Successful transfer of a business involves both parents (current owners) and children (next generation of owners). Each has critical decisions to make and implement. Neither group can assure success in the transfer by working alone. The parents create the environment for success in transfer, the two generations work together to make the transfer, and the next generation determines the success of the business after the transfer. The following guidelines are aimed at parents. However, the next generation should find these guidelines helpful in understanding the steps being taken and parents' decisions.
A plan for transfer of the business starts with the parents accepting the fact that someday the business will either have new owners or will not exist. Base a plan on realistic assessments of the past and present, and reasonable expectations for the future. A plan for transfer must be more than a dream to work a little less and have fewer responsibilities for day-to-day decisions while maintaining control of the business. A need for more leisure time, help with the work, or even delegation of some management is far from a commitment to transfer the business.
One can postpone retirement or even planning for retirement while aggressively planning to transfer the business. The transfer plan may provide explicitly for the new owners to employ the parents in important positions. A second career within the same business can be much more attractive than retirement. Having the parents involved can be tremendously valuable to the children.
The plan for business transfer needs to stay flexible. Annual updates should reflect changes in goals, the business and the people involved. Ignoring the plan is the same as having no plan.
The plan should start with financial and legal intentions. The major elements of a transfer plan that addresses people issues are: timing of the transfer, responsibilities of family members during and after the transfer (including managers for the next generation of the business), and arrangements for a testing stage. It should include provisions for changing as needed and a commitment to communication, including at least annual meetings of the parties to the agreement.
Planning for transfer and then carrying out the plan is a time consuming and tedious task. Even with the full cooperation of all family members, working out the necessary legal and financial plans can be difficult. Under the pressure of time to get the legal and financial matters resolved, the human relations concerns often fail to get the necessary attention. Preliminary thinking may be secretive and change often. As plans begin to firm up, people are assumed to understand what is being done and why. Communication tends toward the informal and second-hand. The parents may not take time to talk to the affected parties before the key meetings with an attorney or planner. Therefore, people go to meetings confused, and suspicious that they are intentionally being kept in the dark. The excuse, "I just didn't have time to talk to you" rarely satisfies the person who wants more information and who feels left out. The best transfer plans have often evolved over many years.
One approach is to use on-the-job-training; that is, have them work. Work may have greater emphasis than the training. Work is important but it is not all that is needed to prepare for ownership of the business.
Another approach is to protect future owners from business problems. Letting them believe all is rosy in the business almost certainly leads to their having unrealistic expectations.
Parenting is an important part of getting the next generation ready for ownership. Experiences children have in the family business affect attitudes toward the business, desire to be part of it as adults, and capability to handle ownership responsibilities. Parents influence their children's attitudes toward self-employment, continuation of a business, riskiness of investments, the importance of education, and the benefits of experience in other businesses before joining the family business. As discussed elsewhere in this bulletin, acceptance and affirmation of children are important in this parenting.
How can we help one or two children take over the business while being fair to other children? This is a perplexing question. Equal treatment is easy when transferring only assets to the next generation. Equal treatment may be virtually impossible when transferring a business. In spite of the difficulty, judgment of what is fair rests with the current owners of the business. Careful explanation to each person of what is being done and why is crucial. It does not guarantee that all parties will be happy with the decisions.
The inability to treat people fairly often becomes a reason to do nothing. Death of one or more of the current owners passes unsolved problems to someone else. The person on whom difficult decisions have been dumped may be less qualified to make them than the deceased was. The heirs may resort to the easier solution of breaking up the business and distributing assets.
Transferring ownership to the next generation is easier than transferring management to the next generation. The transfer process should anticipate management voids created by people moving up, retiring or leaving the business for other reasons. Development of managers is a long-term investment in people. When businesses fail to develop people, success in the next generation absolutely requires hiring managers from outside. One of the children does not guarantee readiness for a management position by having worked in the business for years, being the son or daughter of the owner and founder, having a degree in management, or simply "wanting it badly."
Select a manager or managers for the next generation of the business. A person can rarely be successful in declaring himself or herself the new manager. Selecting the new management team should be part of the transfer plan or a collective decision of the owners.
What is valued? What are the core beliefs? Keeping the business in the family may or may not be valued. On the other hand, sale of land may be out of the question because it has been in the family for many generations. Reputation in the community may be more important than size or profitability of the business.
Each business has a culture. The culture of the Smith business matters to the Smiths and the Jones' culture matters to the Joneses. Differences in culture among businesses and families are as important as differences in enterprises, acres, and breeds of livestock. Agreements and disagreements within the business may be over values and beliefs as much as or more than over business opportunities, size, promotions, and profits.
Determining values and core beliefs challenges all managers. They evolve through passed-down wisdom, discussion within the business and with others, answers to many value laden questions, and the ways in which ethical problems are handled. With patience, managers can gradually change a business' culture though they cannot escape its influence on their actions.
Spouses have a key role. They need to be involved and informed. They need information to develop an understanding of how the business transfer affects their futures. The amount and kinds of information needed depends on the potential impact of the transfer on their future and the extent of their involvement in the current and future business.
Oral agreements may be easier in the short-run but they often lead to confusion and disagreement. Putting plans and agreements in writing forces discussion of potential disputes and misunderstandings. Family members cannot overlook the details of a lease, partnership agreement, job description, or plan for transfer when all parties must read and sign a written document.
A written record provides parties to the agreement basis for resolving future differences about the business transfer. However, written records do not prevent or resolve all future disagreements and problems. However, a written agreement clearly beats argument, recall, and guesses about the intent of an oral agreement made months or years ago.
Transferring part ownership of a business immediately can be a costly and risky test of the relationship among current and prospective future owners. Typically, a future owner should first come into the business as an employee. An employee learns the inner workings of the business while earning greater responsibility. Time spent in a business does not necessarily earn greater responsibility. The testing period is two-way. The future owner is testing and being tested. The goal is to prepare the prospective future owner for an ownership and management role. However, the testing stage can cause the employee (son or daughter) to leave rather than become an owner of the business. The possibility of leaving, rather than joining the business, is an important argument in favor of a testing period.
The testing period challenges a future owner's patience while waiting for more responsibility in the business. Agreement to an employee relationship during the testing period makes the expectations of the future owner more realistic. Unfortunately, the current owners may call someone a partner or even co-owner when in fact their intent is to treat the person as a laborer from now on.
Making testing periods successful is difficult. The employee, even if a son or daughter of the owners, should have a written job description. The employee's performance should be reviewed regularly. Performance reviews should address an employee's weaknesses and make plans for training, more supervision, or whatever is necessary to address the weaknesses.
However, identifying and highlighting strengths is more important than harping on weaknesses. Encouragement, pats on the back, sharing of successes with others in the business, reassurance, and increased responsibility are more important to most employees than money. Major accomplishments should be cause for celebration.
Daughters-in-law and sons-in-law may bring valuable experience, management capability, humor, perspective, mediation, money and dedication to the business. They also may bring pointed questions, confusion and conflict. Regardless, they are important to the transfer of a business. Their futures, their children's futures, their families, their roles and image in the community are all affected by the business. In short, the business matters to them and they matter to the business.
In-laws need to recognize that they differ from their spouses and from the in-laws of the previous generation. New in-laws should accept that they have not built the business, are unlikely to understand the subtleties of the business and family culture, and may be considered threatening to current owners. The most important decisions are going to be made by someone other than new in-laws.
In some cases, in-laws come to be treated as equals to daughters and sons. In other cases, they remain outsiders to the business and to decisions about business transfer. Communication and clarification of their roles is more important than the extent of their involvement.
Differences must be aired and discussed openly. The accumulation of unresolved small differences can be as devastating as a single large issue. No two people in a business are alike. From their individuality come differences in opinion and different views about what is the "right" solution to a problem or conflict. Often, there is more than one good answer to a problem. One person insisting that his or her way is the only way is more likely to magnify than solve a problem. Outside parties serving as mediators may be the only feasible alternative if differences cannot be resolved within the business.
Transferring a business changes the business and affects the lives and welfare of people involved. It is better to make choices than to ignore them. It is the current owners' responsibility to make clear the goals to be accomplished through transfer and the preferred means for transfer.
Maximizing the chances of the business being successful in the next generation may conflict with providing a son or daughter the opportunity to own and manage a business. Complete separation of the current owners from the business may conflict with the business surviving during the first five years after the transfer, while the new managers learn "the business." So, business transfer often begins with transfer of the chattels. The current owners can gradually transfer chattels to correspond with increasing management responsibility going to the next generation.
Transferring the business to the next generation means the current manager must give up control to the new manager. This doesn't happen all at once, but to get a new manager ready for his or her responsibilities, the current manager must give up decision making power. The current owner cannot delegate management responsibility to the most qualified son or daughter and still treat the less interested and less competent siblings equally.
An outside committee of advisers can bring in fresh ideas and technical information. For example, they can serve as a sounding board, evaluate progress and plans, suggest parts of the business needing improvement, and motivate managers to address problems rather than procrastinate about them. They also may mediate differences and conflicts within the management team and among the owners.
The committee needs to meet at least once a year and be compensated for their services. It is advisory to the business rather than a decision making body. Call it a board of advisors, advisory committee, review team, consulting board, or anything else that describes the role of the select group of outsiders.
Carefully choose the committee for its expertise and willingness to be useful. Intentionally choosing people with varying experiences, bents and expertise is preferable. Regular rotation of committee members assures a continuous source of new ideas and perspectives.
The current owners may not be up-to-date on technology, competition, changes in legal and government institutions and influences of the local, national and international economy.
If the next generation of owners cannot develop a viable business plan, the current owners need to address this deficiency in management immediately instead of leaving it for later consideration. Talking about vague ideas for the future is not enough. Typical components of a business plan are: purpose and objectives of the business, enterprises, facilities, machinery, land, technology, marketing strategies, human resources, insurance, financial statements, cash flow, break-even projections, and the management team.
The plan needs to be in writing. A variety of business planning tools, e.g., FINPACK, has made business planning possible even for those inexperienced with computers and budgeting.
Who is the boss? Who makes the critical decisions? Who hires? Who trains? Who evaluates? Who steps forward in crises? Requiring a written job description for each position in the business, with at least annual updates, clarifies the organizational structure and improves communication. Written job descriptions also clarify people's roles during the transition period to new ownership. An organization chart helps everyone involved with the business understand who is responsible for what.
As a business grows in size and complexity, more people, more jobs and more decisions follow. An informal relationship between two brothers and their two employees may work well. Addition of the brothers' two daughters and an additional employee may force a more formal structure and written job descriptions. The alternative to having an organization chart often is to stumble along with confused and disgruntled people.
Strengths of management people in a business vary from generation to generation. New strengths can lead to new enterprises. A son or daughter with strong interest and ability in working with people may lead to adding a retail farm market to a fruit farm. Strong mechanical ability may lead to adding a repair business. A gifted farm business analyst may want to start an accounting service for neighboring farmers. New enterprises have the potential of increased enthusiasm among new owners, fuller use of resources and higher profits.