A COMPELLING CHALLENGE
The risks are great.
When the founder of a family owned business transitions the company to the next generation of family leaders the succession is successful … about 25% of the time. And for succeeding generations the odds are worse.
While family owned businesses continue to contribute to the creation of wealth, of jobs and of opportunities, their long-term viability is threatened by their complexity.
TWO COMPETING SYSTEMS
Today, a large number of privately held companies view themselves as a “family owned business.” Unable to overcome the challenges of transferring the management and ownership of the business to successors, owners/founders frequently postpone their succession plans leaving little room for success.
BROWN ADVISORS understands the need to consider both the Family System and the Business System when designing and executing a generational transfer of the family enterprise. After assessing both, we create and help implement a comprehensive family succession plan that blends four important dimensions: 1. Family and Interpersonal— the relationships and roles of family members; 2. Management and Operations—the critical needs of sustainable business success; 3. Wealth and Ownership—the role and place of family owners and the founder’s desire to transfer wealth to successors; and 4. Balance—the role of the business to add life and vitality to the family, rather than diminishing the same.
WHAT WE HAVE DONE
Example 1 – Generational Transfer of Management Control and Business Interests: The second generation of owners was preparing to transfer their two companies to their adult children. We first met to assess the interests, capabilities and expectations of the new leaders. Over time we created a list of the key elements new leaders felt were important in order to proceed. Significant discussions were held to find agreement in the following areas: elements of risk; management and leadership responsibilities; the formation of a compensation program that rewarded performance while honoring the family’s ownership in the companies. Once the operational agreements were in place, the family was able to move forward with the actual process of transitioning the ownership of the business. This was done through a combination of parental gifts, share purchase and rewarding earn-outs driven by the company’s overall performance.
Example 2 – Transfer of Family Owned Business and Property Interests: After working together to build a successful business that included several real estate holdings, the parents were ready to retire. In addition to their heirs – both those working in the business and those who were not active in the business – the parents were concerned about the impact the business transfer would make on their estate. After considerable discussion we worked with the family’s advisors and drafted a succession plan that included purchase options, gifting, an estimate of business value and a purchase plan the met the objectives of the parents (to create a plan that was fair to all of their children) as well as those of the children active in the business (to create a plan that was fair to the parents while considering the cash flow needs of the family business).
Example 3 – From Partnership to Family Owned Business: The majority shareholder of this partnership was ready to retire. Although his adult child was active in the business, he was concerned about bringing him into a partnership that included other family members and employees. We created a structured approach in which the retiring parent was able to gift and sell his shares to his child. We then added purchase agreements between the other shareholders and the new owner, effectively providing the new leader with controlling interest in the family business.
Example 4 – Retaining the Family Business: Over time, each of the founder’s three children had worked inside of the family business. When the founder was finally ready to retire the adult children were living in different parts of the country and pursuing their own careers. Unwilling to sell the business, we worked with the family to restructure the company, creating ownership positions for key managers. The family members became a part of the company’s Board of Directors and are overseeing its continued growth.