Family businesses play a key role in our economy. According to the Family Owned Business Institute at Grand Valley State University, there are 5.5 million family businesses in the U.S., contributing 57% of the GDP. Passing on the business from one generation to the next is clearly important – not just for the companies and families involved, but for our economy.
Successfully transitioning a family business requires a deep understanding of the dynamics of family business ownership.
Turning over a business to family
Family or “intergenerational transfers” shift ownership from one family generation to another — usually parents transferring ownership to one or more “business active children” (BAC). There are four primary goals for any family transfer: financial independence for current owners; “fairness” (not equality) among family members; transfer of interests to a successor; and business independence for owners.
Most family transfers occur when the owner decides to bring one or more children into the business or decides to retire. Often the owners will gift or sell their interests when they’re ready, and usually, the transfer of all or most of their interests will be over a period of time without a plan for achieving financial goals or retrieving their interests if things don’t work out. When this happens, approximately 66% of transfers result in alienation of key employees, loss of customers and suppliers, and a decline in the value of the business.
Creating the Successful Family Transfer
To achieve fairness and harmony during a transfer, it’s critical to design an internal plan that includes the following:
Define the owner’s goals and create a “vision statement” that includes: timeline for departure; how business will need to evolve over time; new management and governance structure and roles of the successor; how key employees will contribute and become vested; and other aspects of the business.
Once the vision is understood, quantify and value existing financial resources and determine the business’s level of “free cash flow” available for funding retirement, vesting key employees, or growing the business.
Establish guidelines and protocols for bringing family into the business or developing and promoting a current BAC. These include: direction for how family comes into the business, where they start, who they’ll be accountable to, their compensation and the track for promotion and equity.
It’s also critical that the owners identify, motivate and vest the essential employees who will nurture the successor BAC and participate in the growth of the business.
As the transfer begins, consider “transfer scenarios” and create a plan to accomplish owner goals, motivate and retain key employees, develop the successor and increase business value. Usually, these include gifting and/or sale strategies when “non-voting” equity is initially transferred over a specific period. On average, the process takes 2-7 years.
After the transition plan takes effect, the owner and successor(s) create a “business continuity plan” to protect ownership interests and the business in event of “triggering events,” such as an owner dying or the company losing substantial revenue.
Lastly, every plan should include a strategy for taking care of family members not in the business, and the owners when they are out the business.
Ideally, owners should work on the transition plan five years from the time they want to turn over control of the business.
John Carter is the founder of Absolute Succession. He is focused on helping business owners achieve their transition goals so they can leave the business when they want, to whom they want, for the amount they want – enabling them to achieve their desired lifestyle. Contact John at [email protected].