by John McAlister and Chris Beringer
Majority shareholders in a family owned business enterprise are faced with a key decision regarding the future success or failure of their enterprise: Keep, Sell, Grow. When there are children working in the business, the “Keep, Sell, Grow” decision can become monumental.
Today we begin a series of Whitepapers entitled: Bridging the Gap Between, addressing a number of critical topics to the ongoing success of the family-owned business. Today we focus on the bridging the gap between parents and children working in a family business. Whether one is a first-generation owner of a successful family enterprise or a NextGenR, at some point you will be faced with the critical question of how to deal with the future generation of shareholders – both active and inactive.
The “Golden Goose” (the family business enterprise) is often the lynchpin that holds the family together and can be either a curse or a blessing. On the positive side, the family business has created wealth for the family, jobs for the community, a great service or product for the consumer, and has often instilled a work ethic and values into future generations of the family and the community. On the flip side, the business can create deep family conflict, resentment, anxiety, and a negative family culture. Family culture is best developed before a problem presents itself, but there are ways and successful techniques to deal with conflict at any point during the family life cycle.
For a variety of reasons, many business owners hesitate to begin transferring equity to the next generation. Many of these reasons are well founded, but in the long-term can impact the ability for the business to remain with the family. So why are business owners hesitant to begin transferring shares? It is usually due to uncertainty regarding control and income. It is unsettling to leave retirement security and the future of business in the hands of the next generation. Both of those issues can be appropriately resolved by separating control, income, and equity. Making certain that the Senior generation maintains the control they NEED and the income they WANT as long as long as they desire. Formulating a formal succession plan and sharing it with the next generation can go a long way towards resolving inherent family business conflicts.
One of the main problems business owners have with succession planning is dealing with the concept of Fair vs. Equal. Our experience has been the fair vs. equal is usually accepted by the children when the parents tell them their thoughts. This question haunts most business owners who have multiple children, whether they all work in the business or whether some of the children are inactive. Eventually, the ownership of the business will be dispersed to descendants, charity, management, employees, or the government. How that happens is 100% determined by the owner (assuming they planned properly!). For example, leaving shares equally to 3 children, one active two inactive, may seem equal, but is it fair? Ownership accords certain rights and responsibilities. How such rights are exercised by inactive owners who may not know the business but know what they “expect” can affect the business, its future success, as well the business employees. Giving all voting rights to the active family may seem fair from the standpoint or continuing the success of the business, but it is not equal when inactive shareholders have no power to affect distributions to owners, while the “insiders” may be drawing big salaries and perquisites. Every family will have a different answer on determining the “Fair Vs. Equal” argument, but there usually exists a structure that satisfies the inactive shareholder’s desire for cash flow while not putting too large of a burden on the active shareholder or on the business. Careful consideration of all the senior generation’s assets and how they should be divided can lead to solutions that satisfy all parties needs/wants. Senior-generation owners often give mixed messages about stewardship of family wealth. Do they wish their children to be humble stewards of what they have created, or do they wish them to grow the business to heights not seen before? Senior generation members CANNOT give mixed messages to family members but need to have constant dialogue and meetings to get across their views.
Majority owners make complex business decisions every day; however, long-term business planning, i.e. “KEEP, SELL, GROW” is a decision that is often the proverbial can that gets kicked down the road. Hoping it will all work out isn’t a viable option. The first questions often asked are where and how to begin?
It is rarely too soon or too late to begin a “family conversation”. Careful consideration of who is to be included and what topics are covered and in what order is paramount to success. Dealing with expectations, both in listening to what they are and addressing whether they are realistic in the context of a family business, is key to heading off conflict and disappointment. Failure to understand and deal with critical inactive shareholder issues is a major reason why many family owned enterprises will not survive as viable businesses or as family-owned, be as successful, or they will be sold in the next generation of ownership/leadership.
The family business is indeed the Golden Goose where “all the magic” begins. It is the financial engine that drives important decisions concerning the family. For the majority of families, the business enterprise comprises 80% or more of the family’s wealth. Yes, cash is sometimes difficult to come by especially when the business is growing. The old saying, “everyone else gets paid first, including Uncle Sam” is as true today as it ever was. It’s easy to understand why the current generation of owners has a difficult time letting go of the reins to the next generation of family members and leaders. There are strategies to make the numbers work to everyone’s benefit, the process starts with a conversation about what you truly want for yourself, the business, and the next generation.
Corporate Mission Statements, business forecasts, and guiding principles are powerful tools for keeping your business on a success track. Family Mission Statements are a powerful guiding tool to express the role of the business, family obligations, and family expectations now and in the future; they are not a business plan, but a family plan.
What to consider
Leadership and stewardship are about learning how to make good decisions. Mastering any type of skill or ability is like listening to a great piece of music. It takes a great musical score, played by talented musicians in unison to keep you, the listener entertained and wanting to hear it again and again. It is a certainty that no one will ever be able to run the Company the way you have for so many wonderful years. As the majority owner, you should also spend time listening and teaching the next generation of ownership/leadership how to do it better. People can learn just as much from the mistakes we have made as from our successes. This is how legacies are made.
What’s next – “Bridging the gap between Active and Inactive shareholders in a family business”
The Beringer Group has helped transition hundreds of family-owned businesses to the next generation of ownership and leadership since 1979. Our clients are some of the most successful family- owned and operated enterprises in the United States. We have many clients who have been in continuous existence as family-owned companies for over 100 years. Many of our clients have sought our guidance and expertise for nearly 40 years– we are now working with the 3rd generation of family members of our original clients. We are independent, objective advisors with no pre-conceived product or service to sell.
Based in Radnor, PA with satellite offices in Mt. Laurel, NJ, Atlanta, and Tampa. The Beringer Group is now in its 2nd generation of family owned leadership. Please feel free to visit our website at www.theberingergroup.com or call Chris Beringer at 610-293-2020. Mr. McAlister may be reached at 678-392-4337.