Remember when you first started your business? Those early years were nervewracking, exciting and certainly challenging. Over the years, you built a solid business and raised a family. Being a small family business, your kids grew up ‘in the business;’ after all, they listened to business talk every night at the dinner table.
However, the day will come when you decide to retire and you’ll be faced with the dilemma of what to do with the business, unless you’ve made prior arrangements. Stepping down and passing your business down to the next generation is not easy; after all, it’s your baby.
In theory, passing the baton from one generation to the next may sound simple, but more than 70 percent of family-owned businesses do not survive through the second generation. However, with proper planning, your company can grow and prosper long after you retire.
Take, for example, Joe Brown. In 1951, at the age of 24, Joe Brown started his landscape company. He built his business from the ground up, started a family, and created a respected name within the landscape world. Now, at age 74, Joe is ready to retire and decrease his involvement with the company he built. The business provided a good living and he would like to keep it within the family. He would love to see his kids enjoy the fruits of his labor.
He had spoken with his wife about it on many occasions, and he knew his wife had no interest in running the company. Joe called the family together and explained the situation. He asked if any one of his kids would be interested in the business. His son is a successful attorney with his own practice; one daughter has a busy family life raising her children and expressed no interest; and Karen, the youngest daughter, has active young children as well, but has worked in the company in the past.
Karen, though she still has young children, expresses an interest. She works as a management executive, and her husband, Kirk, is a CPA, but both welcomed the career change and were anxious to take the company into the second generation. With Joe’s guidance and a careful succession plan, Karen will manage the office and Kirk will run the field operations.
With that resolved, the financial question is up for discussion. One of the first things Joe did was to get a value on what the business is worth. After all, it’s not fair to give the business solely to Karen, while the other children receive nothing. Joe must decide how to divide the value of the company and provide a comfortable living for he and his wife.
Let’s say the value of the business is two million dollars. He has a number of choices. He can issue stock to all his kids, so each will be a stakeholder in the company, or he can hand the running of the company over to Karen and her husband, with a signed agreement that they will buy the company at a stated price. The money will go to Joe and his wife.
One family business that had a succession plan is Maxijet, Inc. Tom Thayer began manufacturing low-flow irrigation products for citrus growers in the Florida market in the late 1970s. Susan Thayer, Tom’s daughter, was working in the business, installing irrigation systems. When Tom retired in 1992, the baton was passed to her, and she took over as president of the company.
Susan’s brother, who is a citrus grower, and her sister, an interior designer, are shareholders in Maxijet, but they’re not involved in running the company. Susan Thayer said, “The biggest challenge was when the business was turned over to me—it was hard for the older generation to relinquish control.”
Though family business transitions can be stressful, they can also be very rewarding.
The Kujawa family, owners of Kujawa Enterprise, Inc. (KEI), a commercial and residential landscape company, is currently three generations strong. In 1926, brothers- in-law Joe Kujawa and Peter Benka began providing agricultural seeds, supplies and equipment to meet the demands of southeastern Wisconsin’s growing population. The business was passed down to Kujawa’s son, Ron, and his wife, Sally.
When R on’s father passed away, Ron and Sally purchased the stock of the company from his mother. They changed the focus of the company by going into the landscape contracting business, which continues today. Sally Kujawa became president in 1964.
This second generation raised a family of four children, and they all grew up ‘in the business’ by virtue of the dinner table. When the children were teenagers, they too worked in the company part-time and during the summers. The third generation of the Kujawa famiy is now grown and have children of their own. Sally and Ron are still in the business, but not quite as active as before. Each child of the third generation owns 12 percent of the company, while Sally and Ron still own 52 percent. Sally and Ron’s two sons, Joe and Chris, have moved into top management of the company, while their sister works there part-time.
Chris Kujawa contributes their success to having a cohesive company philosophy. “We have similar ideas and we are working toward the same goal, supplying a quality product to our customers,” he says.
KEI employs many family members, including Chris Kujawa’s wife, Judy, in administration, and two of his three children, during summer breaks. He says that working with his wife is wonderful, and employing his children is great because they learn how the fundamentals are driven for KEI, which they can carry throughout life. Though Kujawa says his children are not required to work for the company, transitioning to younger generations brings innovation and newer techniques. KEI hasn’t changed its company mission, nor have they had any radical change. “We value our relationships with customers and family,” says Kujawa.
According to family business expert, Laura Michaud, president of The Michaud Group, and author of From the Kitchen Table to the Conference Table: Family Business Communication, a clear succession plan is key when passing the family business from one generation to the next.Once you decide on your successor, start mentoring him/her to lead. Introduce that person to business contacts, have him/her learn and work within each department, and have your successor conduct meetings.
Michaud stresses creating a proactive plan early. Start your exit plan at least ten years in advance. According to the National Federation of Independent Business (NFIB), begin your successor process by deciding which child or family member should take over the CEO position. You may want a certain child—like the first-born or your only son—to run the company, but your priority is in keeping the business successful. Look past your personal desires and focus on the success of your company.
Even with your careful planning, some problems may not be avoidable. To sidestep family conflicts, inform family members, family employees, and non-family employees of your succession plan early. NFIB recommends providing clear dates for your retirement and the exact date to transfer ownership. Allow all persons involved to meet and understand the new business plan and leadership while you are still present. If your family and company cannot reach an agreement to rectify any conflict or concerns, Michaud suggests hiring an advisory board from an outside source.
An unbiased point of view can save your company from destruction.
Once you decide on your successor, start mentoring him/her to lead. Introduce that person to business contacts, have him/her learn and work within each department, and have your successor conduct meetings. By training the projected leader with the guidelines that made your company the success it is today, a plan for continued success and growth will be maintained and improved.
Now you must prepare your estate. To prepare your company for a new successor, and prepare for your retirement, you should first attend to your financials. Your retirement fund is most likely coming from your biggest asset, your company. Hiring a good accountant is extremely important. He can advise you on how to save your wealth, and avoid paying more than half of your company’s value to taxes, and will help you live comfortably, For retirement, you can be paid a portion of the profits, receive installments on a purchase price, or set up a pension. You can also consider an estate freeze to prevent future capital gains or consider a life insurance plan to pay for the projected tax liability, according to NFIB.com. With any estate planning, you must take into account the comfortable living you and your spouse are accustomed to. Whatever choice you make should not be a burden on the family business.
Michaud says a family business must compartmentalize work and family relationships. The successful family businesses learn how to separate family and work very early.
She’s created a successful business plan for family-owned companies for her clients who want to transfer ownership and improve the work environment:
Schedule quarterly family business meetings, as well as regular operational meetings, where family members are included.
Meetings should address strategic direction, not day-to-day operations. Succession planning, financial statements, estate planning and role playing should be addressed at these meetings. Scheduled meetings allow you to bring new family employees into the company and keep family dinners and events work-free, helping to compartmentalize your family relationships.
Allow family members to sit in on key staff meetings.
Your family members attending will stay abreast of information in other departments, but make it clear that those who do not play an active role in that department are present as observers only. Taking part in meetings is a great way to groom younger family members about the business.
Positively utilize all available means of communication.
Share business-related information immediately. Don’t wait until a family gathering on the weekend to tell everyone. Communicate all company and department- related information to all family members and employees involved.
Learn to “compartmentalize” your personal life and work life.
Don’t discuss work at family events and vice versa. When you are in the office, always address family members by their given names that other nonfamily employees call them. Non-family employees will feel part of a team and you will command respect among family and non-family employees who saw you grow up, who still see you as a child.
Many companies survive and grow through the challenges of passing ownership and management from one generation to the next. Your family-owned business can do the same with proper planning and a well-guided succession and detailed financial plan. Michaud says, “The trick is to tackle the stress from both a business and a personal perspective.” Following a detailed ten-year guideline can reduce the stress of transferring your family-owned business.