Could Your Kids Run Your Company?

If you hope someday to pass your company on to your kids, you should start making plans now. Here's how to prepare yourself--and your children--for the transition.

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Business 101

If you dream of a family dynasty, it's time to start planning

Last April 73-year-old Herman Shooster flew from Florida to Texas for surgery on a stomach aneurysm, a procedure that would keep him from running his company for two months. But the chief executive of Communication Service Center (CSC), a teleservices company with more than 400 employees in Margate, Fla., felt confident that he had left his business in capable hands. After all, his children--Stephen, Frank, Michael, and Wendy Shooster Leuchter--had been practicing for years. They had, for example, run the company while their parents had gone on an extended vacation, and gradually they had become accustomed to making decisions without their father's input.

That's the way it should be. If you're thinking about leaving your business to your children, "succession is more of a process than an event," says Mary Ceynowa, consulting manager at the Family Business Group, a Minneapolis-based division of McGladrey & Pullen, a national CPA and consulting firm.

Unfortunately, too many business owners don't see it that way. According to a recent Arthur Andersen/MassMutual survey, the leadership of 43% of family businesses will change hands within the next five years. However, nearly a third of those family businesses with CEOs age 61 or older have no designated successor. That's a recipe for disaster. But whatever your age, if you're considering passing your company on to your children someday, there are some questions you should begin asking yourself. Now.

What's your vision of the company's future? Now that you've begun thinking about succession, forget about it for a minute. According to Mendy Kwestel, director of entrepreneurial services at the New York City office of Grant Thornton, a national accounting and management-consulting firm, "the first thing you need to have is a strategic plan that tells you where the business is going. That will determine the type of person you want to succeed you. Then you ask yourself who your candidates are." If you find that your kids don't make the short list--or they just aren't interested in managing the business--you may need to separate the management and the ownership of the company. According to Kwestel, you might consider setting up a voting trust, in which ownership of the company remains in the family but all voting rights are passed on to professional trust managers, who are usually a team of seasoned nonfamily advisers. If your children are management material but haven't had enough experience, consider hiring an interim CEO to smooth the transition period.

How will you groom your children for succession? There's nothing worse for your company or your employees than an ill-prepared successor. "My sons worked in the field as electrician's helpers," recalls Marvin Tibbetts, now chairman of Tib's Electrical Service, a $4-million Atlanta company. "I told the men to treat them like everyone else. They had to earn the respect of other employees." Now Mark and Todd Tibbetts both own equal shares of the company, along with Dan Phillips, a 14-year employee. "Dad did a good job of making us work for it," says Mark, who is CEO. Bringing your children through the ranks helps build confidence--their own and employees'--in their abilities.

Experts also highly recommend a family hiring policy that requires your children to work outside the company for a few years. "If they've worked in another business, they'll bring back new ideas," says Ceynowa. "And they'll also discover that much of what happens in companies is just systems dynamics--that it's not just Mom or Dad or their siblings' being difficult." If your children have already been in your company for several years, Ceynowa suggests that you pair them with mentors outside the company or require them to join the boards of other organizations.

What are your future financial needs? Preparing your heirs is just 50% of the succession equation. You also need to ready yourself, emotionally and financially. "You should create financial independence outside the business if you possibly can," says Craig Aronoff, director of the Family Enterprise Center at Kennesaw State University, in Atlanta. Doing so will help prevent you from meddling after you pass your company on to your kids. It will also give you more estate-planning options. Herman Shooster, for instance, gave company stock to his children over a period of years. "I'm not relying on the company for my retirement income, and I didn't want the IRS to get their hands on those assets," he says. Marvin Tibbetts, on the other hand, will be paid off by his successors over a six-year period; from that point on, he'll also receive annual retirement benefits from the company.

Can your children be effective partners? When Billye Ericksen, the former CEO of Capsco, now a $25-million electronics-components distributor in Sunnyvale, Calif., sold her company to her children, three years ago, it was important to her to designate one successor as CEO. Shared governance, she thought, would be a nightmare. So she put her kids through a variety of psychological tests and exercises before choosing her daughter, Kathy, as CEO. (See " Pass It On," August 1994.) Today, however, an increasing number of founders are considering shared leadership. According to the Arthur Andersen/MassMutual survey, 42% of responding founders believe that more than one family member will share CEO duties in the succeeding generation. But if you're considering such a management-by-consensus approach, be careful: unresolved conflicts among siblings tend to play themselves out in the business.

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Donna Fenn

Inc. contributing editor Donna Fenn is the author of Upstarts! How GenY Entrepreneurs are Rocking the World of Business and 8 Ways You Can Profit From Their Success (McGraw-Hill, 2009). Both this blog and the book examine the ways in which GenY is changing the entrepreneurial landscape with new approaches to starting, growing, and managing their companies. Learn more at http://www.upstartsrock.com/.

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