Keeping the dream alive

Three items for your family business must-do list

by Ernest A. Doud, Jr.

Hooray for family businesses! They are the backbone of the American economy. They employ over half of this country’s work force. The fierce dedication of the families that own them and the loyalty of the employees who work in them give them a distinct advantage over their non-family competitors. We like doing business with family businesses. If you don’t know that, you haven’t been paying attention to TV, radio and newspaper ads. They are wonderful supporters of the communities in which they are located and sources of great pride to their owners. It is no wonder that passing ownership and management of the family business to the next generation is part of the dream of almost every family business owner.

Despite the dream, getting the business into the next generation isn’t easy. It doesn’t matter which two generations are involved, an inter-generational transfer is a stormy sea for virtually every family business. While it is true that estate tax laws add to the difficulty, navigating the choppy waters takes far more than good tax and estate planning.

Families that own and operate businesses routinely take for granted that getting from one generation to the next will just happen as if “by magic.” In the process, they overlook any number of key transition factors, each of which can represent a stumbling block. Miss too many and you risk erecting an insurmountable barrier to a successful transition. Two that immediately come to mind are:

• Getting the founder (or current leader) ready to dismount gracefully

• Making sure the business is well positioned for the future

• Preparing the next generation to lead and manage.

A graceful dismount for the founder
It all starts with the founder or current leader. If he or she doesn’t see a clear path to an attractive future, then nothing much happens by way of transition, at least not easily and not well. Right up front I have a few words of very technical advice to founders/leaders: You can die in the saddle if you want to, but it is very hard on the horse!

Here, at a minimum, is what the founder’s to-do list should contain.

• If you don’t have a clear vision of what the next stage of your life looks like, create one. Make sure you are specific about what your reduced role(s) in the business will be, what authority you are willing to relinquish and what you want to retain.

• Find at least two other activities about which you are passionate. Two is an important number because it is unlikely you will find any one activity about which you will be as passionate as you have been about the business. If you are not already involved in them, get started!

• Sit down with your financial advisors and determine what your realistic continuing income needs are (without being either a martyr or overly greedy). Then determine how reliant you are on the business to supply that income. Work with your advisor(s) to develop a plan for getting as financially independent of the business as possible. If you are too dependent on the business for your income, you will never be able to let go!

Positioning the business
Some years ago, some of my old college buddies and I got together one weekend every year for water skiing. Every Saturday morning we went to the same old dumpy café for breakfast and every Sunday we went to a different and much nicer place. One year someone came with us for the first time. When he saw the Sunday café he said, “If you knew about this place, why did you ever go to the other place?” Our answer was simple. “Common sense is no substitute for tradition.”

Unfortunately, that same maxim often finds its way into family businesses. We have seen far too many businesses lose their competitive edge, profitability and market position because they keep doing things the way they have done them for years. The senior generation is comfortable with the old ways and becomes resistant to change.

In fact, the mark of a good business leader is to be a change master. Every successful business has reinvented itself at least once in every product/service generation. It may seem counterintuitive, but the time to invest in reinventing your business – the time to search for better processes, new technology, improved equipment and even new products and services – is when revenues are growing and profits are high. That time when you would seem to least need to make those investments is also the time when you can best afford them. If you wait until the need is obvious, both time and funding will be in short supply.

Preparing the next generation
The third item that belongs on your succession must-do list is one that is often overlooked by families in business. It is the preparation of the next generation. It helps to look at this part of succession planning from a couple of different points of view.

• Do something about management training and development. Most family businesses are founded and run by a man or woman who did so without benefit of too much formal training. If you are one of those people, please don’t assume that your children can do without good training and development in today’s ever more complex and challenging business environment. Oh, and by the way, have you noticed that the little business you started has become larger and more complicated and requires a broader set of management skills?

• Preparation goes beyond training and education. Where and from whom is the next generation learning to lead? Who are their mentors? They may be in the business, on your board, or someplace in the community. But everybody needs at least one.

Finally, here is some advice for those of you waiting patiently (or not so patiently) in the wings for your turn at the top. Except for dying in the saddle (which is not a good thing) that man or woman who has spent his/her entire life running this business will not simply walk out the door one day and disappear. It virtually never works that way and you don’t want it to. Don’t lose sight of the knowledge and connections today’s leaders bring to the business that you could not immediately replace if they were gone in a heartbeat. That is the challenge you need to be working together to face.

We have simply scratched the surface of the succession planning process for family businesses. If you are interested in learning more we will scratch a little deeper during the Sunday workshops in Denver.

This article originally appeared in the 2008 STAFDA issue of Progressive Distributor. Copyright 2008.

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