Planning A Seamless Succession

June 15, 2006 - 11:07

Though it is a topic few
want to discuss, succession
is inevitable for family-
owned businesses. The
benefit of realizing this is that current
owners can prepare their heirs
and plan for the transition.
Thorough preplanning can assure a
smooth, legal transfer of power that
addresses all succession aspects
from taxes to family politics.

James Olan Hutcheson,
founder and CEO of ReGENERATION
Partners, a family
business consulting firm based
in Dallas, Texas, works with
clients on a variety of topics,
though he feels the biggest topic
he deals with is succession.
“From succession comes all
other kinds of issues: conflict,
compensation, governance, family
counsel, wealth transfer planning
and such,” he explained.
Hutcheson believes succession
planning is one of the most
important functions of an owner.

Succession Statistics

Family-owned businesses are
prevalent in many industries,
including the green industry. In fact,
family firms comprise 80-90 percent
of all business enterprises in North
America. They contribute 64 percent
of the United States’s gross domestic
product and employ 62 percent
of the U.S. workforce, according to
the Family Firm Institute (FFI), an
international organization dedicated
to family businesses.

While first-generation family
businesses are easy to find, second-,
third- and fourth-generation businesses
are less common. FFI reports
more than 30 percent of all familyowned
businesses survive into the
second generation, 12 percent
move into the third generation and
only 3 percent are operating in the
fourth generation and beyond.

Hutcheson said roughly twothirds
of family businesses fail in the
second generation largely because of
family issues, primarily stemming
from a lack of open communication.
He gives a number of suggestions
for growers — ranging from the first
step owners need to make to the
importance of scheduling regular
family meetings — on how to plan a
successful, seamless succession.

Taking Action

Many people struggle when it
comes to making succession decisions:
When do I start planning? To
whom should I leave my business?
How will I be fair to all my children?
Even though it is difficult,
making hard decisions in the
beginning will make the transition
smoother for your heirs. “Don’t go
down the path of not making key
decisions. Inaction will leave everybody
guessing,” counseled Hutcheson.
By being inactive, you leave
others to sort through matters after
your death, a move that can create
conflict among family members
who may have differing views on
the future of the business.

The first step in planning a succession
is creating a crisis plan —
develop your will and figure out
who will take over the business,
Hutcheson said. According to FFI,
85 percent of family-owned businesses
identify a family member as
a successor. The success of such a
move depends largely on the chosen
relative’s motivation to work in
the industry and his or her realworld
job training.

Hiring From Within

Hutcheson believes it is best for
the family and the business when
an heir freely chooses to join a company
instead of being pushed into
it. In the same way, even though
you may want to pass your business
to your child who knows the
industry and has worked in the
greenhouse each spring for years,
he or she may not necessarily be the
best person to take the job.

If your children do show a passion
for the green industry and
take an active part in the business,
it may be best to encourage them
to work elsewhere for a while. By
doing so, they gain valuable exposure
and experience in other nongreenhouse
job settings. Working
at a job where the family name
and nepotism don’t influence their
performance reviews will also
give your heirs valuable realworld
perspectives.

When you decide to hire a relative
or train one to take over the
company, it is important to treat him
or her as you would any potential
employee. Make your heirs go
through the same steps that anyone
else vying for the position would go
through, suggested Hutcheson.
Also, if your heir isn’t performing
sufficiently, make it known that termination
is a possibility.

Family Employment History

To ensure policies and decisions
are not a surprise to relatives working
in the family business, establish
a family employment policy.
Hutcheson described the policy as a
sort of prenuptial agreement for
working in the business: Like
prenuptial agreements, the policy
outlines how family members will
enter into a working relationship
and how they will exit it. By creating
the policy and communicating its
contents to family members, Hutcheson
feels family businesses can
avoid many of the problems that
will eventually surface if certain topics
are not addressed up front.

Rules that possible heirs must
meet in order to take over the business
can be included in the policy.
For instance, a policy can state that
a potential heir must graduate college
with a certain grade point
average and can only work at the
family company for up to six
months after graduation; after that
time, he or she must find employment
outside the family company.
It may also be important to outline
what kinds of employment
experiences are acceptable and how
outside work performance and
responsibility will be measured.
Some policies address compensation
and benefits, and all of them should
spell out the conditions that will get
a family member terminated.

Fair But Not Equal

For families with multiple children
or heirs, the temptation to
divide the business equally among
all parties is strong. Yet,
Hutcheson wants owners to
understand that fair does not
mean equal: “We do a disservice
to try to divide the ownership of
the company four ways among
four children — three who don’t
live near the area, have never been
involved in the company and have
no interest in it.” Giving shares to
children not involved in the company
creates passive ownership.

In a $10-million company, theoretically,
each of the four children
would receive a 25-percent interest
in the company, but only the child
directly running the company
draws a salary from it. “There’s no
market for a 25-percent ownership
in a business where they don’t get
a job, and they don’t get any
money out of it because it doesn’t
pay dividends,” explained Hutcheson.
If they are not receiving anything
from the business, chances
are they are not going to want to
retain part ownership.

Ultimately, such decisions spur
from the best intentions; however,
dividing equally and creating passive
ownership can position heirs
for massive legal battles in the
future, Hutcheson pointed out. In
the four-child, four-way division
example, the only heir involved
with the company is put into the
position of having to eventually
buy out the others.

Instead of dividing the company
equally, suggested Hutcheson, try
talking with your heirs and dividing
your assets differently among them:
The children involved with the
company can inherit it, while others
can receive insurance benefits, real
estate holdings or other assets.

If you choose to divide your business
equally, make sure to include a
buy-sell provision in the shareholder’s
agreement. Buy-sell agreements
“specify that if parties wish to buy or
sell shares in the closely held company
they can only be bought and sold
subject to the restrictions outlined in
the agreement,” stated the Family
Business Institute.

Open Communication

Conflict, hurt feelings and disagreements
might occur as you
attempt to structure the future of
your company, but you can avoid
them by maintaining open communication
among all family
members. Dialogue must be a
major aspect of everything you do
while preparing for succession.

While working with families,
Hutcheson often encounters what
he calls the “benevolent dictator”
— the sweet guy trying to do the
right thing for his family. “The
problem with [the benevolent dictator],”
Hutcheson explained, “is
people are more likely to support
what they help to create. When it
comes to something as important
as succession, not including successors
in that process is a major
mistake. You can hire the best
lawyers, draft the best, tightest
documents you’ve ever seen, but if
the documents don’t get the family
on the same page, it’s a disaster
waiting to arrive.”

Hutcheson suggests communicating
from the start, having
numerous family meetings and
asking a lot of questions to determine
each person’s ideas, wants
and views. Though there will be
conflict, resolving the problems
together should lead to solutions
everyone can appreciate.

About The Author

Meghan Boyer is associate editor of
GPN. She can be reached at mboyer
@sgcmail.com or (847) 391-1013.

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