June 2006 Big Grower

Planning A Seamless Succession By Meghan Boyer

Though it is a topic fewwant to discuss, successionis inevitable for family-owned businesses. Thebenefit of realizing this is that currentowners can prepare their heirsand plan for the transition.Thorough preplanning can assure asmooth, legal transfer of power thataddresses all succession aspectsfrom taxes to family politics.

James Olan Hutcheson,founder and CEO of ReGENERATIONPartners, a familybusiness consulting firm basedin Dallas, Texas, works withclients on a variety of topics,though he feels the biggest topiche deals with is succession.”From succession comes allother kinds of issues: conflict,compensation, governance, familycounsel, wealth transfer planningand such,” he explained.Hutcheson believes successionplanning is one of the mostimportant functions of an owner.

Succession Statistics

Family-owned businesses areprevalent in many industries,including the green industry. In fact,family firms comprise 80-90 percentof all business enterprises in NorthAmerica. They contribute 64 percentof the United States’s gross domesticproduct and employ 62 percentof the U.S. workforce, according tothe Family Firm Institute (FFI), aninternational organization dedicatedto family businesses.

While first-generation familybusinesses are easy to find, second-,third- and fourth-generation businessesare less common. FFI reportsmore than 30 percent of all familyownedbusinesses survive into thesecond generation, 12 percentmove into the third generation andonly 3 percent are operating in thefourth generation and beyond.

Hutcheson said roughly twothirdsof family businesses fail in thesecond generation largely because offamily issues, primarily stemmingfrom a lack of open communication.He gives a number of suggestionsfor growers — ranging from the firststep owners need to make to theimportance of scheduling regularfamily meetings — on how to plan asuccessful, seamless succession.

Taking Action

Many people struggle when itcomes to making succession decisions:When do I start planning? Towhom should I leave my business?How will I be fair to all my children?Even though it is difficult,making hard decisions in thebeginning will make the transitionsmoother for your heirs. “Don’t godown the path of not making keydecisions. Inaction will leave everybodyguessing,” counseled Hutcheson.By being inactive, you leaveothers to sort through matters afteryour death, a move that can createconflict among family memberswho may have differing views onthe future of the business.

The first step in planning a successionis creating a crisis plan —develop your will and figure outwho will take over the business,Hutcheson said. According to FFI,85 percent of family-owned businessesidentify a family member asa successor. The success of such amove depends largely on the chosenrelative’s motivation to work inthe industry and his or her realworldjob training.

Hiring From Within

Hutcheson believes it is best forthe family and the business whenan heir freely chooses to join a companyinstead of being pushed intoit. In the same way, even thoughyou may want to pass your businessto your child who knows theindustry and has worked in thegreenhouse each spring for years,he or she may not necessarily be thebest person to take the job.

If your children do show a passionfor the green industry andtake an active part in the business,it may be best to encourage themto work elsewhere for a while. Bydoing so, they gain valuable exposureand experience in other nongreenhousejob settings. Workingat a job where the family nameand nepotism don’t influence theirperformance reviews will alsogive your heirs valuable realworldperspectives.

When you decide to hire a relativeor train one to take over thecompany, it is important to treat himor her as you would any potentialemployee. Make your heirs gothrough the same steps that anyoneelse vying for the position would gothrough, suggested Hutcheson.Also, if your heir isn’t performingsufficiently, make it known that terminationis a possibility.

Family Employment History

To ensure policies and decisionsare not a surprise to relatives workingin the family business, establisha family employment policy.Hutcheson described the policy as asort of prenuptial agreement forworking in the business: Likeprenuptial agreements, the policy outlines how family members willenter into a working relationshipand how they will exit it. By creatingthe policy and communicating itscontents to family members, Hutchesonfeels family businesses canavoid many of the problems thatwill eventually surface if certain topicsare not addressed up front.

Rules that possible heirs mustmeet in order to take over the businesscan be included in the policy.For instance, a policy can state thata potential heir must graduate collegewith a certain grade pointaverage and can only work at thefamily company for up to sixmonths after graduation; after thattime, he or she must find employmentoutside the family company.It may also be important to outlinewhat kinds of employmentexperiences are acceptable and howoutside work performance andresponsibility will be measured.Some policies address compensationand benefits, and all of them shouldspell out the conditions that will geta family member terminated.

Fair But Not Equal

For families with multiple childrenor heirs, the temptation todivide the business equally amongall parties is strong. Yet,Hutcheson wants owners tounderstand that fair does notmean equal: “We do a disserviceto try to divide the ownership ofthe company four ways amongfour children — three who don’tlive near the area, have never beeninvolved in the company and haveno interest in it.” Giving shares tochildren not involved in the companycreates passive ownership.

In a $10-million company, theoretically,each of the four childrenwould receive a 25-percent interestin the company, but only the childdirectly running the companydraws a salary from it. “There’s nomarket for a 25-percent ownershipin a business where they don’t geta job, and they don’t get anymoney out of it because it doesn’tpay dividends,” explained Hutcheson.If they are not receiving anythingfrom the business, chancesare they are not going to want toretain part ownership.

Ultimately, such decisions spurfrom the best intentions; however,dividing equally and creating passiveownership can position heirsfor massive legal battles in thefuture, Hutcheson pointed out. Inthe four-child, four-way divisionexample, the only heir involvedwith the company is put into theposition of having to eventuallybuy out the others.

Instead of dividing the companyequally, suggested Hutcheson, trytalking with your heirs and dividingyour assets differently among them:The children involved with thecompany can inherit it, while otherscan receive insurance benefits, realestate holdings or other assets.

If you choose to divide your businessequally, make sure to include abuy-sell provision in the shareholder’sagreement. Buy-sell agreements”specify that if parties wish to buy orsell shares in the closely held companythey can only be bought and soldsubject to the restrictions outlined inthe agreement,” stated the FamilyBusiness Institute.

Open Communication

Conflict, hurt feelings and disagreementsmight occur as youattempt to structure the future ofyour company, but you can avoidthem by maintaining open communicationamong all familymembers. Dialogue must be amajor aspect of everything you dowhile preparing for succession.

While working with families,Hutcheson often encounters whathe calls the “benevolent dictator”— the sweet guy trying to do theright thing for his family. “Theproblem with [the benevolent dictator],”Hutcheson explained, “ispeople are more likely to supportwhat they help to create. When itcomes to something as importantas succession, not including successorsin that process is a majormistake. You can hire the bestlawyers, draft the best, tightestdocuments you’ve ever seen, but ifthe documents don’t get the familyon the same page, it’s a disasterwaiting to arrive.”

Hutcheson suggests communicatingfrom the start, havingnumerous family meetings andasking a lot of questions to determineeach person’s ideas, wantsand views. Though there will beconflict, resolving the problemstogether should lead to solutionseveryone can appreciate.