Handing down the family business to the
next generation can be a proud
moment, but it can also be a complicated one. Proper preparation is critical to
ensuring a smooth transition for all involved.
It’s never too early to start that preparation,
says Joe Astrachan, Ph.D., director of the
Cox Family Enterprise Center of the Coles
College of Business at Kennesaw (Ga.) State
University. Astrachan says children should
be raised from the day they’re born to handle
the issues they’ll face in heading the business.
Smart Business spoke with Astrachan
on what family business owners can do
now to prepare for the moment they’ve
been waiting for in the future.
How far ahead should a business owner plan
the transition of the business to the leadership/ownership of a son or daughter?
Even before children are born, there are
things that can be done in a family business
to prepare the way. It’s important to have
discussions with other family members
about who’ll be allowed to work in the business, by what rules, as well as who gets to
own stock and how it can be transferred.
This can save a lot of potential strife in the
future. For example, when one brother is
worried that his other brother wants his
children to have top roles without starting at
the bottom and the children are already in
their 20s. It’s a much easier conversation
before the children are even born.
Children should be raised to be able to
work together, make decisions and understand risk, reward and patient capital
(delayed gratification). At an early age,
they should learn what money is, how to
save and how to wait for things they want.
Next, they need to learn that actions and
consequences are linked. This is the primary route to self-confidence.
Next comes the importance of learning
from failure, which is essential in business.
Unfortunately, it seems that our modern culture abhors failure and only celebrates success. That leads to children who aren’t in
touch with reality as they’ve learned that
they aren’t allowed to say, ‘I lost’ or ‘I failed.’
This means they don’t learn how to learn
from problems, challenges and failure.
Later, they should learn to make decisions together by selecting the places to go
to dinner or having a vacation. Learning
that they need to work together and that
there’s no excuse for not being able to
cooperate are important early life lessons
that can cut down on sibling rivalry.
After that, they need to learn the basics of
business and responsibility to employees and
customers as well as understanding finance.
Is it as easy as saying, ‘Son or daughter,
you’re now the president!’?
For a well-prepared family, yes, that’s all
you really need to do because they can and
will take over. They’ll have the right conversations and do what’s needed to succeed. In fact, there’s almost no scientific
research on succession that shows what
works and what doesn’t. There are as many
examples of young leaders who succeed
not out of any planning but because they
had to learn to swim without a lifejacket.
A second route is to prepare the next generation through training and experience. A
good program is to give the next generation the opportunity to earn their stripes by
putting them ‘in combat,’ where they have to succeed or fail. When the time comes to
select a successor, the future owners
should take part in the decision.
How should the transition be handled among
employees?
Hopefully, they’ve known for a long time
that a transition is taking place and who the
leaders and owners will be. The most important thing they need to be told is that the
family is committed to the long-term ownership and stability of the business. During the
transition, they need to be told that the new
leader is the new leader and his or her decision will be backed. Then, the new leader’s
decisions need to be reaffirmed, no matter
who those decisions hurt or benefit. Do not,
under any circumstances, allow employees
to plead their cases to former leaders.
Respect the transition.
What if someone not only wants to relinquish
a title but sell his or her share of the company outright or sell/transfer it to a family member?
The easiest way to do that in a small business is to give the shares to the next generation because that has the least impact on
the company’s cash flow. Hopefully, the
senior generation will have other means of
income and will have done appropriate
planning so taxes are minimized.
To sell the company means that a new
leader not only has to establish his or her
credibility but also do so while making substantial noncompany development-related
payments, a hard task even for seasoned
entrepreneurs. Couple that with trying to
keep brothers, sisters and cousins happy and
you have a mountain to climb.
If you want to sell, it depends on what the
company’s value is and how long you’re
willing to wait to be paid. There are all
kinds of IRS rules about this, so anyone
considering it needs to get the advice of a
tax lawyer or CPA.
JOE ASTRACHAN Ph.D., is Wachovia Eminent Scholar chair
and the director of the Cox Family Enterprise Center of the Coles
College of Business at Kennesaw (Ga.) State University. Reach
him at (770) 423-6045.
