When it comes to making a successful transition within a family business, education and communication are by far the most important factors.
Waldron Private Wealth Partner & Chief Investment Officer Benjamin Greenfeld, speaking at last year's Philadelphia Smart Business Dealmakers Conference, says often the top generation wants to transition the business to another generation. But they should first determine, are there people capable of taking over? And does the next generation even want to be involved in the business?
"That's where we see a lot of conflict where the matriarch or patriarch want their kids to take it over and the kids just don't have an interest in it," Greenfeld says. "That's a tough thing to do if you don't communicate early on, you're jamming them into this role that they don't want to be in. So, having these conversations over and over again is very helpful."
Another debate is whether or not to send the up-and-coming generation somewhere else to work first to learn and gain experience before they come into the business. While either approach can work, he says over the last five or 10 years more people have opted to have their kids come into their business directly.
"Their view is we do it the best way that it's done anywhere, and so we might as well teach them the way we want it to be done. I've seen that be very successful. But one of the problems with that is when you have the next generation coming into the business, is these individuals are probably 20, 21, 22,23 years old, they have a target on their back because everyone else in the business is looking at them and wants to treat them differently because they are the sons or daughters of the owner. But they have to understand that they are just like everybody else. They may be afforded different compensation packages or different benefits, but that's their role in being a member of that family, not their role of an employee of the company when they come in."
Another issue to address when transitioning the business is how to equalize other members of family who aren't coming in? How should the family treat things like country club dues, health insurance or vehicles?
Greenfeld says it's best not to create an environment in which everyone feels as if they're forced to be in the company in order to get benefits. But, the top generation should take a step back philosophically and decide what they want to provide to their children. There are a lot of factors to weigh, many of which become more complicated when the top generation's children get married and others are brought into the family.
When a family business goes through a liquidity event, on the wealth management side, Greenfeld says one of the first considerations the family needs to make is really understanding their expenses, then back into how much they need to live their life, and then start to design the plan.
"You see a lot of business owners who have sold the business want to take a stake from a private equity standpoint in other businesses," he says. "They may want to buy other business and just be a passive investor. I see a lot of times that families sell a business and then they attempt to buy stakes in other businesses as a way to keep the family together and just be passive investors. Or they want to buy a business for one of their sons or daughters to operate and they'll be the bank for that. But again, it goes back to what I said before, make sure that your son or daughter is interested in doing something like that. Don't force them into it."
