When Herbert Budd Jr. decided to pass down the family business, he took his son, Randall, to meetings with distributors and investors. Randall learned how his father negotiated with people in the industry.
“After some time, I conveniently became too busy to take the meetings and let him do them instead,” says Budd, co-founder of Budd’s Pools in Deptford, N.J.
The plan worked. By the time Randall took over the company, he was known as the point person for all corporate operations.
But it’s not always that easy. Even under normal circumstances, running the day-to-day operations of a company is taxing, and when it is time to retire and hand over the family business, a whole new set of problems arise.
Less than one-third of family businesses survive into the second generation, and only about 13 percent make it into the third, according to the book Keeping the Family Business Healthy by John Ward. And fewer than 5 percent of all businesses become family operations through the appointment of a family member as its successor, often because the successor is either not equipped to handle the job, or not interested.
Finding the key to success when passing down a family business can be tricky, but not impossible.
1. Map out the way for your successors.
Steve Hackl tells a troubling story. When his grandfather decided to pass the family business down to his son, he did so with nary a helping hand. “He asked my father if he wanted the business and when my father said yes, it was, ‘OK, bye.’ He never taught him the books or showed him how to run the business,” says Hackl, co-owner of Hackl Construction in Lake Worth, Fla.
It is essential to remember that as a predecessor, you must map out the way for your successor. Do so by integrating them slowly into the business. Many parents start by offering summer jobs to their teenage children as a way to test the waters.
“I have four brothers and two sisters, and we all started working [for the business] about the age of 14,” says Rita Rowlen, owner of Ultra Modern Pool & Patio in Wichita, Kan. The business grew right along with Rowlen and her siblings and by the time she was ready to take it over, she had been “almost 100 percent in charge” of the daily operations.
“It’s important for the children to learn what it’s like to run a business,” says Jerry Goolsby, Hilton/Baldrige Eminent Scholar at Loyola University in New Orleans. “They need to be out there digging the holes and getting their hands dirty. This will gain the respect of their parents and of the other employees.”
Similarly, teaching your successor the ins and outs of bookkeeping, inventory, human resources and retail management can seem daunting. One of the least problematic ways to handle a transition is to lead by example. Start by introducing your successor to the people with whom you do business, and be sure to govern the interaction, say experts.
2. Create a transition strategy.
There is so much more to turning over a company than teaching your children how to be good businesspeople. It’s also important to learn how to be a good predecessor. What that means is knowing what your children want and expect out of their own careers.
“I have seen many family feuds between fathers and sons when it comes to turning over the business,” Goolsby reports. Many people who have spent their entire careers nurturing the growth of a business have a difficult time letting go. “To be blunt, the parent ends up caring more about the business than about what the child wants,” Goolsby says. “They only spend a few hours a day with their children, but 10 times as much with their business. Their entire livelihood is invested in it,” he says.
Goolsby suggests turning over the business slowly to allow successor and predecessor the opportunity to become comfortable with the change. That may mean letting your children pursue other career goals before offering them the business, he points out.
“Forcing the business on your child doesn’t make them appreciative of what they’ve got,” Goolsby says. “Tell them to go to college, get a degree and spend 10 years in the work force before offering them the company.” They will feel a sense of accomplishment in the end, as if they were the best person for the job, instead of just the owner by default.
3. Trust your successor.
Trust is the No. 1 factor in achieving a successful transition, says Drew Mendoza, managing principal at Family Business Consulting Group in Atlanta.
“Trust is the mainstay of family business transitions because of the tremendous value of the chips on the table,” Mendoza says. For the turnover process to work effectively and efficiently, “they have to behave in ways that are within the constraints of good business, including above all else, honesty.” Predecessors need to ask themselves, “Am I truly prepared to step away from this and let my successors spread their wings?”
Budd says he was never worried about his son’s ability to run the business. A case of selective memory? Possibly.
Randall recalls a different tale. “My father had to become comfortable with not having a say in the operations of the business,” he says. “He could be there as the consultant, but he had to learn to give me space.”
One way to achieve this comfortable space is by yielding control. “It’s OK to say, ‘This isn’t the way I would do things,’ but it’s even better to say, ‘Do it however you think is best,’” Budd says.
4. Don’t be shy about hiring a consultant.
Consultants offer an unbiased position on many different matters, achieving a comfortable balance between a predecessor and successor. They also have the ability to create a clear business plan that’s beneficial to both parties.
“Hiring a consultant is important. However, hiring the best consultant you can afford is even more important,” Mendoza says. “A family business is the most complex macrosystem imaginable. Someone has to sort it all out.”
Rick Vaughan is not shy about singing the praises of BioGuard University, a five-day consulting program for business owners that he and his sister, Cathy, attended last year. “It not only taught us how to run a better business, but it also brought succession planning into clear view,” says Vaughan, co-owner and successor of Vaughan Pools Inc. in Jefferson City, Mo.
The course pinpointed ways to effectively manage funds during and after a turnover. It also prompted Vaughan and his sister to begin thinking about their own succession planning. “When will we turn over the business and to whom? These are things we are constantly thinking about,” Vaughan says.
Hiring an accountant never hurts either. When stock options, capital gains tax liability and legal partnerships are being transferred, it is best to have a third party divide and mediate the funds fairly and succinctly.
5. Make room for change.
Turning over the business to a son or daughter may mean putting those calculators and old-fashioned accounting books to rest. It’s the timeless struggle: habit vs. change. But many young business owners win this battle and, sooner or later, implement software and computerized point-of-sale systems to track sales and balance books.
Without an up-to-date, inventory-tracking program, a business is put at risk, according to Bob Phibbs, retail consultant and author of You Can Compete. “A miscalculation of any sort can lose the company a lot of money,” he says. “By using computerized programs to track sales and inventory, you stand a better chance of managing your budget.”
Allow for staff changes, promotions and firings to occur as well. People usually seek like-minded people to be on their team. Don’t be surprised if your 50-year-old sales manager doesn’t like being told what to do by your son or daughter, and be prepared for your successor to bring in younger staff.
“New blood never hurts,” Phibbs says, “as long as everyone has the same work ethic and you don’t alienate your customer.