Family Business Succession, Exit Planning for Contractors, Engineers, and Others

It is tragic when a business or anything else splits a family into pieces.  Yet I see this all the time in family business succession matters. 

 This is particularly acute in the construction industry including specialty trades such as mechanical, HVAC, electrical and plumbing contractors because of the prevalence of family business.  Exit planning between generations is difficult at best.  Too often when the successor is chosen or when the stock is given or sold, the family fractures.  This is not success.  You can maintain peaceful Thanksgivings (maybe not all of them but most) and a successful business transition. 

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Clear communication which includes listening to everyone is essential.  Continuing to communicate (listening – not just telling) after splits in family / business opinion is crucial.  It takes time (a long time, usually many years) and patience to accept that things may be different from what each family member hoped.  It takes determination to build a business and it takes determination to keep communicating when you do not like giving or hearing the message.  Communication in family businesses often requires creating a back channel with an outside person that really wants to see the whole thing work well for everyone.  This provides a vent and an opportunity for someone with no emotional claim to provide another view. 

A few more quick thoughts on transferring a family business: 

Fairness is a big consideration.  I don’t know what fair is but I often know if a situation is unworkable or just “way” unfair.   Giving a business to 5 children evenly when 2 work in the business and the rest do not is a disaster waiting to happen.  This is unfair to all.  Often, life insurance is used to “even” out the opportunity being given to the children “getting” the business and the other children.  Again, fair at the date this family/business decision is made and fair at the date of death 20 years later may or may not work out the way one hopes, but, it is much better than a guarantee failure. 

Another matter is the children who are to lead the business must be trained and groomed for the post.  Not all will be able to do it. 

I equate running a business to riding a bike.  You can ride in a child seat on the back for years.  It feels like you are riding the bike.  You have been looking over the shoulders of the rider and see everything she did.  But it is not the same.  Only getting on the saddle and grabbing the handlebars and peddling teaches you to ride a bike.

It is tragedy when the wrong child takes over and in a few years crashes a 35 year old family business.  No one wants to burden their child with that.  Telling a child that does not have the capacity is hard.  Killing the golden goose is even harder.  It just does not seem that way at the time you need to have the “you’re not the one” conversation.

How can the family test the child?  Can they let him run a division?  Perhaps start up a new company to tackle a growth area?  Nothing prepares or tests an owner other than being an owner.  Find a way to stress test the child if at all possible.

Another reason you are going to want to start the transfer early is generally the child is going to earn the money to pay for the business from the business.  If the parent has done really well there will be gifting for estate purposes but in most cases the value of the business is going to fund the parent’s retirement plan.  I would not advise any business owner to walk away from control and knowledge of what is really happening until the debt or payments to them are substantially made.  This means you need to start the transition well before mom and dad intend to spend 11 months of the year in Florida. 

In family business succession planning starting early and carrying through with clear communication including listening and consensus building is one key to creating an exceptional exit. 

Gregory R. Caruso, JD, CPA, CVA
Harvest Business Advisors
609-664-7955

gcaruso@harvestbusiness.com
www.harvestbusiness.com

 

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