Column: Family business: The right way to pass the torch

Denise Koslowsky

 

by Denise Koslowsky

It would be hard to pass along a better legacy, or receive a better leg-up on life, than transitioning a thriving family business to the next generation.

But so often we see problems due to insufficient preparation, sibling and intergenerational rivalries, incompatible ideas and visions, and personal emotions that exist more in family settings than in situations in which business colleagues are unrelated.

The good news is it can be done correctly and smoothly if the planning starts early and the family stakeholders commit to making it work without letting their feelings get in the way.

As the second-generation principal of a 46-year-old family business that is successfully making the transition, I”™ve seen first-hand the issues that arise and the solutions that will work.

First, understand that this is a multiyear process. Mom just can”™t announce one day that she”™s retiring and hand over the keys to junior. Uh-uh. You might as well launch the going-out-of-business sale.

Years, perhaps decades, in advance the older generation must take stock of what is to come and start a checklist of decisions and actions that must be made. Among its items:

Ӣ Are the kids interested in running the business?

Ӣ Are they capable?

Ӣ How do I give them the appropriate training and mentoring?

Ӣ How do we structure the ownership transaction(s)?

Ӣ What is the timeline?

Ӣ What are the pitfalls?

Ӣ How do I, as the founder, let go?

The bulk of the work is in two broadly defined areas: succession planning and formalization, according to Family Business magazine. For the first, structure is important, as in an apprenticeship. The next generation must be exposed to all aspects of the business, learn the possibilities and problems, be let in on dad”™s special way of tracking sales and expenses, and know mom”™s special way of closing the deal.

Maybe the starting line comes early in life with a child helping the staff stuff envelopes. Maybe it comes after getting the MBA, when the next generation shadows department heads and learns to think critically and make sound decisions for the business. The key is to get the process moving ”” plan the work and work the plan.

The thorniest problems often are closely tied to the relationships ”” a couple of your kids really don”™t like each other, a younger daughter is more qualified to be CEO than your oldest son, old rivalries and disappointments are rekindled in the transition process.

Solve these problems now. Don”™t turn over your keys to the business or do things that can”™t be undone while issues are boiling under the surface. Years of planning and work can be wasted when you head off to retirement and the office turns into a war zone.

Your accountant and lawyer are vital partners in making sure the business entity transitions smoothly to next-generation ownership and with minimal negative consequences ”” such as an inheritance tax bill that would force a sale. Has the older generation gifted the business, or is the next generation buying the business from mom and dad? Again, you must start years in advance to do it right, without hidden financial surprises.

Formalization is also where you will likely need some outside help to define roles and responsibilities, plan and structure the company for the future. Hire an organizational consultant to work with your company to help ensure success in growing and effectively transitioning the leadership among the generations of family owners.

A few tips we learned from our organizational consultant along the way that I would like to share:

Ӣ Clarify and harmonize management roles.

Ӣ Ensure your company is a great place to work that attracts and retains talented employees.

Ӣ Develop best practices for the company

You might have to make some hard decisions; maybe a fallback is to split off segments of the business to various children, bring in unrelated executives for key positions or even fire one of your kids. Nobody wants to do that, but sometimes it must happen.

In my business, the transition has been working well. My parents, the founders, remain active participants and decision-makers, yet they get to enjoy the fruits of their labors on the golf course in Florida for much of the year. Early on, they took stock of us kids, saw our interests and made us a part of the plan. They became colleagues, mentors, business partners and problem solvers. They set the tone and the example, and both generations together made it happen.

This year, the first of my children will go to college. I don”™t know yet if he”™s interested in the business; he probably doesn”™t know yet. But as he and his brother get their education and formulate their futures, it”™s a conversation we”™ll have at the right time. We”™ll see what works and what doesn”™t, and if another generation will come on board.

But this is a decision that is not up to us. And that”™s another vitally important realization that family businesses must have: Those of the next generation may not love the work, and you have to respect that. But if they do, and they have that fire in their bellies that you feel upon unlocking the door every morning, go for it! Watching their success will be a success of your own.

Denise Koslowsky is a principal at Advocate Brokerage in Scarsdale. She can be reached at 914-723-7100 or denise.koslowsky@advbc.com.