Terry Basnight Hamlet isn't ready to think about retirement just yet. At 51, she's spent nearly three decades working in her family's construction-supplies company and only recently became its president. Though she knows dealing with succession issues is important, thinking about the next generation right now seems premature. After all, her own father, who headed up the company before her, never did step down: He simply kept working until he passed away at age 76.
It's a decidedly common phenomenon in family-business circles -- where entrepreneurs' fortune, worth, and identity are all wrapped up in their companies, and letting go can be a scary, if not impossible, proposition. As the baby boomers approach retirement age, however, they're proving to be business owners of a different breed. "They have a philosophy to enjoy life," says Bernard Kliska, a licensed family therapist and chairman of the Loyola University Chicago Family Business Center. "When they reach a certain age and a certain amount of money, they're happy to move over for the next generation."
Even so, handing off a company to your kin is not an easy process. Experts say doing it right requires at least ten years of careful planning. "If you don't start early, the chances of survival for a family business are pretty slim," says Orlo Stitt, who opened Rogers (Ark.)-based Stitt Energy Systems in 1978. "There has to be an orchestrated program in place to make it happen without calamity."
PERFORMANCE UNDER PRESSURE.
For 63-year-old Stitt, who began planning for a handover about seven years ago, that has meant stepping back into broader, bigger-picture roles, while promoting his son and other employees to positions of greater responsibility. The more sticky task of deciding how to divvy up the company among his three children still lies ahead of him, and it's here, experts say, that many business owners falter.
Parents frequently try to avoid friction by splitting the company equally among their kids. While that may avoid immediate problems, in the long run it's a disaster waiting to happen, says Wayne Rivers, president of The Family Business Institute, a consultancy based in Raleigh, N.C. "The simplest is always to choose one quarterback for the team," he says. "If you don't want to go that way, then everyone at least needs to clearly know what their daily responsibilities are."
That means first determining what is required to successfully manage the company. As with any other position, you've got to create an up-to-date job description, realizing that what is needed at this stage of growth may be very different from what you've been doing for years. Once you know what you're looking for, assess each family member unemotionally, putting aside factors like gender, birth order, and time with the company, and looking instead at actual talents, skills, and abilities. Base your evaluations on performance under pressure, giving people real authority and real challenges, rather than simply assuming they're capable, Rivers says.
SOURCE OF CONTENTION.
This can be extremely hard for many parents, since there are two conflicting systems at work. "Families are about love, giving, and acceptance," says Loyola's Kliska, who is former CEO of his family's 95-year-old glass and container company. "Business is about accountability, performance, and proving yourself." If you don't feel willing or able to single out a particular family member for the top slot, he suggests finding an adviser who can help siblings decide for themselves, since it's easier to abide by a decision in which they participated than one imposed on them.
Even in more clear-cut cases, where there's only one child -- or at least only one who's active in the company -- there's still plenty of room for friction. For Ray Childs, whose son Michael has worked with him at his Archbold (Ohio) financial planning firm for 14 years, handing the company over to Michael alone was still a source of contention with the family's other two children.
"They felt that because dad has worked on this, they're entitled to a portion," says Childs, who officially retired last year. But he knew that giving a stake to people who were not involved in its daily affairs would undermine Michael's authority and put the company's future in jeopardy, so he instead formulated a plan for Michael to buy him out over the next ten years, while arranging for his other children to receive comparable benefits from his other investments.
"AN ORDERLY FASHION."
Unfortunately, figuring out who will tend to your corporate baby is only half the battle -- making sure it's financially feasible for you to step down can be equally challenging. Though the idea of withdrawing funds can be downright strange when you've spent years pouring earnings back into the company, after honestly assessing and reconciling how much money you'll need with how much the company can afford to give, it's time to work an extraction plan into your annual budget.
Actual strategies vary from company to company, but may include measures like taking dividends, slowing down growth in order to harvest money above and beyond your regular salary, or preparing residual income sources so that there's enough cash flow for the next generation to start buying back your stock once they take over, says Glen Ayres, partner at the San Diego offices of Doud Hausner & Associates and former president of the Boston-based Family Firm Institute.
The key, again, is to start early and plan scrupulously. "It needs to happen in an orderly fashion," Ayres says. "You can't just jerk [the money] out all of a sudden."
The biggest problem he sees is that people wait too long to figure out their financials, ultimately leaving too little time to make their exit viable. In those cases, owners often are forced to either debt-burden the company to sponsor their retirement, or liquidate their assets just to keep themselves afloat. "Time is your most valuable ally," Ayres says, stressing that for the baby-boomer generation, the time to start preparing is now.
Even with both time and good preparation on your side, having an outside party help your family navigate the process can make it less emotional and more deliberate and efficient. "I'm very, very thankful that we had the support of an outside group," says Hamlet, who, together with her uncle and two cousins, worked with consultants at The Family Business Institute to sort out succession issues after the death of her father. "While our family dynamics are very good, at best it's still really difficult."
That's why you've got to plan well, but still expect some hurdles in the end. After all, running a family-owned business isn't easy, and neither is leaving it.