Establishing a Proper Succession Plan for Your Family-Owned Business When I sat down with Jack, David, and Erik to talk about managing their family-owned-and-operated business, several questions were on my mind. By Mike Detmer Published: March 2, 2015 ⋅ Updated: April 15, 2019 Mike Detmer is global vice president for the residential and light commercial markets at LED lighting manufacturer NuLEDs. he can be reached at [email protected]. When I sat down with Jack, David, and Erik to talk about managing their family-owned- and-operated business, several questions were on my mind. Having served in a number of family businesses, I’ve seen a varied set of operating standards and management styles based on what the owner/s had in mind. One wanted a “lifestyle” business, an entity that could spin off enough earnings to satisfy the owner’s needs. Another wanted an asset to sell, a business that could be sold for a handsome sum. But when Jack, David, and Erik’s father explained his goal of sustaining a multi-generational business, I instantly knew that I wanted to take on the challenge. I remembered reading that family-operated businesses account for nearly half of America’s gross domestic product, and that number is likely to increase as the Great Recession prompted many Americans to create home-based businesses of their own (my own consulting company, Mike Detmer Business Solutions, being one.) So when Jack explained how he funded David and Erik some 35 years ago and over the years they created the nautical industry’s premier application specific coatings lineup, and that between the two of them there were 10 kids, some of which already were working in the company, I knew the company would benefit from my expertise and I would enjoy being part of its development. If you own your business and plan to pass it on, you’ll likely face some of the key issues David and Erik are addressing now. These include aligning their succession strategy to be sure that the next generation has the ability and propensity to continue to drive the business and that the business provides sufficient gains to address both generations’ needs. All of this can be addressed with a well thought-out succession plan. Here are a few considerations in building a succession plan of your own: If you are thinking of passing your family owned and operated business on, make sure you and yours are ready for the transition..1 FORM A MUTUAL VISION: Passing a company to a second generation requires everyone to have a similar set of objectives. This way you can avoid the pitfalls of misunderstandings that will likely spring up regarding cash needs of the retiring generation, as well as the financial goals of the next generation. This is where experienced legal and tax advice are invaluable. Be sure you seek them early and often in the process. 2 AGREE UPON HOW THINGS GET DECIDED UP FRONT: Setting the rules of agreement in advance avoids arguments that can arise, even over seemingly small things. Having a clear pathway to dispute resolution that everyone believes in nips arguments in the bud and keeps family harmony, which is all so important. 3 WRITE YOUR SUCCESSION PLAN DOWN: Identify whom the successors are and what their management roles look like. If a successor is to be inactive in the company, say so up front and plan around that dynamic. Again, this is where an experienced business law firm can help. Typically, they understand parts of the process that you may not even be aware of. 4 ESTABLISH AN ESTATE PLAN: Be certain to avoid unnecessary taxation consequences during the transition process, or in case of a death or divorce. There are estate planning techniques that can avoid costly delays in ownership transition while minimizing taxes. Be sure you know them and have them in place. 5 CONSTRUCT A SUCCESSION TIMELINE: Whether you are planning a buyout, gifting your business, or doing a combination, there are logical steps that need to be taken over time. Set your timeline to suit the transition so the company can continue to run and grow in the transition. Clear milestones will thwart any confusion in your succession plan. Roughly speaking, only one in three family businesses survive the transition to a second generation. But the ones that do tend to be well run and organized. So if you are thinking of passing your family-owned and operated business on, make sure you and yours are ready for the transition. Donald Trump, Ralph Lauren, and Vidal Sassoon did.