Cashing In!
Douglas Group
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Beware the Pitfalls of Family Succession
Business owners often agonize about family succession issues. They have a natural desire to give their children a head start in life. They want to let their children pick up at the summit of what they themselves have accomplished.
There is no more natural desire for a parent. However, beware the pitfalls.
·
Second-generation business people often do not have the talent or skill
to pick up in the next stage of the business evolution. It is very
difficult to build entrepreneurial instincts into a child growing up as
son or daughter of the boss. If children don't have the raw capability,
you will harm both their psyche and their inheritance by putting them
in a position to ultimately fail.
· As you plan for business
ownership transition, keep in mind that kids working in the business
view things quite differently from kids outside of the business. Family
ownership can be an enormous source of sibling conflict. The kids in
the business with think, "I helped to build this business. I was
toiling away for all these years, and I have earned a greater reward
than my siblings outside." The kids not in the business, in response,
will think, "You had a job given to you for all of those years. You got
the company car and the benefits. I, on the other hand, had to make my
own way in the world. You have had disproportionate advantages."
·
If you think it's complicated to contemplate sale with one set of
family members, that's a day in the park in comparison to the third or
later generations, with multiple family units involved. If you have
more than one family member involved, and there are likely to be
multiple kids as heirs, develop a mechanism now to shift control to one
or two key operators. Do not leave it to be decided and agreed upon by
those increasingly diverse next-generation beneficiaries.
We did
some expert-witness testimony for a family where three siblings worked
in the business, and several third-generation kids were employed by the
company as well. As the years passed, the family segmented into two
factions, dramatically at odds. One wanted to sell and one did not. The
non-sellers obstructed sale in every way possible. The bitterness and
unreasonableness on the part of both sides was unbelievable.
The
matter finally went to court, and a judge ruled that sale was the only
possible option. Unfortunately however, that judgment was late in
coming. By that time, the owners of the company had diminished its
value to about one-third of its former glory. In the meantime, multiple
lawsuits had been filed, a five-generation family vacation property
(owned by all) had been sold in a fit of rage by the managing trustee,
and a competitive business had been formed by two of the
third-generation kids. The family relationship was destroyed, and the
value of the business with it.
Family ownership transition is
risky business. Think twice about your priorities before you gift or
"sell" to a child, and think ten times before you sell to more than one.
It
can be tempting for the owner/builder of the family business to view
his legacy (his gift to his children) as the passing along of reigns to
the great "dynasty" of a family business. However, realistically,
you must keep in mind that virtually every business ownership endeavor
is fraught with risk. As owner you are almost always one lawsuit,
one lost customer, one technological shift away from loss of all you
have built. We find that it is often the second or later
generation family beneficiaries who are actually more clear-headed
about what they hope to achieve as a result of ownership - and thus
more ready to sell when the time is right. If opportunity seems
to present strongly and often for purchase by bigger and stronger
outsiders, at least give consideration to, and discuss with family, the
potential trade-off in benefits for "cold, hard, cash" versus longer
term ownership.
Written
by Deborah Douglas, Managing Director of the Douglas Group, a St.
Louis-based private investment banking firm which represents sellers of
middle-market companies. Ms. Douglas is also author of "Cashing In,"
(2004). For more information, contact her at ddouglas@douglasgroup.net or call 314-991-5150.
Click here to read more articles on buying/selling a business
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Learn How To Sell Your Business For Maximum Price!
In her best-selling book, "Cashing In!" Deborah L.
Douglas, nationally acclaimed market merger and acquisition expert, shares her
wisdom and wit as she recounts dozens of real-life deals and "tricks of the
trade" that netted millions.
To order:
call 314-991-5150
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