Tug of War

Bobby L. Hickman

March 13, 2008

If you own a family business, have you made preparations for the inevitable day when it's time to pass your business on to someone else? Or are you putting off dealing with the likely conflicts that arise when family and business interests collide.

"The combination of money, blood and power is a lot of baggage," says Larry Colin, an entrepreneur who experienced plenty of challenges before selling a 92-year-old family business. "When you can't see eye to eye with other family members, those ingredients become combustible."

Larry and his wife, Laura, a former investment banker with Solomon Brothers, moved from New York to Atlanta eight years ago. The couple has written a book, "Family Inc." that combined personal experience with research that offers guidance on planning for family succession. Their advice: take action now to plan ahead.

Larry said family businesses are "a huge economic engine." There are 24 million family businesses in the United States; and six out of 10 people in the American workforce are employed by family businesses.

However, the couple found "family businesses have a real problem with succession – passing the business on from generation to generation," Larry says. "We found 70 percent of family businesses did not make it to the second generation, and 90 percent did not make it to the third generation."

Laura adds the couple found "it's hard to get it right. It takes a lot of planning. There's no human resources department to go you, so it's all up to you."

The Colin's recommend a "triple five-year plan" which breaks the planning process into three five-year periods. The periods typically begin at age 55, although Larry emphasizes that it's never too early to plan. "We're saying age 50 is not the first time to start planning – it's the last time."

A major issue is figuring out how to develop liquidity, he says. "The typical problem in a family business is that all your money is tied up in an illiquid asset. So you need to take steps such as putting some money into outside assets like real estate, and having the company purchase insurance that will provide money for your spouse." Other steps include determine the value of the business, doing estate planning and assembling all the necessary paperwork for succession.

Also during each planning period, the owner should evaluate children or other family members as potential successors. "Then, if you have no candidates within the family, you must decide whether you'll keep the business, sell it or bring in someone from outside to run it." Laura adds that candidates "should also have experience working in a business. If they do not have management skills, people will be suspicious."

"Entrepreneurs in most family businesses are so busy with the day-to-day of the business, they don't pick up their head to think about these things," Larry says. "And even when you do think about it – when you realize you need to address a family squabble or a make shareholder agreement with your sister – you put that on the to-do list right after a root canal."

Larry "ended up in significant family issues with my brother" over the fourth-generation business he headed. "Imagine being in a room with a mediator," he says. "You show up with three lawyers and your sibling has three lawyers. Each of you is spending a fortune. Your sibling's lawyers talk about how bad you are and your sibling's lawyer says how bad you are. Then you realize you've lost your way. You need intervention: family counseling or marriage counseling. And if that doesn't work – if you can't fix it – you've got to go your separate ways. You can't stay in that box and keep fighting."

Laura says the couple recommends two major approaches to addressing family dynamics. One is bringing in an outside advisor. She said there are a number of universities that have family business consultants, citing a program at Kennesaw State University. "Outsiders bring a different perspective, and many businesses have been successful with that."

The second approach is running a family company just like any other business. "Many family businesses don't have the structure that regular businesses do," Laura says. The couple recommends some "rules of engagement" for having family members work in the business, including requiring family employees to have prior work experience; giving them a written performance review; paying family members a market salary; and getting legal documents covering the employment agreement.

Larry emphasizes, "You've got to treat your child like any other employee. People have fuzzy lines between family and business. That was one of the problems in my business. We had 10,000 employees, but it was hard time to delineate between the family and the business. When your family treats the business like its own ATM, you've got problems."

The couple also found a longer transition is more likely to ensure success than more than something abrupt. One of the reasons family businesses are so successful is that the culture familiar for long-term employees, Laura says, and they don't want to see huge changes.

"Don't sweep your problems under a rug and think they'll go away," Laura says. "You need to act now. So pick your head up from thinking about making the next sale, and focus on family business management."

Larry adds, "It's difficult to win at family business. If you don't plan ahead, it's going to cost you a lot. When the family becomes disruptive and you take your eye off the ball to deal with internal conflict, a competitor is going to eat your lunch."

© James Steidl | Dreamstime.com

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Tug of War

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Bobby L. Hickman

March 13, 2008