Future Perfect

by William A. Mason and Margaret L. Montgomery, Gravel and Shea

Succession Planning Pays Off

Family-owned and family-managed businesses account for 50 percent of this country’s work force and 50 percent of the gross national product. Over one-third of Fortune 500 firms are controlled by families. The Vermont landscape is dotted with many of these small and family businesses in areas too diverse to enumerate with detail here, but they include family farms, telecommunications firms, insurance agencies, venture capital funds, retail stores, hotels, motels, ski areas and campgrounds, real estate developers, manufacturers and food processors, to name but a few.

Significant changes in ownership and management lie ahead for these family-owned businesses, according to a recent survey by the Mass Mutual Financial Group. An unprecedented 43 percent of family-owned businesses will experience leadership shifts in the next five years as the chief executive officers retire. Of those businesses, only 43 percent report having selected a successor (which means 57 percent have not), and 25 percent of the family business owners are not sure how they will divide ownership among members of the next generation. Frequently cited statistics indicate that 70 percent fail to make the transition to the second generation, and 90 percent do not make it to the third. Succession planning should be a priority for any family business, but it is often overlooked because the owners are too busy, there are complicated emotions and relationships involved, or because it involves uncomfortable discussions regarding aging, death and the financial state of the business and related economy.

Like so many things in life, timing is crucial.

Start succession planning early. The sooner you commence family business succession planning, the smoother the transition process is likely to be. Too often, the planning begins after the owner(s) have become sick or unable to work, which makes the eventual transition of the business to the next generation more difficult.

Involve the family in succession planning discussions. Unilaterally establishing a succession plan and then imposing it upon others is a sure way to create chaos and discord. Each family member involved in the family business may have his or her own ideas about what will work best. Listening to and considering those ideas may avoid future family conflict. Being honest with family members and involving them in the process is a surer way to create a common goal.

Know your family and its strengths and limitations. Examine the strengths and weaknesses of the next generation, ask yourself the tough questions, and determine what is most important to you: Do you want to save taxes and protect your assets? Do you want to keep the company? Do you want to empower your children and/or give them options? Do you want to give your children incentives? Are you confident your children have the skills to carry on the business? Do your children really want to carry on the business, or would they prefer to pursue other interests? A third-party sale should not be viewed as a business failure. Indeed, family business owners might empower and create better choices and opportunities for the next generation by selling their business to an outsider and not a family member.

Assemble the team. To prepare a succession plan that addresses fundamental issues such as management, ownership and taxes, you will need to assemble a team of professionals, including lawyers, accountants and bankers. Depending on your plan, you may also need to engage business or real estate appraisers and/or business or real estate brokers, or some combination of them. Most often the lawyer will lead and coordinate these efforts, especially when confidentiality is a concern, but the business owner should expect to be actively involved to be sure his or her objectives can be reasonably satisfied.

Train your successors and work with them. Family business owners have a wealth of knowledge and experience to share with their successors. To help ensure an orderly transition: (1) Identify one or more successors with sustained performance records and place them in management positions to test their abilities; (2) Gradually delegate more and more responsibilities to them and let them continue to learn from you while you still remain in ultimate control of the business; (3) Practice subjecting some of the big decisions to collaboration between you and your potential successors; (4) Elect the most competent successor to president or CEO while you continue as chairperson of the board; and (5) When the successor is trained and ready to take control, and when you are ready to retire and relinquish control, go ahead and pass the torch. Now celebrate.

Many of us are naturally inclined to procrastinate. To avoid becoming a family business statistical casualty, it is generally prudent to tackle succession planning issues head first and early on. •

Margi Montgomery and Chip Mason are attorneys with Gravel and Shea, in Burlington. Montgomery practices in the areas of commercial and corporate law, mergers and acquisitions, financings and family business counseling; Mason practices corporate and commercial law with a primary focus on debt and equity financings for privately held businesses.