Preparing for transition
Three Tips for Transferring a Family Business to the Next Generation
In the late 1800s, my grandfather started a small retail bakery in the north end of Boston. Then, driven by a passion for the business, my father started his own retail bakery in 1952 and was joined by his three brothers. In the late 70s and 80s, his siblings and each of my three brothers started their own independent retail bakeries.
Even though I built a financial career outside of the family kitchen, the newspaper headlines announcing the closures of these family businesses a few years ago still hit me square between the eyes:
“After 110 years in the North End, Boschetto’s Bakery announced it will close its doors on July 6, 2013.”
“A. Boschetto Bakery has closed after 57 years in Roslindale on October 28, 2009.”
With the insight gained from my family’s experience and more than 20 years of helping organizations transfer their businesses, here are three succession planning tips to consider:
1) Don’t equate ownership with management
One of the guiding principles I use when working with business owners is to separate their children’s interest in the business as beneficiaries of the estate from their interest and position in the business as employees, mangers, and CEOs. This means that, if your daughter is hired as the CEO, her compensation should be commensurate with her experience and qualifications, the same as it would be for a third-party candidate. Likewise, her interest in the estate should be treated equally (or at least separately) from a sibling’s interest, even if the sibling is less involved in the business. When these interests are balanced and fair, everyone is more likely to collaborate to maximize the value of the business with an eye toward its long-term success.
It is also important to remember that children should not automatically have a seat at the management table; their roles should fit their skillsets. Make sure that when you put them in places of leadership, they are set up for success. Giving an unqualified son or daughter leadership in a company is one reason why we don’t see many third and fourth generation businesses.
The overriding goal of succession decisions should be to increase the value of the organization, make it more attractive to different types of buyers, and help to create more options in the future. One way you can do this is by working on the business versus working in the business. Whether you sell to a third party, or transfer to management or family members, you must separate your role as an operator in the business from your role as the investor in the business. While the operator’s role is to keep the business humming, the investor’s job is to enhance value and develop a business that is transferrable.
Some of the key steps to building value toward a smooth transition include:
- Building a strong management team
- Developing clear governing procedures and an advisory board to help you make decisions
- Establishing financial and accounting systems and reports
- Aligning management compensation with the long-term value of the business
- Developing a strategic plan and long-term financial goals
2) Value the business and have a personal financial plan
Typically, a large part of a business owner’s net worth is tied up in the value of the business. But if you wait until it’s time to sell to begin the valuation process, you won’t know all of the pressure points that can be addressed in the near term. Knowing and understanding those details will arm you with more options to build value when it’s time to transfer the wealth to liquid assets down the road.
The value of the business is important, but value doesn’t exist for its own sake. It is more critical to connect the business value to what the members of the ownership group need to reach their personal goals. If the business value is not able to support those goals, then a plan needs to be put into place to get it on track. This is why it is so critical to start this process early — it may take time find the right path.
3) Determine the most effective transfer options
Once you understand the value of the business and how it fits into your personal financial goals, you will have more clarity on the type of exit and transfer options available.
Some of these options include gifting, management purchase through leveraged buyout, owner financing, stock redemption plans, and employee stock ownership plans (ESOPs). Evaluate each option against tax-saving strategies, personal and financial goals, and the maximum value for shareholders.
At the end of the day, you want to be in a strong personal and financial situation and still have your options open. And remember, you don’t need to know all of the outcomes right away. Trying to predict the future — and knowing that you can’t — may freeze you into not committing to anything.
How we can help
I am proud of my family’s bakeries and the impact they had on the lives of so many generations. We can help you prepare now for a successful business sale later. Take steps early to discover your goals and dreams, create lasting value, personalize the plan, prepare for the transition, and, when the timing is right, execute the plan. Get a valuation of your business and ask our professionals for help with business succession planning and executive search, if necessary.