Family Business in Transition

A challenge for John and Mary is to decide who should one day run the business. Steve is a capable leader and has done well in the company, but with all her talent and big company training, Jody is probably a better candidate for future CEO. To his credit, Steve is a good manager and has more tenure at the company than Jody. She’s a great mother and can’t reasonably be expected to put in the 70-hour work weeks that Steve considers the norm.

John and Mary love Robert a great deal but worry about what owning a third of a successful company might do to him. He’s never handled money well, and Steve, in particular, has indicated that he has no interest in sharing future ownership with his “black sheep” brother.

The estate planning that John and Mary have done is sophisticated and extremely tax-wise. However, like most tax-wise documentation, it places control of the family business empire solely in the hands of Mary if something happens to John. Mary has indicated she doesn’t like this arrangement and is quite uncomfortable with the prospect of having business debt and potentially refereeing between her children.

Furthermore, if Mary lives for 20 years beyond John’s demise, and Steve and Jody run the company effectively during that period, a modest 7 percent growth rate would quadruple the size (and presumably the value) of the company. That would earn them the perverse privilege of paying vastly more estate transfer tax than they would have otherwise.

While John and Mary have spent thousands of dollars in the estate plan’s execution, they are still uncomfortable with all of the unknowns and how to treat their three very different children equitably and reasonably.

Exit Strategies

The surveys tell us that, for company owners who are considering their exits, the most common method is to attempt to sell to non-family members (CFIB). Some 26 percent intend to transfer their businesses to family members, and 26 percent of the others have created no plans at all. Since the surveys indicate that approximately 40 percent of family companies will transition within the next five years, to have no plan at all for how that’s going to happen is downright startling.

Having worked with and observed family companies for the last 18 years, we also have to challenge the wisdom of basing an exit plan on selling to someone outside the family. Though it may be an owner’s dream for a deep-pocket purchaser to waltz in at the precise moment when the founder is ready to exit, in reality it almost never happens.

Business Scenario

The owner of a successful mechanical contracting company was recently chatting about his eventual exit. His thought was that if he couldn’t transfer his company to his son and daughter in the next few years to assure his financial security, he could just sell it to an outsider. When asked what exactly would attract a purchaser to his company, he said, “It’s perfect for an outsider; we have almost no structure here. Someone who’s a good corporate manager could really come in here and make this thing work and take it to a whole new level.”

This owner has an inverted view of what purchasers actually want. He considers it a strength that a buyer would be able to select a company with little or no structure, create systems for success, and imprint a new stamp on the company. What purchasers actually want is a company which is already successful. They don’t want to have