RSM Resources

David Sloan and his brother and sister started working at their family business as youths. They learned the business from the ground up by sweeping floors, taking out trash, making deliveries and doing other odd jobs. This year, these third-generation owners expect Li’L Guy Foods Inc., their Mexican-food manufacturer and distributor in Kansas City, Mo., to generate the greatest revenue in its 40-year history, according to the Kansas City Business Journal.

When it comes to family-owned and closely held businesses, Li’L Guy represents the exception, not the rule. Family-owned businesses alone make up approximately 90 percent of the 20 million-plus companies in the United States and employ about half of all private-sector workers, according to the Family Firm Institute. Yet, the chances of such a business surviving past the founding generation are less than 30 percent.

Why the low odds? To be sure, some businesses fail due to poor management or competitive pressures. But many disappear because owners neglect to plan for a feasible transition from one group of owners to the next. And still others sell to outsiders as a way to resolve unique and complex business and ownership issues. While selling may be a sensible alternative in certain cases, a comprehensive transition analysis covering all available options may identify other much more attractive solutions. Thorough transition analysis encompasses wide-ranging issues including business planning, estate planning, risk management, succession planning, tax planning and wealth management.

If a small group of family members or others owns your business, it’s never too early to start planning for the successful transition of your business. Says Bill Monson, director of the Center for Family Enterprise at the University of St. Thomas: "The best time to start succession planning is today."

Common goals and alternatives

Baby boomers developed a large number of successful entrepreneurial businesses. Members of that generation began turning 60 this year and are contemplating the next phase of their lives, which typically includes business-transition planning. Those who own businesses face key decisions about their enterprises that will dramatically affect themselves, their businesses and their employees.

The goals of business owners often include protecting the wealth their businesses generate for their own financial security. They also include enabling the business to continue and succeed for the benefit of their families and employees. The owners have generally three strategic choices to achieve these goals:

Family, co-owner or employee succession. Business owners can transition ownership, management, or both, to these potential owners. Doing so successfully, of course, requires willing and qualified successors to own and manage the business. The successors must have the financial capability to structure terms that work economically for all parties, including the business itself.

Sale to outsiders. Business owners may choose an outright sale to independent third parties for a variety of reasons. Perhaps they have not identified anyone from their family or management to lead the business. Or perhaps the likely candidates from within cannot afford to buy the business.

Professional management. Business owners may retain ownership for themselves, other family members or inactive members of the current ownership group but retain others to manage the business. Sometimes these outside managers may serve as a bridge until other potential managers who are also owners gain the education and experience they need to run the business.

Key elements of a transition plan

When it comes to managing transition planning, no two solutions are alike. Each business is different, with its own distinct capital requirements, growth strategies and ownership structures. Each ownership group has its own emotional commitment to the business and unique retirement needs. These factors, combined with the unique characteristics of the successor owner-manager group, demand a plan specifically designed to achieve a successful transition to the next stage of ownership and management.

An effective transition plan recognizes that there’s no one-size-fits-all approach. It should help owners identify their respective transition issues and outline a path toward resolving them. Three key elements of a sound transition plan include:

A management strategy. This includes a clear structure, role descriptions and a system for accountability. It addresses the selection of future leadership,focusing on the crucial criteria of competence, commitment and character — without respect to family or other relationships. It provides for appropriate training and development based on the objectively defined needs of the business and individuals. Finally, it creates an orderly succession plan that may involve both family and non family employees.

An ownership plan. Such plans typically must accommodate the owners’ and their families’ tax and financial goals and ensure those goals are met to the fullest extent possible. They address the income needs of the senior generation and treat all stakeholders fairly while also promoting business continuity.

Business direction. The success of both the management and ownership plans depends, in part, on a sound business strategy, including the mission and goals of the organization. A clear business direction helps minimize the possibility of internal competition and confusion, which can undermine the success of the business.

Questions and more questions

The development of a feasible transition plan requires serious dialogue among owners and key managers of the business. They must openly discuss important issues that will put their individual needs and goals, and those of the business, on the table for discussion.

Key questions include:

Management succession. What are the senior generation’s career goals? Do they intend to work indefinitely? How do senior leaders see their role changing as they move toward retirement? Who among the younger generation aspires to work in the business and lead it? Are there any concerns about the capabilities and financial wherewithal of other identified owners to assume control of the business and operate it? What training and mentoring would benefit them? If key managers work for the business but do not own a stake in it, how will the succession plan affect their interest in staying with the company?

Ownership transition. Do all current owners understand the present ownership structure of the business? Does the group want to share the economic benefits of the business with key non family personnel who are involved in management? What are the senior generation’s ownership goals for the business? Is there an ownership transition plan in place or in progress? What effect will the ownership plan have on ensuring management continuity in the business? How will the plan achieve fairness? How will the ownership structure provide financial security for existing owners and opportunity for the successor ownership group?

Business direction. What is the current ownership’s long-term vision for the company? What is the next generation’s vision? Has the company done formal strategic planning? Under what circumstances would the owners consider selling the company? Is the attitude about selling the same or different among generations? What is the makeup of the company’s board of directors? Does the board include "outside" directors?

Asking and answering these and other questions can be challenging, time-consuming and emotionally draining. Individuals may have different emotional and financial attachments to the business — not to mention diverse goals. They may get along with each other or not. Some group members may have stronger opinions, or exert their leadership or claim on the business more than others. Dynamics among the ownership group may foster open communication — or obscure it.

Successfully achieving diverse goals and objectives demands a strong quarterback, an outside consultant who can build an effective transition plan that addresses issues from business strategy to estate planning to tax management — as well as family relations. This consultant brings all the players together, draws out their objectives, walks them through their alternatives, and engineers a successful drive down the field of life and business. An experienced consultant will know how to facilitate discussion and planning among owners, managers, accountants, lawyers and other professionals whose expertise and counsel is necessary for success.

What every business wants to avoid is what Monson refers to as the hospital transition-planning strategy, or the planning that an illness or accident triggers. Such planning usually occurs hastily and disregards potentially key issues — often putting the business at risk.

Most family-owned or closely held businesses struggle with ownership transition. It is possible to pre-empt many issues by starting discussions early and implementing certain aspectsof transition plans over a period of time. A gradual process can support and strengthen both your business and family relationships.