Business, Too Close To Home

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Realistically, the older generation should have a written succession plan by the time they are in their 50s, especially if adult children have been working in the business, says Michael Fay, senior partner and estate-planning attorney with the law firm Hale and Dorr in Boston. The plan should offer guidelines for the transfer of ownership if one member of the family wants to sell his shares. This usually involves a right of approval by the remaining owners coupled with a right of refusal to buy out a sibling or other family member before a portion of the business is sold. The elders should also make some dispassionate judgments as to which of their offspring has the skills and experience to take over. The designated CEO should then be given voting control of the business. Owners should never assume that each of their children will have the same role in the company. Each family member needs a definitive title and written job description. "There should be a logical, sensible employment-and-promotions policy, no matter what size the company is," Fay says. "Junior should not automatically have a job at the company."

Another pitfall to avoid is the often made assumption that all children want to follow in their parents' footsteps. They need to be asked about their individual desires, and their decisions need to be respected. "Passing on a business should be a legacy, not a life sentence," notes San Diego financial planner Peggy Eddy. "I was hoping to be a designer and wasn't really planning to run a diesel company," says Victoria Jackson, 45, who took over her father's Nashville company, Pro Diesel, at age 21, after he died suddenly. "But I felt that I just had to see my father's dream fulfilled." Jackson grew the business from 40 to 175 employees, increased its earnings more than tenfold and eventually sold it in 1998. Today Jackson is running her own fine-jewelry design-and-distributing firm, which she launched in the spring.

Along with a strategy, those passing on businesses need to follow an organized plan. They should seek advice from an estate-planning attorney and a financial planner who are experienced in working with family-owned small businesses. Experts say each family has to evaluate which method of succession is best for its particular needs and for its type of business. A trusted board of directors, of whom half are family members, should assist in the succession plan. "Too many entrepreneurs work in the business, not on the business," says Eddy. "This is where an impartial board can help with a strategy that's based on logic and sense and not emotion."

It's very important to know how much the business is actually worth. A good appraisal should take into account about five years' worth of financial statements, public comparables and the performance of competitors, says John Connell, an accountant with the financial-planning and valuation firm Causey Demgen & Moore in Denver. An appraisal can cost anywhere from $5,000 to $15,000 and take anywhere from two weeks to two months to complete. "Given the competition and your particular market niche, you want to know that there is really a viable business to pass on before it's too late," Connell says.