Many family heads who started businesses are nearing the time when they’ll hand over the reins of their firms. Particularly, baby boomers who founded companies are closing in on or have entered their 60s. Succession will soon be forced upon them.
“It’s going to be accelerating,” says Henry Hutcheson, founder of Family Business USA and author of “Dirty Little Secrets of Family Business: How to Successfully Navigate Family Business Conflict and Transition.” “It’s not just one or two family businesses. It’s going to be thousands that need to be doing some planning.”
If you’re part of a family business, how can you prepare your firm for a smooth succession? By keeping these three fundamental points in mind.
Open a Dialogue
Family business calls for layering a profit discipline over emotions—that of unconditional family love and support. Not easy to do. Rational operating decisions and the “I love you” factor don’t normally correlate with making money but with chaos and conflict. This is especially true when the family business lacks a definitive succession plan.
Start by calling a family meeting. Put everything on the table, and don’t worry about hurt feelings. Perhaps Dad (or Mom and Dad, or Uncle Bob or whoever founded the business) could say to the family members: “Guys, we need to start talking about transitioning the family business. Are you interested? If so, let’s begin right away. If not, let’s begin anyway.”
The key is to learn every family member’s communication tendencies, get important issues out in the open and get comfortable talking face to face.
Develop a Five-Year Plan
About two-thirds of family businesses fail to survive from one generation to the next, Hutcheson says. Failure, he says, comes most often when the family spends little time planning for business succession.
“Planning is the Achilles’ heel of all family businesses,” Hutcheson says.
When business is good and the kids are involved, life can be wonderful and move along without much of a plan. But the time comes when the owner (or owners) need to retire, move on or deal with a health crisis. Suddenly, business transition questions get dropped on the family.
“The questions swirl: Are my kids capable? Do they want to run the business? Will Dad ever step down? How do we do this?” Hutcheson says. “Family love can interfere with sound reasoning.”
Your challenge is to develop a five-year plan. Don’t wait to do it. Start as soon as you can.
The Compensation to the Market
Whereas family members should be paid at market value for their job functions and talents, business founders often let sentimentality rule. They pay their family members equally.
“The problem usually comes up in the transition to the second generation,” Hutcheson says. “Mom and Dad don’t want to deal with the uncomfortable scenario of giving their kids different levels of compensation, so they pay everyone the same amount of money.”
And sometimes, no one realizes this right away.
Four brothers once went at each others’ throats over this issue, Hutcheson relates. They were each paid the same salary, but in time the president began pocketing extra cash. He felt it was fair for the extra work he did as president. The situation became heated when the other brothers found out about his draws. Maybe he deserved it, but he didn’t tell his brothers. Much hurt could have been avoided had the founder based his boys’ salaries on market pay rates from the start.
To head off (or undo) this harm, be willing to broach the subject. If not, you’ll risk leaving a compensation legacy that can be explosive.
You could say the goal of a family business is two-fold: Preserve family wealth, maintain family harmony. The key to achieving those ends is good communication. Sure, it’s not easy to talk such matters through, but you might as well get started.
Mark L. Johnson is an industry marketing consultant and writer. He tweets at @markjohnsoncomm and connects at linkedin.com/in/markjohnsoncommunications.