Succession Planning: From One to Many
Transitioning a family business from sole ownership to a family partnership can be a challenge.

by Bill Chapman

Many ownership and management successions fail because family members do not anticipate changes that inevitably occur when a single owner passes a company to a group of heirs. The responsibilities that accompany shared ownership and management are very different from running a company single-handedly. That responsibility includes identifying management talent, utilizing effective communications skills and understanding the psychology behind the transition.

A Case Study
In 1974, Bob Callahan started Advanced Automotive, a company that focused on manufacturing automated equipment for the transportation industry. The company grew and Callahan’s family grew up in it.

In 2002, Callahan was 64 years old and running out of energy. He wanted to retire. By then, all three of Callahan’s sons held management positions in the company.

As Callahan pondered his future, he was concerned about a number of complex issues for which he didn’t have clear answers. The business had been his life for the last 30 years, and without any serious interests outside of the business, Callahan didn’t have the slightest idea what he would do when he retired.

The success of the company also had provided a comfortable lifestyle for Callahan and his family. But, Callahan had only limited assets other than his investment in the business and his home. He wanted to keep the business in the family, but he didn’t want to be financially dependent on the company for the rest of his life.

Callahan also worried about sibling conflict between his grown sons, and how that would affect their ability to work together as partners in the company. And, he worried that his sons may not be as committed to the business as he had been.

While Callahan planned to have elder son, Tom, succeed him as president of the company, he was concerned whether Tom had the necessary leadership and management skills to successfully grow the company in an increasingly competitive marketplace. Callahan regrets that he had been too critical and often second-guessed Tom, making him increasingly reluctant to make significant decisions.

Callahan’s dilemma closely mirrors the situation faced by the current owners of many family and closely held businesses.

Working Together
The United States is on the verge of a significant wealth transfer. More than half of all businesses in the United States will transition ownership and leadership over the next 15 to 20 years. For many businesses, this transition will be to the next generation of a family. It will be the daughters, sons, in-laws, nieces and nephews who have grown up and are ready to take the hand-off and run the family business.

The easiest transition is usually from one sole owner to another, such as  a daughter or son. This type of transition involves less complex financial, legal and even emotional aspects. But today, most family businesses are transitioning to multiple siblings or family branches. When there are three, four or five family members who are joint owners of a business, you can’t assume that everyone will always get along.

Remember, in family businesses the partners are usually together by birthright, not by choice. Because it involves family, these businesses are inherently more emotional than non-family businesses. Eliminating this conflict in a family business is often difficult, if not impossible. So, skills and structures must be developed to manage conflict more effectively.

Because siblings who work together in the business have a long personal history, they  know each other’s weaknesses and hot buttons better than anyone. Work relationships between siblings often have a personal edge that relationships with non-family members do not. One of the greatest challenges family members often face is siblings being able to hold each other accountable.

Communication Is Key
Many of the characteristics and qualities that make controlling owners successful lead to significant problems with siblings or cousins who are partners. Sharing power and authority in a business is a very different and often more difficult task than running the whole show. It is important for sibling partners to develop decision-making structures, codes of conduct, compensation guidelines and liquidity strategies. Sibling partners should also set criteria for how other family members, such as spouses and in-laws, can come into the business. Developing written and mutually agreed upon policies in advance can minimize potential sources of future conflict.

Families and partners in business face many challenges, and the strength of their communication is critical. There will be differences and disagreements. The key is to establish appropriate forums for communication, and continued development of communication skills. Family members should conduct meetings to discuss individual desires and interests and address family conflicts. A good board of directors or advisory board also can be an invaluable structure for facilitating dialogue on key ownership and business issues.

The thorough discussions and communications required for a successful transition should be the focus of regular management meetings, as early as possible. As in many endeavors, the sooner you start planning, the greater your odds of success. The important thing for all families in business is to take a holistic approach to the issues and requirements of a successful transition process.

Bill Chapman is managing principal of the Legasus Group, LC. He can be reached at (913) 402-0100.