Succession planning for clients who have family- owned or closely held businesses is a world unto itself. Many entrepreneurs remain unwilling to plan for succession. The reasons they give are varied, but often include a reluctance to give up control, an inability or unwillingness to see someone else in charge, the belief that no one could possibly take over, a fear that if they give up control the company will inevitably fail, or that no one in the family is prepared to assume control.

Many of those who own such businesses said that their most difficult challenges are deciding who will succeed the current owner, and how to preserve and build the company's value by providing for a smooth transition of ownership and management to the next generation.

Challenges abound

The metropolitan Washington accounting firm of Beers & Cutler provides extensive succession planning services that focus on helping closely held businesses plan their leadership transitions.

Co-founder and partner John Cutler said, "A thorough succession plan produces smoother transitions. We understand that when expectations are clear in advance, there will be less disruption to your business and less turmoil for owners, employees and family members."

The firm specifically helps its clients focus on key issues such as transition of ownership and control, minimizing estate and capital gains taxes, retaining key employees, maintaining liquidity, and trust and estate planning for spouses and children.

Cutler pointed out that succession planning cannot begin until "the owners are ready and willing to begin the transition process. A common challenge is that many founders hold on to control too long. Another is making sure the right people are in place to take over."

Firm co-founder and senior advisor James Beers noted that another key issue is, "Does a family member or long-time employee want the job, have the necessary skills and have the support of the family members to succeed?"

Jim Wilhelm and Mike Young are partners at Stout, Causey & Horning in Hunt Valley, Md. To them, the challenge is dealing with business issues that are intertwined between family and personal issues.

"Often, decisions are made for the betterment of one stakeholder, which could potentially be to the detriment of the other," said Wilhelm. "There is no such thing as 'just business,' when dealing with family business issues." Another challenge, Young noted, is having family employees who have only worked within the family business. "Due to this, their experiences and background can be limited, which can sometimes create obstacles for change and innovation."

David Rubin, a partner in New Jersey-based J.H. Cohn LLP, said that the issues will depend on the specific circumstances. "For instance, if there are younger family members in the business, it is often difficult for the current senior management to be objective about their performance. These objectivity issues can cloud perceptions in a negative or positive light. As an example, in one case we were speaking with a CEO of a privately held company who was in his late 80s. He spent a considerable amount of time complaining about the incompetence of his kids. They were in their 60s and had been with the company for more than 30 years."

Moreover, Rubin pointed to the case where there are no next-generation family members. "A critical succession issue then is developing a competent next generation that can afford to take over and potentially afford to pay the owner's buyout."

Terry Aidman, managing partner at Tampa, Fla.-based Aidman, Piser & Co., said that many entrepreneurs think they're immortal. "They talk about succession planning, but they just don't believe it. 'I'm there, so I don't need to think about it.' Getting them to recognize the need for succession planning is a huge job."

Children are tricky, too, he said. Some may want to be in the business; some may not. "So we wind up with different talents. Who do you trust then?" He cited the fact that non-family members may be running the business and family members may not be so involved. "Do you give them non-voting stock? How to avoid conflicts becomes a major challenge."

Peggy Hollander is the founder and managing director of The Succession Group, a South Florida-headquartered succession-planning firm that specializes in providing wealth transfer and business succession planning programs for an exclusive roster of high-net-worth individuals and families, as well as affluent business owners.

From Hollander's experience, the most successful transfers of ownership have been those in which the first generation clearly communicates with the next generation as to who will succeed him or her and why. "This communication fosters mutual understanding and decreases the likelihood of turmoil within the family and its business. That said, many of the challenges our clients encounter result from poor communication."

Greg Skoda, chairman and one of the founders of Ohio-based Skoda, Minotti & Co., specializes in assisting clients in growing and developing their businesses. He points out that assessing and developing talented professionals to ensure leadership in key positions within an organization is a challenge to be considered seriously. "Taken lightly, it could impact the very survival of your company in years to come. Careful planning is essential for the successful transition of your business to the next generation."

According to Skoda, his firm concentrates on helping the client determine desired leadership-style business values, identify a pool of potential succession candidates, compare candidates with existing leadership, design performance appraisals, and foster relationship-building within the organization. "We help clients recognize and understand that both present company business goals and the future vision must be considered when grooming future leadership and developing succession plans. Proper planning, selection skills and company loyalty of the key employees are all part of the plan."

Skoda pointed out that many entrepreneurs don't recognize that they need it yet. "They don't really help themselves in getting to the topic early enough, whether formally or not. Sometimes they just get to a point where they don't care. Of course, by then, they realize that it's too late and don't care to do anything."

He noted that should a health event occur, then it becomes a hurry-up-and-get-it-done situation, and it's a mess. "It is the rare firm which structures and does it right, and it doesn't matter whether it's family or not."

Richard Lackey, partner at Shannon & Associates in the Pacific Northwest, said that, many times, the patriarch or matriarch owner identifies themself with the business, so letting go of it - even though the next generation is ready to go forward with management - is very difficult.

"In many cases, the better the next generation has become in running the business, the harder the transition becomes. They start adding energy and profits, and thus increase the value of the business, ultimately making it more expensive for them to purchase."

How are the challenges overcome? The answers are rarely the same. Setting out the concept of a plan, valuing the company, and possibly allowing the owners to continue to work and to be on the board are approaches that sometimes work. Conversely, having the owners continue in any managerial capacity may usurp the incoming generation's authority.

Seamless transitions

Unfortunately, according to Wilhelm and Young, the challenges are sometimes not overcome.

"However, candid communication with all stakeholders is essential for a smooth and successful transition of a family business," Wilhelm said. "In addition, working with clients who can accept advice, and sometimes even criticism, is a key ingredient to allowing our firm to add value during the succession process."

Young observed that Stout, Causey & Horning is a member of an association of closely held businesses in its region, and this experience has proven valuable. "We have gained tremendous insight into issues that closely held and family businesses face on a daily basis, adding to the experiences we have already accumulated over the years while serving middle-market companies."

J.H. Cohn's Rubin said that there are a broad range of strategies that may need to be applied, depending upon the specific issues being faced by the business. "From the accountant's perspective, it is important to find out if the client has developed a written succession and leadership development plan, which should consider both ownership and management succession, and has objective performance criteria to limit the impact of subjective perceptions of performance."

With regard to selecting a successor, the decision, said Hollander, is driven by a variety of factors as unique as each family. "Birth order, aptitude, interest, gender and education all play a role; however, regardless of which child succeeds his or her parent, I often recommend narrowing the inheritance gap between siblings by distributing assets disproportionately to make up for the fact that one will be acquiring control of the family business. I refer to this as equalization."

Shannon & Associates' Lackey noted that his firm's practice is built around closely held businesses. "I have encountered many examples of business succession issues. I might first say that, in some cases, it is not the best idea to pass the business on to family members. Sometimes the best approach is to sell the business and develop a plan to pass some of the wealth created by the transaction on to the next generation. But in most cases, the first step is to allow a gradual ascension to upper management, so the incoming family members know the business and are respected by others in the company. Once this happens, the existing owners/management need to be counseled about the need to come up with values for the company and an affordable means to turn over control. Hopefully, in most cases where children have done well, it is because the parents have done a good job and are ready to give up control, and the talks can revolve around the value of the business and how it will be paid."

Charles O'Malley, managing partner of New Jersey-based O'Malley & O'Malley, said that the Internet is full of advisors. "Everybody from business consultants, financial planners and ministers to psychotherapists and universities want in on this niche, but the most effective advisor should be the family's CPA. You may need to assemble a group of specialists through your networking ability for the legal, investing and insurance ends, but look at how much of this planning involves accounting, taxes and good business common sense. That's what the CPA does best."

He noted that the CPA needs to understand the client's business and define their common goals. "You must also properly and fairly evaluate the management ability of their chosen successor(s). Their successor does not have to be their first-born, or their son. Women have proven to be very effective managers. Or maybe your client is fortunate to have a son-in-law or daughter-in-law who shares their vision."

If this isn't possible, then look for professional management, either from within the company or from the outside.

"It has worked before," he said. "Many of today's top family-owned businesses, either now or during some period in their past, have gone outside the family for professional management. Lee Iacocca, one of Ford Motor Co.'s previous presidents, is a prime example of how a family-controlled business can go outside while they wait for the next generation to grow into the top job."

Trunkful of help

Skoda recounted the story of one client, a manufacturing company with $45 million in sales that was run by two brothers in their mid-60s and mid-70s. The younger generation is between 40 and 50. "It is a profitable company run by the older generation with an iron fist from its inception. The kids all have tasks, but none, other than the two older brothers, have a comprehensive knowledge of the company or possess any real authority."

Skoda said that he worked at building a bridge between the two generations through a series of meetings. "It took a couple of years to get all the issues on the table, which included educating the kids in the business and broadening their experience. I had to build a level of trust. And only then could I start moving the kids into the business with a view toward succeeding."

Beers said that the financial and emotional problems that often arise among family members can sometimes be helped through changes in the structural ownership of the business. He referenced an entrepreneur-client who owned several automobile dealerships. "He had a child running each dealership, but couldn't decide on who would succeed him at the top. We learned that there couldn't be one person running the entire business, as each child wanted independent control." The dilemma was solved when Beers recommended that each child operate their own dealership on a separate financial basis, which necessitated a complete change in the original owner's estate plan and will.

One of Cutler's clients was a family with significant wealth. "I tried to envision the family's differing roles when the owner passes. This came about because I felt that his children were not interested in managing the wealth and they were not active in the business. This led to developing a plan to establish a future infrastructure for a family office and assisting the children in becoming more knowledgeable of the family's affairs."

The bottom line, Beers said, is to make sure that "the owner addresses the needs of the business and the family, so that both prosper and family relationships remain harmonious. We want to be sure that all the children still enjoy having Thanksgiving dinner together."

Aidman, whose full-service firm provides services in almost any financial and business situation, including business expansion planning, corporate restructuring, family business issues, operational reviews, and troubled-company consulting, to name a few, cited an entrepreneur he represented who didn't let go in a distributorship. "It simply ruined it for everyone," he explained.

He says he is partial to family boards. "Take two brothers who own a business. Which one gets to the top of the pile? Remember, don't confuse ownership with management. I prefer a transfer of ownership at certain ages." In this particular case, Aidman demanded professional management to run the business while the sons worked in it and learned how to be good shareholders.

Hollander also believes that the transfer of values can be an equally important component in succession planning. She said that she frequently advises families and businesses looking to ensure congruity with respect to standards for their business and charitable values.

"Recently, a client allocated the lion's share of her estate to a charitable organization, rather than to her children," she said. "Clearly communicating her goals, the client explained how important it was to her to support this specific charity. As a result of the dialogue, the woman's children embraced her decisions without resentment, and, more importantly, they inherited their mother's interest in the charity." In this case, and in many others, her client's assets were secondary to the transfer of her values.

Rubin highlighted one case that involved a family-owned manufacturing and distribution business with a chief executive officer and father in his 70s, and a son in his early 30s. "Objective criteria were established for the son's development. At that point, it was clear that the time needed for the son's development was inconsistent with the father's timeline goal for retirement. To accommodate both goals, an interim president was brought into the company on a five-year contract. The president's role was to manage the company and contribute to the son's development. Today, the son is successfully running the business as president."

In another instance, Rubin cited the untimely death of a CEO that then required four other junior partners to take over a growing engineering firm. The former CEO had been the firm's source for approximately 70 percent of new business revenue. "In an emergency planning session, the four remaining partners determined what roles they would each fill in the company, how they would develop new business, and how they would hold each accountable for performance. A board of directors was established that met regularly to review performance against goal. In the first year of transition, the partners developed a strategic planning team, which drafted a comprehensive plan for the entire organization. Over the course of the next five years, the firm grew approximately 300 percent."

Wilhelm and Young spoke about a client who was a distributor and manufacturer in the Baltimore area. Their business had been family-owned and operated for more than 25 years. "The second generation of this two-family operation was poised to take over the reins and guide the firm into the future," says Wilhelm. "We were helpful in devising appropriate estate planning for the exiting owner and providing a tax-efficient solution for both the selling owner and the second-generation buyers."

Young noted that his firm also provided insight and guidance to the new ownership group in terms of financing the transaction, related state and local tax planning, and accounting matters. "The growing company is now ready for accelerated growth and seamless transition. This transition has a great potential for success, as the second generation has been involved in all operational and financial matters for several years, and the company has been financially positioned to afford the buyout of the first generation."

O'Malley said that, having been involved in two family businesses, he used to think that a prosperous business was the main ingredient to succession. "However, through the years, I have learned that desire to succeed is more important," he said. "It will drive the successor to overcome a lack of income and other obstacles, even the dreaded 'Letting Go Syndrome.' I remember the son of one of my clients frequently complaining about preparing for his father's retirement, only for it to be delayed on several occasions. The end result was that when the son finally got the reins of the business, he grew it dramatically."

O'Malley added that frequently, new ideas are hard to sell to the older generation and, because of the age difference, current management may be more conservative. "Patience is needed by both generations, and this is another area where the CPA as a business advisor can be very helpful in the transition. We need to be proactive and recognize the opportunities to assist our clients in succession planning. It's not routine, it's challenging, but it has been done before and it is not rocket science."

Register or login for access to this item and much more

All Accounting Today content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access