Planning for the future: Family succession

Here’s an old story, backed up by statistics: The founder works and builds a business.

The son takes over, but is poorly prepared to manage and grow it, yet enjoys the wealth.

The grandson inherits a dead business and an empty bank account.

The average lifespan of a family-owned business is less than 25 years. Less than 33 percent make it to the second generation. Only about 15 percent make it to the third. After the third generation, the odds plunge to only three percent that pass the baton to the next generation, according to research from Harvard Business School.

Nonetheless, family businesses represent 80 to 90 percent of all American businesses, and there are 1.2 million husband/wife teams running the show.

When they are good, they are very good. But when things deteriorate, not only are business relationships destroyed, but family relationships are also at risk. There are ways to avoid the pitfalls facing the second generation, but it takes planning and clear vision to ensure a smooth transition.

Here are ways to navigate the challenges of working with relatives:

1. Communication and clear agendas are key

The best way to resolve conflict and make business-related decisions is to establish clear communication channels and set regular business meetings for planning and discussing issues.

It’s great to have easy access to the decision makers, but James Hanselman, along with his wife Betty, who own Hanselman Landscaping in Manheim, Pennsylvania, says it’s best to talk about work at work and family at home. “My wife and I try not to bring business issues to the dinner table,” he says. “Otherwise, it can take over your life.”

Doug and Carol Rowald, owners of Heart of Texas Landscape and Irrigation in Belton, Texas, have been in the landscaping business they started for 21 years. Their two sons and daughter-in-law have joined the business and are in leadership positions as Doug works through the transition process.

He says all the family and one non-family members in management positions gather twice a month in the boardroom at the company headquarters for formal business meetings.

“We have an agenda and a clear division of responsibility. Any issues are resolved in a business setting,” Rowald says. “I have someone I can trust to have my back and give me the advice I need.”

While it’s not always easy to separate family and personalities from work, having a designated time and place for planning and discussion keeps things professional and not personal.

2. Avoid the perception of preferential treatment

One of the biggest challenges facing proprietors of family-owned businesses is the perception of non-family employees that relatives receive preferential treatment, perks and compensation. It’s de-motivating to employees when an owner’s child starts out in a position he’s not qualified for or didn’t earn.

Hanselman says his daughter and son worked in the company this summer and had clearly defined expectations, overseen by a crew manager. “That takes the parent out of the role of supervisor and reduces the chance of other employees complaining about favoritism,” Hanselman says.

Bobby Franz, owner of Franz Landscaping and Nursery, established in 1965 in Hamilton, Indiana, says he started out working on the lowest rung of the ladder in his father and grandfather’s business. “I learned the business from the ground up, and I believe that made my transition into ownership more favorably received by the longtime employees.”

Franz says his father was even harder on him than on other employees, but it benefited him in the long run. “I worked hard, probably harder than non-family employees, but the result was I learned every aspect of the business,” he says. “By the time I was ready to take over, I knew it inside and out.”

The biggest mistake an owner can make is to put his progeny in a management position before they’ve worked their way up from the ground level. The ‘ugly’ of the good/bad/ugly in family-owned businesses comes from simply handing over the keys to the kingdom.

The second generation does not benefit from special treatment. In fact, lack of drive is one of the most common complaints founders have about the next generation. Experts says it’s hard to have a fire in your belly when you’ve not earned your spot in the company.

Holding family members accountable for their roles in the business begins with clear job descriptions and metrics to measure performance. No matter what the family dynamics, excusing poor performance or promoting unqualified managers is always a bad decision.

3. Have an entrance exam

Family members who want to join the business need an entrance plan as much as those who wish to retire need an exit plan. Many second-generation leaders started their careers in an outside business before joining their family’s business. Economics, interests and ability may be determining factors in the decision, but expectations need to be clearly defined so the next generation feels welcomed and can succeed.

The decision to bring in a family member can be as angst-ridden as the one to retire from the business. Hanselman says his three older daughters appreciate the business and have worked summers but have no interest at this time in assuming a leadership role. But his son Ian has expressed interest in the business after working summers, as well.

“That can change, of course, but I will encourage him to pursue a business/management degree in college,” Hanselman says.

Franz always knew he wanted to take over the reins one day. When the moment of transition came, his parents left the area for three months to travel. “It was hard to not feel abandoned at first, but now I see it helped with the transition,” Franz says.

4. Stay close, but not too close

Franz’s father remains his closest business advisor and a source of information and help when he needs it. “I have someone I can trust to have my back and give me the advice I need,” Franz says.

Likewise, Doug Rowald remains an advisor and mentor to his two sons, Ben and Tony. “They can come to me with any issue, and I am happy to offer my opinion. I don’t want employees to perceive ‘the old man’ is still running things, though. It’s important for employees to know the clear division of leadership and my sons to be the ones in charge.”

5. Have a plan and a backup plan

Succession plans are mandatory for any business, but the lack of one puts family relationships at risk in a family-owned business.

Considering that only one third of family-owned businesses make it to the second generation, you need to plan for a worst-case scenario and not rely on family members to assume a role they might not want to take or for which they are unqualified.

One quarter of all family business owners don’t have any estate planning beyond a will, and nearly a third have not picked a successor either formally or informally, according to a survey by the American Family Business Association.

Planning for your retirement falls under the same estate planning necessary for smooth transitions. It takes three to five years to transition a business.

You need a written plan in the event of a catastrophe but also to guide you and your family through the passing of the baton to the next generation. A consultant can help with succession planning.

6. Create and test autonomy

One of the best ways to work in harmony with family members is to carve out niches in the business they can run with some degree of autonomy.

One family-business owner did just that with his three sons. One son took over the nursery business, one handled the hardscape and irrigation side and the third started a new landscaping side of the business.

The son who was able to start and grow his part of the company ended up the most successful.

He had the opportunity to experience the excitement of entrepreneurship. It was a gift to both father and son because he was able to build something in his own right.

Franz agrees while he enjoyed the fruits of his father and grandfather’s labor, his joy comes from the company he has built himself. They all worked together in the nursery side for 13 years, and Franz moved into the business side. “We had good times and worked through our issues. I believe the benefits of working with family outweigh the negatives. If you constantly communicate and stay on top of problems before they mushroom, you can enjoy the upside of keeping it all in the family.”

By Carolyn Mason