In an interactive panel discussion at Ward and Smith’s annual Closely Held Business Conference, three of the leaders from Ward and Smith Business Consulting shared valuable insights on the benefits of business succession planning for family-owned and other closely-held businesses, as well as some of the common challenges associated with business transitions.
The presentation featured guidance from Travis Adams, an Entrepreneur Coach, and Hank Harris, Director of Consulting, and was moderated by Will Oden, President of Ward and Smith Business Consulting.
Ward and Smith Business Consulting works with closely-held businesses on all manner of issues, from strategy, succession, and transition, to organizational development, and the people side of growth.
Harris spent most of his career at FMI, a national management consulting and investment banking firm, where he was the CEO and chairman for many years. Drawing from his experience advising hundreds of privately held businesses, Harris serves as a high-level advisor to CEOs and families.
Adams is a visionary strategist who has built and sold a number of successful businesses. Having served as CEO of his family enterprise, where he quadrupled revenue and transformed a legacy culture, Adams leads the company’s Longleaf Entrepreneur Program. In this role, he works directly with founders and business owners to de-risk their companies, grow profitably, and plan for the future.
A few of the key topics covered during the panel discussion included the timeline required for succession planning, how to implement a structured approach to the process, and the benefits of internal transitions versus external sales.
To initiate the conversation, Oden first explained the difference between “preparing the assets for the family and preparing the family for the assets.” “This is one of the most critical ideas that we present to our clients when we are helping them with succession planning,” noted Oden.
Ward and Smith Business Consulting’s Longleaf Entrepreneur Program helps families define, distill and execute on the values that they already have in place. “The goal is to use these principles as a springboard to develop a values-driven plan that will help the business and family thrive generationally,” added Oden.
Timeline Misconceptions
Harris explained that most people avoid thinking about the mechanics and the timeline associated with retirement, especially business owners. “People don’t want to think about what their business will look like and what will happen after they have to leave it behind,” said Harris. “This is something people self-identify with to the highest degree. They don’t want to consider a future when they’re not involved.”
What most people do not realize is that it takes approximately 10 years to create and implement a thoughtful and successful internal transition plan. “This may sound crazy but there are a lot of moving parts, because you’re basically going to be selling your business to people that don’t have the money to pay for it,” Harris commented.
Underestimating the amount of time involved is a common mistake, one that removes many of the options available to business owners. Selling and cashing out is a faster option that only takes about a year, however, Harris does not believe it is the best choice for most small business owners:
“Once you sell it and you get the money, it’s gone. If you pass it along to your family or your employees, you could still have a role and a place to go…you could be part of the management or chairman of the board…you could participate in the earnings that the younger people grow for 20 years.”
Parents can expect the timeline and decision-making involved to be more difficult. “As parents, it is almost impossible to see children objectively, but these decisions demand some clinical objectivity,” added Harris.
Successful Transitions
Committing to the transition and treating it as its own entity within the business is critical, explained Adams: “The values and the business have to be viewed as a separate asset class. That motivates the family to devote the necessary time and resources to manage it the most effective way possible.”
Adams cited the work of Dan Sullivan, who said that, “You have to commit first, then you find the courage that leads to the capability that leads to the confidence.”
A well-conceived succession plan can help to protect the longevity of the family and the solidity of the relationships into the future. And as most people who are a little older already know, money can be a wedge driving a family apart if the distribution of assets is not carefully planned for and well-executed.
Though it sounds counterintuitive, treating children equally is a bad idea when it comes to creating a transition plan for a family business. “It is a normal parental thing to want to treat kids equally, but that is the wrong mindset for this,” noted Harris, “because they aren’t equal, they’re individuals.”
Some people are simply not well suited to run a business. “You want to treat them equitably, and you don’t really want to put kids into a business as passive shareholders,” commented Harris.
Passive shareholders without a full understanding of the business will also likely not understand that profits can fluctuate significantly. “There could be five great years followed by three bad years,” added Harris. “Passive shareholders love the good years when the dividends are being paid and hate the bad ones when the checks don’t show up. This can create a lot of animosity between them and the kids who are actually in the trenches running the business.”
Harris also recommends thinking carefully about how to bring children into a business. “There are a lot of movies about kids going straight from the frat house into a business, and they’re funny, but in reality, not so much,” laughed Harris.
“The last thing you want to do is shoot the Golden Goose, so it is easy to see why some families make it a requirement to get a legal degree or an MBA and work somewhere else for five years prior to joining the company,” said Harris. “You want to make sure they’re proven and credible.”
Though a small business owner who is extremely busy may want to have a child join the staff and start helping out as quickly as possible, Harris does not recommend handing over the reins without a clear direction: “None of us are good at things that are given to us, because we take it for granted. We’re good at what we work hard for, so you want to think about that.”
Strategic Gifting
Adams explained that a gift can be like a crutch for some people. “There’s a difference between an ‘I love you gift’ and a ‘handicap gift,’” he said. “A handicap essentially removes the healthy struggle from the next generation, which ultimately leads to entitlement and other issues.”
The healthy struggle is a path to resilience, grit, and determination. “An ‘I love you gift’ comes with no strings attached and promotes family ties,” mentioned Adams. “For example, you could foster healthy relationships and marriages by creating a fund that gives married children an opportunity to go on a recharging anniversary trip every year.”
An additional fund could be established to incubate new business ideas. “This could be a way for the more entrepreneurial kids to pitch a new business idea. It might get shot down, but at least the family would have a chance to continue thriving into the future through entrepreneurship,” said Adams.
A whole life policy could be an additional means of providing a strategic gift to descendants. “For kids that don’t want to be involved in business, a certain amount of money could be set aside that they could use like a bank, to put a down payment on a home at a favorable interest rate,” noted Adams.
Creating an equitable strategy and being proactive about communicating that strategy before it ends up being read in a will is the key to preventing conflict within the next generation.
The audience was then asked, through interactive polling software, about their biggest fear for the next generation. The majority said that the wealth being wasted was their main concern.
Putting a plan in place that uses family values as a springboard to create actionable steps to empower future generations is an effective means of alleviating those concerns. “The process is time consuming but highly beneficial,” Harris commented. “There is something magical about putting goals and dreams down on paper. It also creates a touchstone the family can refer back to if there is a disagreement about things, so it’s very healthy.”
Longleaf Entrepreneur Program
To help business owners create a legacy spanning generations, one that is based on maximizing profit with purpose, Ward and Smith Business Consulting established a framework for strategic planning that includes seven pillars:
- Purpose – The compass that guides every business and family decision
- Cash Flow – The financial engine that fuels your life
- Resiliency – The protection you need for unseen, worst-case scenarios
- Growth – Lasting value creation, ignited from your passion, that ignites the highest ROI
- Stewardship – Ensuring your assets seamlessly continue and thrive beyond you
- Next Generation – The strategic mentoring and training needed to ensure future growth
- Community – Meaningful impact beyond your family and business
“Thinking about maximizing ROI is critical because a lot of times it could be the business owner that’s holding the company back, or it could be something else that’s not necessarily something to do with the business,” Adams explained.
A good starting point is the complementary Longleaf Entrepreneur Score, a self-assessment offered through Ward and Smith Business Consulting. “Coming up with a plan is essential because it’s the only way to protect your legacy,’ added Oden. “As the saying goes, ‘The first generation makes it, the second generation maintains it, and the third generation loses it.’”
A widely cited study by wealth transfer expert Roy Williams found that 70 percent of family fortunes are lost by the second generation, and 90 percent by the third. Another well-known adage is “Shirtsleeves to shirtsleeves in three generations.” And, added Oden, “to paraphrase Nathaniel Hawthorne, families are always rising and falling in America. This is from 1851 but it still rings true. There’s a reason it continues to happen.”
“Working in your business and on your business is extremely important. An essential element of that is coming up with a values-driven plan, however, if you try to execute that plan without the requisite legal strategy and architecture, it’s really just a wish,” concluded Oden.
