The owner of a family business who envisions his company being passed from one generation to the next must ensure his children are prepared to take the baton.
“You are not preparing your kids to take over the business if they are living in your basement,” said Tom Garrity, managing partner of Compass Point Consulting LLC of Hanover Township, Northampton County.
Garrity, like other business consultants, sees this sort of scenario at family businesses all too frequently. It is part of his job to educate owners of family businesses on how to effectively turn ownership of the company to the next generation.
Those in business coaching say that family governance is an essential component in succession planning. To preserve the wealth and become a multigenerational company, family business owners need to communicate with their sons or daughters, groom them to take over the business, make them members of the company advisory board or foundation and teach and educate them on the inner workings of the business.
“It is about determining what is our operating policy, how to bring your kids into the business, how that person will be compensated and also having an advisory board that has board members who are outside of the family,” Garrity said. “If you can get those things working together, you have a good shot at keeping the business running in the next generation.”
At Continuous Financial Improvement in Center Valley, owner Gerry Pandaleon said she always recommends an advisory board for a family run business, especially those where owners have several children and each of those children are to inherit equal shares. That advisory board, for several reasons, should have nonfamily members.
“Sometimes family members are pitted against each other, and they equally feel they have a vote and can run the business,” Pandaleon said. “An advisory board forces a family to sit and discuss issues that must be talked about.”
She added that an advisory board works when the people in it are logical and take into account the advice of third-party members, banks and customers.
At Peerless Business Advisors in Center Valley, Philip Mason is a certified family business specialist.
He agreed that it is necessary for the next generation in a family run business to be brought into the fold.
Mason suggests to clients to create a family forum where family members, including those being prepped to take over the business, can discuss future expectations, clarify roles and responsibilities, set goals and provide knowledge of the company’s mission and issues.
He said tax efficiency is one of the best ways to preserve wealth, as well as working with business and legal experts to design a wealth transfer strategy that will “ensure that income, employment, estate and gift taxes don’t erode the value of what you’ve worked so hard to build.”
Kayte Connelly, president of Best Principled Solutions LLC of Bethlehem, said that a family business needs to put a lot of thought into whether it wants to pass on the business to the next generation or sell it.
According to Connelly, the first born is not always the heir apparent or the one chosen to take the reins.
Sometimes, the best way to get members of a family business working together is through the establishment of a foundation. It strengthens communication, gets family and business values clarified and helps members of a family work productively together.
“The stronger families, and those that have been around a long time running a business, are aware of laws, how money should be spent and what tax benefits and legal ramifications are involved,” Connelly said.
Business consultants say family governance may not make or break a family run business, but clients need to have a formal business succession plan.
Too many times, clients just expect that their children will want the business, and that is not always the case.
According to Garrity, only 33 percent of family businesses make it to the second generation, and only 5 percent make it to the third.
When there is no governance plan, a family business struggles, Garrity said, so it becomes crucial to educate the next generation, determine if future successors need a college degree, take into account the time needed for transition of ownership and to decide the future direction of the company.
Pandaleon estimated it takes about three to five years to position a business to be sold or passed on to the next generation.
“Each generation needs a new mindset,” she said, citing technology as one of the key areas for family business owners to focus on in the current generation.
In the end, Garrity said, family governance and business succession may just mean selling the business and walking away wealthy.
“It may just be about falling in love with business versus falling in love with family business,” he said.