Passing the Baton in a Family Business

By Deborah Rechnitz CMA CMC


Family businesses get that name because real families are involved. Mom and pop may start a business, sons and daughters join the business and ultimately mom may want out, the younger generation wants to run the business their way and frequently pop continues to control the reigns. Family businesses, just like families, go through transitions and creating a smooth, successful transition is an art, not a science.

Understanding the Family. As a transition begins, even in the early stages, there is a tendency to take sides. One argument supports the parents' continued control. The parents need to retain control because they have so much invested and they have the knowledge to run this business successfully. Another argument supports the younger generation's struggle. This generation has to support themselves and purchase the business and in order to do so they need to grow the company at a faster pace than their parents, but that will require taking risks which the current owners don't want to take at their stage in life. It is far more critical to understand all the parties needs rather than to take sides.

The parents require income, retirement, and security. They have built a good, strong, revenue-producing asset over their lives. At the same time, it may be time to take some time off, to enjoy yourself outside of the business. In order to accomplish this you are not willing to take as many business risks as you might have previously and yet these risks may be important to keep the business vibrant.

The next generation, a son or daughter or son in law perhaps, may have spent time in the business or out of it. If this younger generation spent time elsewhere, there may be even greater tension. Frequently additional skills and perspectives are developed and the next generation wants to apply these skills to their current venture. New ideas and a willingness to take risk because there is less to lose adds to the tension between the parties. There is a real need to grow in order to secure his or her future just like their parents did.

Wants and needs are a clear source of tension. Differences in the timing of these wants and needs adds to the tension since timing is rarely the same for all parties. When the current generation wants out is usually not the same time when the next generation wants control of the decisions and the capital.

Meeting of the minds and the wallet. Trust, needs and wants all come into play in a family transition. Trust is translated into such terms as confidence and comfort zone. Can the next generation do the job? Sometimes it's obvious. Sometimes it's not depending on whether the younger generation has been given an opportunity to try and fail. Will the next generation fail to make payments, will they over-extend the company's ability to succeed? Can they achieve their goals that, ultimately, will achieve the parents' retirement goals? These questions have to be resolved in everyone's minds, but they will never be actually answered until after the transition.

In addition to issues of trust, there are trade off between wants and needs. Parents want lots of money. The younger generation needs to keep the money in the business for growth. These differences often lead to natural and frequently unavoidable conflict. Parents frequently want to stay in the business, the next generation needs to take control of the staff in order to accomplish their objectives. Parents need a certain amount of income for retirement. The next generation wants to keep their debt payments as low as possible.

Resolutions. How are these natural conflicts ever resolved? In some situations parents and kids work it out by themselves. It's wonderful. More frequently, families are not so lucky. The gap is just too wide. The younger generation becomes more and more impatient. After all they have choices -- they can go start up their own business, they can return to previous work, sometimes outside of the industry, which frequently pays more than they are earning as a family member. Frequently the younger generation has to pursue a "walk away" strategy out of desperation and frustration. Often the conflict grows before it is amicably resolved.

Outsiders help, but not always as you might expect. There are certainly the technical experts in business valuation, tax issues and estate planning. Sometimes trained arbitrators are called in. These outsiders are not usually adequate to resolve the emotional and monetary conflicts that exist. Often, the most influential outsider to the exiting generation is their retired friends who are happy with their new life, who have found that the trust they laid in the next generation was not misled and who influence moms and dads to pass on the baton.

Our work in this area, in communicating with both generations, provides the following perspectives.

To Mom and Dad: This is a highly emotional decision. It's a one way street once you've turned down it. There is no going back. It involves legally binding agreements between family members. To make it work for all parties, it must be treated as a business decision.

To The Younger Generation: Learn, gain as much knowledge of the older generation as you possibly can in the time you have. Earn their respect. Your natural impatience will move the process along.


Published in the American Drycleaner, April, 2001

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