8 Keys to Passing Down a Family Business. Learn how to transfer a family business to the next generation.
When it comes to transferring a business to a new generation, do not improvise.
At least half of the companies in the U.S. — even those listed on the stock exchange — are family businesses, according to Harvard Business School.
These businesses are not only “the backbone of the American economy,” but also tend to perform better than nonfamily companies during economic crises, says Pramodita Sharma, a professor at the University of Vermont School of Business and an expert in family businesses.
But what happens when the founders decide to retire and hand over the reins to a new generation? For many family businesses, that involves one of the most complex processes and generates the most challenges.
3 Pitfalls to Avoid
A successful transition
Henry Suárez had a career in the pharmaceutical industry. His last job was as an executive for Upjohn (now Pfizer). In 1990, at 50, he decided to go out on his own and created Suiphar, a drug distributor. He started the business with his three sons.
That was the first step in a successful generational transition, years before it happened. The sons not only learned the details of the business, but also contributed to creating the company. “My father always got us involved in his business, ever since we were just kids,” said Jaime E. Suárez, a board of directors member of Suiphar group and company shareholder along with his two brothers, Henry H. and Luis A. The three of them have equal shares.
Eight years ago, their father gave them control of Suiphar, a group of nine companies with headquarters in Sunrise, Fla., and offices in five Latin American countries, including a production plant in Bogota. The company generates annual revenue of almost $50 million.
The Suárez family’s generational transition was successful for several reasons: The sons were trained to run the business; they had a clear interest in the company; and they had earned their participation through effort and not simply by being the boss’ sons. They contributed their own capital and effort to the enterprise.
The following are the eight most important aspects in the generational transition of a family business, according to several experts.
1. Business plan
The transition from one generation to the next must be thoroughly planned. “The family must meet to define where the company is now and where it wants to go in the future: the technology it will need, what will be the capital requirements, and what type of human resources will be needed, among other subjects,” says Wayne Rivers, president of the consulting firm Family Business Institute. “This is part of a business plan that, in 95 percent of the cases, [the companies undergoing this process] don’t have.”
Jaime E. Suárez adds: “When we transitioned, we did the strategic planning for the company for the 2010-2015 period. And it’s a plan we revise every five years.”
2. Real commitment
The new generation must never think that their place in the company is guaranteed because they are part of the family. Working for a family business must be an opportunity, and the owners must be very clear about the employment conditions of their children — from benefits to performance policies — to avoid giving the rest of the employees the wrong perception, says Paul Karofsky, a family business consultant.
3. Corporate governance structure
Every company must have a professional management system. Establishing a board of directors composed of industry experts, attorneys, accountants and others from outside the family will lead to better decisions. However, “having a good board of directors that includes mom and dad as advisers is essential,” says Greg McCann of McCann & Associates, a consulting firm specializing in family businesses. A small business that cannot afford to have a board of directors with paid professionals can have a board of advisers made up of relatives, friends, attorneys and accountants.
4. Gift or sale?
A common dilemma is whether the new generation should get stock as a gift or should contribute capital to buy the company. “The most advanced usually have a combination of both in the transition plans,” Sharma says. “Showing economic commitment to the company is important for the company’s success throughout the generations.” For Suiphar, the commitment from the second generation was clear from the beginning because the sons worked with the father to create the company.
The generation taking over must receive the training required to take control. The generation giving up ownership needs a plan that clearly defines the conditions of their exit, and whether, for example, they will remain as advisers or keep a position with specific duties. “In my experience, the time needed to make sure all parts are ready for a successful transition is between five and 10 years,” McCann says.
6. Management first, then ownership
Transferring the company to the next generation is not only a matter of naming the children as owners. The first step is transferring the management of the company and ensuring that the new generation is trained to lead the business. “When the new leadership is strengthened and it is shown that they are competent, then the property transition process can begin,” Rivers says. If needed, professional managers can be hired until the relatives are ready to take over complete control of the business.
7. Resolution of conflicts
All families have problems and conflicts to be resolved. Karofsky says it is vital to remove interpersonal conflicts from the day-to-day operations of the business and to define ways for the family to resolve differences. Conflicts not only “can destroy the family, but also the business,” he says. According to Jaime Suárez, it is fundamental to have a family pact, a document that governs how relatives behave inside the business and within the family, and “how conflicts are resolved among family members.”
8. Key documents
The generational change process includes documents that family businesses should pay attention to. According to Karofsky, they are:
- Family pact: Establishes the terms and restrictions for a family member to be able to transfer their shares of stock. It also establishes the rules to join and leave the company, how conflicts will be resolved, educational requirements, and compensation and promotion policies.
- Will: Specifies what will happen with the stock if a shareholder dies.
- Code of conduct: Establishes the rules of behavior for family members within the company and information-confidentiality matters.
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