« May 2010 Table of Contents
Business Trends: All in the family
Succession planning requires a team approach to cover all the bases
By Joanne Friedrick
May 01, 2010
The family business may have been started on a shoestring, with a little bit of money from the bank and a whole lot of sweat equity from the founder. But that same company today may be worth millions, and the decision on how it will pass to the next generation becomes a major business issue. With many baby boomers reaching retirement age, the need for transition planning will only increase.
However, the success rate after passing the business from the first generation to the next is only 30 percent - and it drops off even further as the business progresses to generations three or four,
according to succession-planning experts. By the fourth generation, only 1 in 1,000 family businesses succeed. Despite a desire to keep the business in the family, most owners and their kin fail to plan properly to ensure the transition is successful.
John Nagle Co., a seafood wholesaler and distributor in Boston, is one of those rare fourth-generation family businesses. Charlie Nagle, president and great-grandson of the founder, used outside sources such as a lawyer and an accountant as it made the transition to his taking over leadership of the company 2001, "but there weren't a lot of issues. We were fortunate that we felt a strong sense of tradition."
While the Nagles had a smooth succession into the fourth generation, not every family business is equipped to handle the process on their own.
Take a team approach
There are five key areas - business financial planning, management succession, ownership transition, personal financial planning and estate planning - that every family business must address to achieve the greatest chance of success, says Dan Gaffney, head of succession and transition planning at Moss Adams, a business consultancy and certified public accounting firm with headquarters in Seattle.
To help address these areas, both Gaffney and Ira Bryck, director of the University of Massachusetts Family Business Center in Hadley, Mass., recommend family businesses gather a board of advisers to discuss these topics.
This board should include the owner and spouse, their attorney, accountant and a neutral facilitator, says Bryck. A financial planner and a succession professional are also critical to the team, notes Gaffney. It's important to have someone on the board who will challenge the owner on tough questions, such as whether the next generation is capable of running the business and, if they aren't, what can be done to improve their chances.
The main question to address, says Bryck, is where does the owner want to be 10 years from now? After that is determined the family can work backwards. Questions likely to arise, he says, include: What do we need to do to grow the children into leaders? At what point will the matriarch or patriarch of the family begin to cut back on time at work?
"We see it as a major project of the company to talk about succession," says Bryck. "It has to be more than just business-driven; it has to be about the sustainability of the business. Families need to concentrate on working on the business, not just in the business."
It's also important to address all five steps for a successful transition, and to revisit them annually until the transition takes place, says Gaffney. If the goal is to transition the business to the children, the financial plan should take into account how they are going to acquire the business. Unless they've worked elsewhere to make money, most children of family-run businesses don't have the finances to buy the company outright, so there needs to be a plan
in place that allows them to pay over time, but which also provides for the retiring family members.
In the case of the John Nagle Co., Charlie Nagle has seven brothers and sisters, and brothers Robert, Vincent and John all work full-time in the business. While not the oldest, Nagle says, "It just turned out that way" that he landed the role of president. His father's philosophy was to "make the next generation work for it. My generation had been running most aspects of the business before the transfer," he adds. In addition, the succession happened gradually, so the older generation had time to downsize their ownership stake in the company.
Who will mind the store?
Management succession revolves around asking tough questions. As many as 80 percent of business owners want to transfer the company to their children, but that may not be the desire of the next generation, says Gaffney. In addition to securing buy-in from the family, Gaffney says it's important to know that your current employees are on board as well. If they aren't sold on having the children as the next leaders, the business may fall apart.
A successful family-run business has more risks than a start-up one, as the assets and customer base have grown over the years, notes Gaffney, "so it requires someone in charge who is prepared for the job."
Ownership transition is all about structuring the deal, especially from an estate, gift and income tax perspective, says Gaffney. That's why it's important to have a team of advisers, because an accountant or lawyer alone may not consider all the implications.
While personal financial planning covers the insurance and retirement needs of the owner, Gaffney says estate planning can be the trickiest of the issues because it requires family members to address the fairness question. Specifically, what is their fair share of the business given their roles within the family and the company?
The problem, notes Gaffney, is "Most entrepreneurial business leaders aren't good at this kind of communication," which is why they need impartial advisers to broach these topics.
Specific to the seafood industry, Gaffney says companies need to consider the ups and downs of the business cycle, because such fluctuations can impact profitability and value year to year. If the business is more volatile it may be harder to structure a transaction in which the owner takes out a certain amount each year. Additionally, the
buyout structure has to be flexible because of the cyclical
nature of the business.
And there may be extra involvement with the bank because of debt related to fishing vessels or processing equipment, he says.
Despite the added challenges of transitioning a seafood-related company, says Gaffney, he finds car dealerships and seafood businesses are the ones most likely to remain in the family.
As to what will happen next for the John Nagle Co., Charlie Nagle says to "check back in five years." They are thinking about transition to the next generation, he says, but he acknowledges that with family spread out around the country, it's not the same experience as it was for his generation.
Contributing Editor Joanne Friedrick lives in Portland, Maine