Hitting a Home Run

Every family business owner eventually must face the tough decision about passing the torch. A well planned transition to new ownership and management is like hitting a home run: it brings success to the owner, his or her family and the business. Failing to plan adequately leaves players on base, and missed opportunities for everyone in the post-season.

Transitioning management and ownership to other family members, current managers or employees, or an outside third party should be part of the business's strategic plan. Ideally, the transfer should help the owner and his or her family achieve their most important business and life goals. Unfortunately, most business owners wait too long to begin planning for transition.

Four Goal-Setting Steps

No baseball team would dream of going to the World Series without a game plan. The same holds true for planning the transition of a family business. Every transition is complicated, dealing with who will own the company and how it will be managed. Family business transitions add a third dimension-family dynamics. A family business transition plan must take into consideration its effect on the family, as well as the business. These four goal-setting steps help craft a successful transition strategy: setting goals, writing a mission statement, developing the family's constitution and considering the family legacy.

Owners should ask themselves what they want to accomplish most. Research and experience demonstrate that two considerations frequently top the list: preservation of capital, and financial independence for the owner and the immediate family. For many, the ultimate goal is to complete a transition that creates sufficient wealth for the owner to retire comfortably, while at the same time taking care of the owner's spouse and children.

Setting Goals: First, ask yourself these questions: Does the business or the family come first? Are family issues the biggest challenge in running the business, or is the business the biggest challenge to being a family? Understanding the answers to these questions and their implications affects many aspects of transition planning and will help identify the values and goals most important to you. Once a list of your values and goals has been compiled, prioritize them. This will determine how the planning process should proceed, with each step measured against meeting these priorities.

Mission Statement: The mission statement can unite the family and give it purpose. Creating one involves reconciling disparate visions. Where does the family see itself in 10, 15, 50 years? Does the business have a central place in that vision, or is it the creator of wealth to be managed and deployed for other purposes? A mission statement defines where the company fits into the family dynamic and how major stockholders envisions a favorable transition.

The Family Constitution: It's not uncommon during this goal-setting step to discover that family members have different goals and ideas of how the vision should be attained. Establishing a family constitution that outlines the family's beliefs, goals and governance structure often helps bridge these differences. The constitution should be created with the input of all family members. Occasionally, professional help may be needed to unite the family around a common purpose.

The Legacy: Finally, determine what type of legacy the owner and family want to create, and what needs to be done to achieve this.

Preparing for Transition

The goal-setting stage of transition planning establishes the roadmap the business and its owners will follow. But without the right team that roadmap could lead to a dead end. It is essential to build a transition team comprised of specialists who can provide the necessary guidance to achieve the family's goals in a prompt and cost-effective manner while alerting the family to risks they may not have considered. Certain advisors should be part of any transition, including a corporate attorney and a CPA. The owner's most trusted advisor should take the lead role.

If pursuing a sale, the attorney should have mergers and acquisitions experience to better protect the family's interests and provide a wider range of structuring ideas. The same standard of experience is needed from CPAs to assure they are familiar with how buyers evaluate financial statements, and they know how to build the value of the business. Sellers often also benefit from engaging an investment banking firm to market the business, screen for viable purchasers, and provide market knowledge on similar transactions. These areas of expertise are essential because many deals have fallen apart-or failed to come together in the first place-because the family has unrealistic assumptions about what the business is worth.

Intergenerational transfers also require an experienced trust and estate attorney to recommend deal structures to help the family achieve its personal objectives while working within the existing gift and estate tax framework. Finally, a wealth advisor helps identify and prioritize goals, evaluate the effect of the transition or sale on those goals, and protect the wealth created by the sale to assure the owner's financial independence and family objectives are met. With the team in place, there are three essential steps to preparing the business for a transition.

First, ownership should select a leader to oversee the business during the transition. This leader should have broad operational experience and authority to handle the day-to-day operations, and should not be the person primarily responsible for completing the transition of ownership. This is vital because having a CEO who is distracted by the deal and isn't paying close attention to day-to-day needs, may cause the business to lose important value.

Next, a plan should be put in place dictating how the CEO responsibilities will shift during or at the conclusion of the transition. This is particularly important when the business is staying in the family because owners who try to maintain their influence after giving up the reins often inadvertently end up undermining the transition. This is the most common reason that intergenerational succession plans fail.

Finally, there must be continued communication with all key constituencies, including employees, customers, key vendors and banks. Everyone needs to be on the same page and have faith in the transition plan for it to succeed.

Every family business eventually faces a transition of some sort. It could be passing the torch to the next generation, or an outright sale of the company outside of the family. Likewise, every family business owner faces a transition, stepping out of his or her role as the business' leader and creating an entirely new identity. It is important for every business owner to develop and implement a succession plan that assures the success of both the business' and the owner's transitions into the next stage of their lives.