Statistics compiled by Johnson Cornell University tell us that 40 percent of all U.S.-based family businesses, of which there are approximately 5.5 million, are passed down to the next generation. From there, about 13 percent keep their doors open long enough to be transferred to the third generation, and a mere 3 percent are ever held in the fourth generation’s hands.
While these numbers may look a little grim, especially if you’re involved in a family-owned business yourself, businesses passed from one family member to the next actually tend to last longer than non-family owned businesses, at least as far as statistics are concerned. That’s because the average life-span of family businesses is 24 years which is 2.5 times more than what research says is the “magic number” for most business’ longevity, with most not making it past the 10 year mark.
Plus, who says you have to be part of the minority and do nothing but watch your family business slip away because the odds are stacked against you? Transitioning to a future generation is possible, although it isn’t always easy. So if this is where you are, or where you think you will be in the future, there are a few things you can do to smooth the transfer process so you keep the business (and family) intact.
Address the Personal Side of the Transfer Early On
There’s an old adage that says, “Business is business; it’s not personal.” However, that really doesn’t apply as well when you’re talking about family-owned businesses because the lines often blur.
For instance, Griffin H. Bridgers, tax and estate planning associate at Berenbaum Weinshienk PC, says “where there are multiple family members who might be candidates to take over the business, there is always a risk of friction.” That’s why he always advises that you “bring everyone to the table before making the transition,” enabling you to deal with these types of issues before it does any harm to the family unit.
Additionally, because it is personal, Bridgers says a lot of families don’t prepare the necessary paperwork in the same legal manner they would if they were transferring business ownership to a stranger. They simply rely on trust, which he says “can cause issues if, for example, a family member decides to form a competing enterprise and steal clients, or if a child purchases the business and fails to make payments.”
So, even though you’re dealing with family, it’s extremely important to make sure all of your paperwork is in order. Do it in the same way you would if you were turning over the business to someone you don’t know. This can help protect relationships, as well as the business itself.
Have a Communication Plan in Place
Because transferring a business from one generation to the next can affect treasured family bonds, Sam Butler, public relations consultant and founder of 35th Avenue Partners, suggests that you also “go through a strategic communications planning process” and get a plan in place.
Butler says this is important because transitioning a business isn’t just about turning over ownership to the next generation. You’re also “handing over long-standing relationships with employees; business continuity with customers, suppliers, and partners; reputation and credibility” and more. Therefore, you want to make sure you have a plan in place that helps protect all of these during the transitional phase.
Butler also suggests that you “think not only about the financial and structural terms of the deal, but also the stories you need to tell.” For instance, if the transition is likely to garner the attention of the media, decide beforehand who will talk to them. Also, make sure everyone has the same details because, “when companies go through change, people get excited and nervous at the same time and mixed messages don’t help.”
Be Clear About the Type of Transfer That’s Occurring
Because businesses are so complex, Julian Cordero, attorney and managing partner at Cordero Law LLC, says that you also want to be completely clear about what type of transfer you want to do. This ensures that all family members know exactly what they are, and are not, getting in the deal.
Cordero provides the example of doing an asset purchase versus a stock purchase. “When you do an asset purchase, you purchase the assets of the company but do not purchase the company,” he explains. However, “when you do a stock purchase, you take the entire company as is.”
This is especially critical if the transition isn’t a full transfer and the original owner, the prior generation, is going to retain some type of ownership or stake in the family business. So, make sure you’re both on the same page so it’s perfectly clear what type of transfer is going to take place.
Along these same lines, Andrew Reeves, owner of Luxe Translation Services, says to “always make sure the other party knows you’re inheriting the entire business…with all its goods and bads.” Reeves speaks from personal experience in that, when Luxe Translation transferred from his brother to himself, it wasn’t doing so well. However, he was able to turn it around, which is when his brother stepped in and said that it was “due to his efforts,” which meant he felt that he should share in the profits.
Unfortunately, this has put a wedge between the two and Reeves says, “long story short, I haven’t seen or talked to my brother in four years.” He doesn’t want to see this happen to anyone else, which is why he suggests that all parties involved realize that the new owner is the one on the hook if the business goes bad, as well as being the one who reaps the benefits should the business prosper.
This is where it helps to make sure your paperwork is in place. “I didn’t get contracts drawn because I thought, since he was my brother, we wouldn’t have problems,” says Reeves. Don’t make the same mistake because you’re never really sure how things will go.
Follow a Defined Set of Principles
At the opening of this article, we shared that a mere three percent of all family-owned businesses make it past the third generation. Well, Richard Swartz is proudly included in this number as a fourth-generation furrier (and current CEO) with Mano Swartz Furs, a company that his great-grandfather started over 125 years ago. Furthermore, he shares that the secret to his family’s continued business success lies in following five basic principles.
First, Swartz says that “it is understood that ownership of the business must reside with the one person who is ultimately responsible for the business.” In other words, there is one owner per generation. “Other family members can work in the business,” he says, “but not have ownership.”
The second principle to having a business that can be passed down from generation to generation according to Swartz is “training starts at birth. From dinner conversations to working summers, the business and its values and beliefs are constantly discussed.”
The third principle is that the owner has to be a model when it comes to work ethic. Or, as Swartz puts it, “the owner works harder than anyone else in the business.” By doing this, future generations learn exactly what it takes to run a business strong enough to be passed from one generation to the next.
Fourth, “stay ahead of competitors,” as business is constantly evolving and changing. Always put yourself one step ahead of the other companies in your field and you’re more likely to have a business to pass down.
And finally, don’t transfer the business to a family member blindly. Swartz says that his family has followed the principle that ownership should “not be transferred until the next generation has demonstrated the ability and commitment to be successful. Sometimes that’s at age 25, sometimes that’s age 45.”
Ask Yourself Some Rather In-Depth Questions Up Front
Erica Jameson is also living proof that generational businesses can and do succeed, as she is the third-generation owner of Jameson Ranch Camp. This camp was started 83 years ago by her grandparents, transitioned to her parents in 1979, and then to her in 2010 (although her parents still help out). Her advice? Ask yourself a lot of rather in-depth questions up front so you know beforehand how you’ll deal with different topics and issues.
For instance, Jameson says you should think about when you “can safely talk about business. Thanksgiving? Christmas? Other family gatherings?” Knowing this type of information beforehand can save you from some tension-filled family get-togethers. It also gives you time to establish some “rules” so that everyone is on the same page and knows when it is appropriate to discuss business and when it isn’t.
Other things to think about, according to Jameson, have to deal with “rules of conduct.” She goes on to say that “with every generation, or family relationship, there is baggage.” Therefore, you need to think about what you need to do so that each person in the transition feels valued. Ideally, this needs to occur prior to the transfer process so that it is a positive experience for everyone involved.
Also, ask yourself how you’ll deal with some basic business situations and how they relate to your family members. For instance, Jameson suggests you develop answers to these questions:
- How will you introduce your family member to others in the business world?
- If you have a heated business discussion, how will you respond?
- What role, if any, will the prior generation play in the business once it’s transferred?
- How will you separate business from family business?
- If you have to discipline or fire a family member, how will you do it so it has minimal impact on the family unit?
Coming up with answers to these types of questions from the very beginning can help you take actions that preserve the family relationships while transitioning the business to the next generation. Jameson also says that you need to think about what happens if no other family member “steps up to take over after you.”
Jameson admits that, “my company has done these both poorly and well.” She also says that transferring a business to another family member “is a difficult thing to navigate, and it takes a great deal of time, energy, and perseverance.”
The Big Takeaway
If you take anything at all away from this article, I hope it is this: transitioning a business from one generation to the next isn’t a process that should be taken lightly. In fact, it requires a lot of forethought and planning if you want things to go smoothly, keeping both the business and the family intact. But as long as you go through the process with your eyes completely open and deal with these types of issues early on, your chances of being part of a business that survives generation after generation increase tremendously. And you’ll have quite a legacy to pass down along the way.
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