In assisting our family business clients in making the right decisions for the futures of their companies, K&A believes it is important to examine all options.  This article highlights several issues to consider about passing a business to the next generation.

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Corporate Governance: Keeping it in the Family

When handing your company down from one generation to the next, the first step becomes Crystal clear: Start Early

Premium content from Dallas Business Journal – by Jeff Bounds, Staff Writer

Date: Friday, July 8, 2011, 5:00am CDT

“I can’t wait,” Christi said. “I’m a terrible employee.”

Between 10 and 15 other family members also work at the company, which has a total of 200 employees and brought in $37 million in revenue in 2010.

Christi Redfearn believes she was chosen to take over the company because she’s shown consistent interest in the business, has worked hard and did well in school.

“I’ve done well in every job I’ve had” at the company. “I found new ways to do things more efficiently and to save money.”

She concedes that other family members all have their own ideas of how things should be run. “That can boil over at family functions, where work isn’t supposed” to be discussed, she said.

In addition, employees who aren’t part of the family may think family members are getting promotions because of blood, not merit, Christi said.

“I envision the role of CEO as a chess game — making sure you have all the right pieces in place,” she said.

When things go smoothly, the transfer of a business from parent to child can keep a source of wealth in the family, sometimes setting up subsequent generations financially, experts said. When the transfer process goes awry, there’s no telling what may happen — hurt feelings, lawsuits, even the demise of the business, experts said.

The bottom line: Plan early for the changing of hands of a family business. Engage a team of trusted advisers — such as a family member, a tax and estate attorney, an accountant and a wealth adviser — and plan often. Have a contingency plan in case things go wrong.

“A lot of what I do is driven by sensitivity to taxes,” said Jack Nuckolls, a partner and national director of private client tax services in the San Francisco office of BDO USA LLC, an accounting, audit and consulting firm. “But the hardest decisions are non-tax (related), such as giving up control, when is the right time to do it and who is best to serve” as the next leader.

Nuckolls and other experts say that while the process of changing hands may not be easy, there are steps that will smooth it out:

• Give younger generations a try. If you’re thinking of handing down a family business to one of your kids, it never hurts to let them take a job in the company to gain experience and to give you an idea of how capable they are. “In an ideal world, ease them in there,” Nuckolls said. “Don’t think you need to walk them to the high dive and shove them off.”
• Get help in assessing your child’s potential. It may be worth the money to have a professional assessment done of the next generation’s progress as those family members work their way up the ranks, according to Mark Casey, the Dallas-based southwest regional managing director for Merrill Lynch’s Private Banking and Investment Group. “Evaluate their maturity and preparedness to handle the implications of running a business,” he said.
• Fairness isn’t always best. Parents may want to treat all their children the same, but that may not be in the best interest of the business, Nuckolls said. “It’s like anything else. If you want to rule by committee, it’s often a disaster. You need a leader.”

One difficulty with moving control of a business from one generation to the next is that there is no uniform “correct” time when it should happen, experts said.

“In the past, a lot of our business owners (who are clients) had a clear path for succession, based on their retirement goals or plans to pursue another venture,” Casey said. In the wake of the economic downturn, Merrill did a study that found more business owners and near-retirees choosing to work longer or (even) forgo retirement, he added.

For her part, Christi Redfearn advises would-be heirs to a family business to talk regularly with the person in charge, and to be prepared when there is a difference of opinion to be hashed out. She has lunch with her father regularly, where he clues her in on what’s happening at higher levels of the business.

“Be prepared to argue,” she said. “There are things my dad and I will butt heads on. It goes better when we each have valid arguments.”

jbounds@bizjournals.com | 214-706-7122