contacts. Some long-term clients may snub successors, but your assistance in helping successors build a good reputation within the company and business community will earn the respect of business patrons.
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Prepare yourself financially by creating financial independence outside the business. Review your current status and determine if you have sufficient retirement, insurance and health benefits to support you and your spouse. If you are not prepared, make this a top priority.
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Have a good estate plan and do not write your own will. According to Albert C. Todd, Todd & Johnson Attorneys of Columbia, S.C., “Estate planning requires the help of skilled advisors. It is essential that the attorney have an in-depth understanding of your family and financial situation.”
Three items to consider are a living trust, buy-sell agreements and annual exclusion gifts. A living trust reduces probate costs and hastens the distribution of business assets. Buy-sell agreements allow family members to buy out the owner upon retirement, disability or death and leave the company’s ownership to the involved members. Todd strongly recommends annual exclusion gifts. He adds, “Tax laws currently allow you to give up to $10,000 per year per person to any number of recipients without paying gift taxes. Since property and stocks (at fair market value) are also included in this law, you can transfer a major part of your business assets without incurring taxes.” Remember, the goal is to plan succession and limit taxes by all legal means.
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Turn over the business. It is hard to walk away, but it’s important to put your planning and training to the test. My sons have gradually taken over the day-to-day operations, and I limit my input to long-range planning. It is pleasing to see the results as my businesses, Thompson’s Grand Rental Stations and Thompson Services, are reaching the final transition stages. Our corporate structure is designed to keep our rental business in the hands of my sons and ensure its successful continuation.
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Decide your “retirement” role. Serve on the board in a minor role or become active in the community. Starting a second company is an option for some ambitious retirees. For a limited time, I will maintain my position as chairman of the board in order to offer insight and advice. But whatever your direction, let go and walk away, leaving your children to assume the position of authority.
While I am ready to practice my golf swing, business has always been my passion. I trust my sons to carry on a strong heritage of hard work, ethics and common sense. Remember, it is not achieving success that is the greatest challenge, but leaving a lasting legacy. |
