Family business Featured

7:00pm EDT January 31, 2007

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.