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Transferring Control in a Family Business
The family business is an important part of any national economy. In the
U.S. something like 90% of all businesses are either owned or controlled
by a family. It’s about the same in Canada, the U.K., Australia and New
Zealand. And they aren’t all small businesses either; about one third of
Fortune 500 firms in the U.S. are family-owned.
Family businesses have an
unfortunate weak spot that means only one out of three survives the
transition from the first generation of ownership to the second. Only
one out of two survive the transition from second to third generation
ownership.
This poor survival rate is generally felt to be the result of poor
planning for the future rather than resulting from the more visible
family disputes that often make the newspapers.
It’s estimated that 40% of family-owned businesses are facing a transfer
of ownership or control issue at any given time. The issue can arise due
to the death or incapacity of a family member or it could be the result
of new family members being brought into the management of the business.
For the founder of a family business there are few options when it comes
to giving up control:
1. Stop trading and close the doors
2. Sell to someone outside the family
3. Retain family ownership but hire outside management
4. Retain family ownership and management
Since statistics show that the survival rate of businesses choosing
options 3 and 4 is so low, it follows that more attention needs to be
given to the issue before the need to transfer ownership arises.
Why is the survival rate so low?
Experts in family business management say that four basic factors are
the cause. They can occur independently of each other or they can be
linked together, and the result is likely to spell disaster for the
enterprise.
The first and most common
cause of failure is a lack of planning. The business reaches
a point of crisis and no plan is in place to facilitate the transfer of
ownership from on family member to another. The resulting disruption
causes the eventual demise of the organization.
Another statistically important factor is that the business lacks
viability. This most often happens when the founder’s personality or
abilities lay at the heart of the business and can’t be replicated by
later generations.
In some cases of failure the owner has little interest in handing the
firm over to the next generation and just accepts that when he or she
depart the business will end. A fourth cause of failure is simply that
no one else in the family wants to take it over.
Even if these last two factors apply, it makes sense for the owner of
any family business to optimize their return from the enterprise by
making plans for a smooth transfer of ownership when it becomes
necessary. When the right kind of planning has been done the business
will usually survive the transfer and remain viable.
There are four distinct plans that need to be done. Each is a complete
and separate plan that complements the others, and all four plans need
to be prepared to ensure the organization’s survival.
A Strategic Long-term Plan
for the Business
A strategic plan for the business charts a course for the firm and
details the goals of the business. Is growth of the enterprise the goal
or is it there to provide an income for family members? Will the
business trade aggressively or conservatively? Working through these
kinds of details creates a clear picture of the intended future of the
business.
A Plan for
Each Family Member
This plan addresses issues of importance to all members of the family.
It outlines the role of the family in the business and the part each
family member will play. It can state policies regarding employment of
family members, how they might leave the business and what their
entitlements are, and what support family members will receive from the
business to ensure they are adequately trained and qualified to take a
part in the firm.
A Business Succession Plan
The succession plan states who will take over when the present owner
leaves the position and when the transition will take place. It tells
what the role of the former owner will be and what compensation they
will receive. It includes a timetable for the handing over of executive
power and what remuneration the family member who takes over will
receive. If desired a succession plan can include other family members
in board or management positions as part of the succession arrangements.
Estate
Planning
Many family businesses fail because the owner dies and hasn’t reflected
the business succession or transition arrangements in their estate
planning. The business is an asset like any other asset and can be
subjected to destructive taxation if the estate planning isn’t done
correctly.
Preparing four separate plans to handle the transfer of control in a
family business may seem like a lot of work, and if done correctly it
will be. But the alternative is for the enterprise to join the numbers
of failures and either fade away or self-destruct.
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