Business owners generally assume that they will manage their business, functioning as owners, for as long as they are able, and still enjoy doing it. But at some stage, the concepts of succession and transition come to mind. Sometimes this happens because the spouse says: “It’s time for you to retire”. Sometimes it happens because of an unexpected health issue for the owner. Unfortunately, the time for planning retirement is at least five years BEFORE the actual retirement.
Transition of Ownership and Management are two different topics, but they can be analyzed and planned together. Owners tend to think in terms of the simplest transition: “My son/daughter will take over the business someday”. If you really plan this, you will start by asking some questions:
- Does my son/daughter want to work in this business?
- Do they have the necessary skills and aptitudes to manage this business?
- Is S/He a responsible person, who can be accountable to the business, the employees, the customers and the world as a business owner?
- What do I want to happen to this business? Did a build something, hoping it would last forever under the tutelage of generations of this family? Or did I simply create the best job for myself, provide a living for my family, and don’t really have strong opinions about what happens in the future?
- How many children do I need to provide for? How many want to be in the business? How many are capable of contributing to the business?
- What careers really excite my children? What do they want to do with their professional lives?
Of course, no one is born able to do any of these things. The question is, “Are the future owners and managers capable of taking on these responsibilities with proper guidance, training, education and mentoring?
First let’s address the difference between ownership and management. You as the current business owner, created this business, or took it over from a father, etc., and you both own it and manage it. But that isn’t the only way to do this. A business can be owned by a group of people, related or not; that might be a partnership, LLC, etc., or perhaps a family trust. Some participants in that group may be inactive, that is passive owners. Their role is to collect distributions, their share of earnings, and trust the managers to run the business. Of course, corporate governance dictates that the ownership group has the right and responsibility to oversee management, and they can change managers if needed. The point here is for you to consider your options, and tailor the future to fit the needs of your family.
One really important element to this is that management should be compensated for their professional efforts, whether they are owners, outsiders or anyone else. The compensation and benefits package should be the same. If the CEO is your daughter, she should receive the exact same compensation and benefits package that you would need to offer to hire a similarly-qualified outsider to perform the tasks. And her compensation should be unrelated to any ownership in the company. So a person can receive a salary for being the VP of Marketing, and they can receive distributions / dividends from their ownership of the company, but these two roles are separate and distinct. The biggest mistake a business owner can make is to hire all of his children and pay them identical salaries for different roles. They likely have different skills, different aptitudes, and different interests. How does the CEO feel when she earns the exact same salary as her brother who runs the shipping department? More importantly, what is the impact on the company from supporting people who don’t contribute the same value to the company? They can be equal owners if that is the decision; they can have equal votes on the board of directors if so elected, but salaries should be based on fair, equitable assessments of the value of the position in the marketplace.
If you are concerned about being fair to all your children but some do not fit in the business, prepare your estate planning on a holistic basis. Bequeath shares of stock to one child, and an interest in some other investment, say a real estate holding to another child. You make the best effort possible to fairly divide up the assets, and don’t worry too much about whether the future might provide some unexpected benefit to one or the other. Your children need to function as adults, make their own way in the world, and get over being handed the exact same scoop of ice cream that their siblings received. Life is not fair. Do your best, and let them build on their inheritance or not, based on their own desires and efforts.
Business owners should periodically assess the compensation packages of all their employees. To neglect this managment responsibility will risk your company falling behind the competition and losing key employees because your benefits and salaries are not comparable or hamper your ability to hire replacements because your compensation programs are out of date. And the incumbent should be paid the appropriate compensation, according to the job description and performance levels, regardless of whether their name is on the front door.
Preparation for leadership
Everyone can benefit from a management training program, one which shows them different areas of the business, helps them learn business economics and appreciate the inter-dependencies of various business functions. Some of this needs to be done within the business at hand, to learn its specific characteristics. But some of that learning can be done elsewhere. Many young people can benefit tremendously from working for an outside, unrelated business for five years or so early in their careers. This gives them a perspective on how things are done in other parts of the business world. It gives them self confidence in their ability to work with others, be a team player, receive real-world guidance, understand and deal with real-world unfairness. And it gives them credibility when they are appointed to a management role in the family business. If he was manager of customer service for Zilch corp., which is five times bigger than our company, then he must have real expertise and management skill, not just given a job by Dad.
But whatever methods are employed to help young people grow and learn, make sure that these experiences include the opportunity to fail. You won’t learn how to be a good hitter if you don’t strike out a few times; in fact, a good hitter generally only hits about three out of every ten pitches. Make sure they get an opportunity to do the grunt work: future managers need to appreciate the people who do that work every day of their lives.