By Christine Hansen
BridgeTower Media Newswires
About 20 percent of U.S. businesses are family-owned, according to the U.S. Census Bureau, but only about one-third survive the transition from one generation to the next.
This is often due to poor succession planning – the forward-thinking required to replace important roles with experienced leadership within a company and financial planning to ensure prosperity.
Wayne Rivers, president of the Family Business Institute based in Raleigh, North Carolina, says heads of companies need to lay the framework for strategic future planning at least 10 years before they plan to retire in order for the business to thrive through multiple generations.
His company focuses on the familial aspect of succession planning and complements the roles of financial and wealth management advisers, and attorneys.
Succession planning for family-owned businesses involves more than just strategy and balance sheets – there are also emotional ties. Rivers started his business after hearing time and again that his clients weren’t implementing the financial succession plans he helped develop. The reason? Family conflicts or dysfunctional business practices.
Rivers advises that owners need to think about who they want to take over leadership roles, and then how they plan to do it. Rivers also advises his clients to become less involved in the day-to-day dealings of the business and pass those roles on to the next generation.
“Family-owned business leaders must examine how they invest their time and attention so that they’re sending clear signals about what’s important. Especially as they grow beyond age 55 and business succession becomes an ever more pressing issue, they must devote more and more of their time to evolving into true executives and mentors rather than simply super-productive managers and doers of an amazing variety of tasks,” he says.
Ronald Attman, CEO of Acme Paper and Supply in Elkridge, Maryland, is a second-generation business owner. He is all too familiar with the planning required to ensure continual company success, just as his father did before him. Acme has been in business for 71 years.
“Going back to my father who founded the company – he looked at his four sons and how he wanted to allocate his estate, but also how he wanted to see the business continue to preserve it for future generations,” Attman says.
That is what Attman has done for his three sons, who now also work for the company. Attman met with advisers to put a succession plan in place, and presented it to his sons for their buy-in. The plan, he says, takes Acme through to the next generation, and then it’s up to his sons to map out the next phase based on the contexts of the business world at that given time.
In the financial aspects of succession planning, many family business owners don’t properly value their company, often overinflating it. Steve K. Ball, a partner at Baltimore-based CPA firm Gross Mendelsohn, says value is a function of future cash flow and its risk.
“Much of this is an education and enlightenment process. The biggest mistake I’ve seen is owners think their business is worth more – so we spend a good time working out plans to get the company profit up so it’s valued at where the company believes it is,” Ball says.
Ball has worked on a number of succession plans with clients – often a three- to seven-year process. He says he’s seen an uptick in clients in recent years, as baby boomers begin to look at retirement. Each succession plan consists of determining what the client’s goals are, determining the fair market value of their business, and assessing what options are available.
Talking to the kids
Options, according to Kent Pearce, managing director of investments for Merrill Lynch Private Wealth Management in Towson, Maryland, are what family-owned businesses have more of than in past years. He’s seeing more clients opt to liquidate or sell, versus passing the direct business on to the next generation in the family. Selling can be more advantageous, and it’s not necessarily bad for the future of the family business.
“This new generation of millennials has a different thought process and often has an entrepreneurial spirit. They can recreate their own business model from the capital infusion. The parents think it’s another way of passing the business on to their children,” Pearce said.
While Pearce’s firm handles the wealth management aspect of his clients’ succession planning, much of the work also is helping families communicate in a productive way, helping them weed through the emotions tied to the business.
He and Rivers agree that family-owned companies should approach succession planning from the bottom up versus top down. This allows the next generation to provide input on where they see the company going, while the older generations provide feedback that helps preserve their legacy. Rivers also suggests getting key non-family members involved in discussions.
“Why exclude the very people who are going to be in charge of making the plan work?” he says.