business builder management  

Make plans now
so family business
lasts for generations

by Steve Erdall  

Family-owned businesses are the backbone of America. Yet most do not make it past the second generation.

The statistics are startling: Ninety percent of U.S. businesses are family-owned, and one-third of the Fortune 500 companies are either family-owned or family-controlled. Yet only 30 percent of family-run companies succeed into the second generation. An even smaller 15 percent survive into the third.

The reason, according to many experts, is obvious: the lack of an orderly succession plan.

Minnesota’s family-owned businesses, unfortunately, follow the national norm. Western Bank’s latest survey of small-business customers shows a troubling lack of succession planning. While almost 56 percent of the businesses surveyed are family owned, only 18 percent had a succession plan.

An exit strategy is a critical element of any business plan. When the business is family-owned, it becomes more crucial as there are sensitive personal issues to navigate.

Obstacles to succession planning — lack of time and family sensitivities — can be overcome. To get started, consider these seven simple steps:

1. Get outside help to facilitate discussions.

Hire a professional facilitator to take your family and key managers through a discussion of succession planning. This should be done on an annual basis. Sooner is always better.

We recommend that business owners consider having their children work elsewhere for several years, then enter the family business when they are about age 30. But that’s just the beginning of the training. Once a potential successor is identified, the internal training process often will take a minimum of 10 years.

And keep in mind, we emphasize potential successor; the offer to “learn the business” must be conditional. The son or daughter must prove himself or herself over those 10 years.

2. Keep open communication in the family, including the possibility of selling.

All family members should be part of the annual facilitated meeting. The facilitator’s job is to make certain that each person involved is heard. It is critical that any concerns be identified and addressed early. An outside facilitator may draw out quieter family members and address any simmering conflicts.

One potential outcome of these annual meetings is that no family member is interested in continuing the business. If so, the owner’s best option will be to sell to an outsider. An honest discussion of selling may change a family member’s mind and a potential new leader may emerge.

3. Be upfront with the fact that family members may not and often don’t get an equal share.

It may be best to make sure the child who will lead the organization has more stock than other siblings.

4. Consider taxes and estate planning.

The following example quickly illustrates the need to meet with an estate planner. Let’s suppose a business owner dies in 2005 with a company valued at $3 million. The will may stipulate that $1.5 million goes to the spouse. That portion won’t be taxed.

The will also may stipulate that $1.5 million goes to the children. Again there will be no estate tax ramifications at this level. However, if all $3 million went to the children, there would be federal estate taxes of approximately $675,000 on $1.5 million. This illustration vividly points out the need for tax and estate planning.

Owners can also reduce estate taxes by having each parent owner give each child up to $11,000 per year in stock or $22,000 per year.

5. Consider individual strengths and talents when selecting successors to lead the company.

This bit of advice underscores the reason to start a child “in the business” at about age 30 and conduct a 10-year development program. This time gives both the parent owner and the adult child a chance to test whether the business transfer will work.

It’s possible the adult child may not want to continue; or the parent owner may decide that the child doesn’t have the skills or interest necessary for continued business success. At this point a non-family professional manager may be the right answer.

6. Plan and develop the successor’s leadership talents far in advance of the transition.

Leadership skills can be developed through mentoring, professional courses and individual coaching. Few leaders are born; most are developed. The most cost-effective method is personal mentoring by the current owner or top executive in the business. This may be supplemented with professional courses offered by industry trade associations or universities.

An MBA is not essential, but can’t hurt. Individual coaching is a third option. Although expensive, coaching can provide the personal, objective attention needed to shape and hone a great leader.

7. Understand, plan for and address the potential impact on business, key employees, customers and the organization’s culture.

Once the successor has been chosen and developed, it is time for the first-generation owner to start relinquishing responsibility and authority and diminish his or her time at the company.

During the transfer of responsibilities don’t let employees do an end-run around the new leader and go to the original parent owner for advice; the result can be a dysfunctional business in which employees are confused about who is in charge.

Succession planning can be boiled down to just seven steps. The hard part is taking action. Make the commitment now to complete your business succession plan. The investment will pay great dividends as your business flourishes into the second and third generation of family ownership.

[contact] Steve Erdall is president and CEO of Western Bank in St. Paul, which specializes in working with small businesses: 651.290.8134; serdall@western-bank.com; www.western-bank.com

Steve Erdall

Western Bank