During a recent family dinner, my teenage daughter casually mentioned that she could not wait until she grew up and I gave her my company. I looked at her quizzically and asked, “Honey, what do you mean by ‘when I give you my company?’” She replied, “Well, eventually the company will be mine, right? Aren't you going to give it to me?” Well, about that.
Have you had “the talk” with your children?
When it comes to succession planning, parents and children often have different expectations. These differences are often more marked when it comes to family businesses. Family businesses have their own set of challenges.
These topics of conversation may be uncomfortable, but they need resolution before the succession plan materializes. If they are not resolved beforehand, they are guaranteed to surface at the worst possible time.
These differences can be resolved with a simple strategy. Have open and frank discussions with the incoming generation of owners. Have everyone lay their cards on the table and come to an agreement.
The subjects that need to be discussed with the family fall into five categories:
1. Company direction
The company’s future direction is often a source of disagreement between the outgoing and the incoming generation. For example, the family elders may be interested in keeping the business stable. This approach makes sense for them, especially if they plan to get retirement income from the business. It’s a logical and low-risk strategy.
On the other hand, the incoming generation may be interested in pursuing growth. This goal is not surprising, as the younger generation may be looking to make their mark.
Growth comes with potential rewards, but also with increased risk. From the new generation’s point of view, this strategy makes sense. The incoming team has plenty of time to recover from any mishaps.
Company direction disagreements are common during transitions. It’s best to resolve them before the transfer.
2. Management structure
Discuss the future management structure with the incoming generation early. Set expectations properly. This subject could be an issue if family members are vying for the same management position.
3. Ownership structure
Ownership structure is one of the more sensitive subjects you need to discuss with the incoming generation. How will business ownership and control be divided among the incoming generation? Will everyone have an equal share? Will everyone have the same voting rights? The answers to these questions depend on specific family dynamics.
Some owners sell the business to their successors at full market price. This strategy is perfectly valid. They have invested a lot into running and growing the company. Also, most entrepreneurs have their nest eggs tied to their companies.
Other owners may choose to sell the business to their children at a discount. That strategy also makes sense under the right circumstances, especially if the owner wants to (or can) help their children. This approach also improves their children’s chances of getting external financing.
Regardless of which path is chosen, the business should be valued by an expert appraiser. There are a few very different valuation methods. Selecting the right one is key. In this field, experience matters. Look for an appraiser who is certified by a national association.
5. How involved will the owner be in the company?
Lastly, the owner will need to discuss their level of involvement after the glass business has been transferred to the incoming generation. Will they remain hands-on? In an advisory role? Or will they completely step away from the business? Owners should discuss this issue with the new generation and make sure that everyone agrees.
Read Part 2 of Marco Terry’s “All in the Family” series about financing the sale of a family business to the next generation.