March 2011: How do I get my dad to step aside?
Succession Planning: A Son’s Dilemma?
BACKGROUND
This question is about an issue common to virtually every business - Succession Planning. However, this month we examine the issue through the lens of a family-owned business, a retail hardware store with several locations throughout the Midwest.
The call came from the President, a young man of 47. We had helped him with an acquisition some years ago.
The acquisition and subsequent integration was successful, helping to expand sales threefold over the past eight years. The business has survived and prospered despite the economic downturn and the proliferation of hardware superstores and on-line retailers.
The father – founder and primary stockholder - is 73 years old, and is still active in the business on a daily basis, drawing a generous salary and perks. However, it is the strategic savvy of the son that has expanded the business from its initial single store location to today’s successful, profitable, multiple location operation.
As you can well imagine, the specific question has to do with a formal change in ownership and management.
QUESTION
“My father still shows up for work every day. He talks to employees as well as to customers. With all of the changes in methods, materials and inventory management and control that have been instituted since I became President, he frequently causes more problems than he solves.
All employees pay attention to what he says, and the further the store location is from the central office, the more authority he seems to exert, which typically results in compounding problems. Although he continues to be very clear-headed and knowledgeable, his productivity has slowed. While he has shortened his workday, and I run the business, he is still Chairman and he has not changed his pay. In fact, he has increased his total overall compensation steadily as revenues have increased.
In addition to it not seeming fair that he works less and gets paid more, I could really use the additional capital to improve our training programs, hire more and better educated sales personnel and improve our marketing position.
How can I convince him to turn the ownership and complete management of the business over to me?”
ANSWER:
In an extended series of telephone discussions, I outlined the following 3 step approach:
- Separate the Issues
- Develop Agreements
- Get Good Legal Advice
Step 1. Separate the Issues
Although the issue feels like a “financial problem,” it is really more of a family problem. I think it best to separate the financial issues from the non-financial issues. They may be difficult to separate, but doing so will help bring clarity to this dilemma. And, as you indicated in our discussions, your mother has warned that if this issue is poorly handled, the result would be “empty seats at the Thanksgiving table.”
The number one issue is, “What does your father want?” He is a smart man. He is pragmatic and although living “better than ever” from the business, he is aware that his current lifestyle is due to the significant growth and development of the enterprise, which he has mostly let you manage. As you describe him, he has devoted his life to the business.
I proposed a one-on-one conversation between you and your father, consisting of three parts:
A. An overview of what your father wants to do over the next decade.
I suggested that you simply listen, not judge or challenge. Listen for clarity and understanding. Bring a flipchart to write on. Do not seek or offer any decisions or agreement at this point.
B. A discussion of your ideas for the business for the next decade.
You have solid knowledge about patterns and emerging trends in the industry, your evolving customer base, as well as the role of the internet. Share those perspectives with him.
Do not presume that he knows as much as you do. His perspective on the business is different than yours. Look for understanding and agreement on the overall direction. This is not the time to argue about details.
Seek alignment about a vision of the future for the business, and your role. He is devoted to the business, and has respected your sound management of assets, especially cash flow.
C. Revisit his interests, as outlined in A. above.
With the context of the future and your role outlined, it will be easier to discuss his evolving role. Discuss his interests to see where they fit. Be upfront in letting him know that you expect to move towards to complete ownership and management over a ten-year period. The roadmap for his changing role and responsibility over the next decade should include decreased compensation along with decreased responsibility, and a movement of ownership to you.*
Discuss where and how he will spend his time as he moves from the business into other activities. It sounds as though your father has few interests outside of the business, other than family. He will need some help thinking through how to stay active outside of the business.
Step 2. Develop Agreements with the Rest of Your Family
It seems as though there may be some fences to mend with a couple of your relatives who work in the business. Although they do not own voting stock, they are family and they are making a contribution.
I suggest a similar three- part discussion with each family member as recommended with your father. Plus, you have a cousin with an interest in representing the family on the Board. You commented that, “he is smart but very young.” Sounds familiar: I think you told me you were handing all of the hiring, purchasing and day-to-day management of three locations at his age. He may be worth considering for the Board.
You and your family are living very well from the business also, as are other family members working in the operation. There is no doubt that you work hard for your compensation. Others, family or not, should be working hard as well. Be fair in assessing their performance, contribution and remuneration.
In determining compensation in this situation, there is an old cliché, “hungry pigs may get fat, but greedy ones get slaughtered.” Don't be the former. It makes no sense to lunge for every last nickel.
Also, outline a plan with your father about his approach with your mother regarding the future. From what you have said, it sounds as though your father might need some help in speaking with her. There may be a role for you in that discussion(s). Or not.
Step 3: Get Good Legal Advice
We help organizations resolve the people side of succession planning which can be tricky enough, but the legal aspects of business ownership and change are extremely complex.
In this arena, we use the experts at Fletcher, Tilton and Whipple (FTW). Since 1822 they have been advising family business owners throughout the country. Here is a glimpse of some of the considerations involved from attorney Dennis Gorman (508) 459-8037dgorman@ftwlaw.com
Things to Consider, From FTW
There are numerous ways to transfer a family business to the next generation. One must always be mindful of federal estate taxes when transferring assets to heirs.
- The current federal estate tax is 35% and each individual has a $5,000,000 exemption until 12/31/2012. Thereafter, the rules will likely change.
- The laws in each State have to be considered. As an example, Massachusetts has a $1,000,000 threshold and maximum tax rate of 16%.
- There are ways to transfer corporate stock to heirs while achieving a minority/lack of marketability discount of 25-35%, if done properly. This reduces the estate and gift tax burden.
- Annual gifts of stock may also be made ($13,000 per person per year) gift tax free.
- The parent must always be mindful of retaining an income stream, e.g., a profit’s interest, salary, rent from a related real estate holding entity, etc., if necessary, to continue the parent’s lifestyle after the transfer of the business interest.
If you would like to discuss the legal issues of transferring your family business to your heirs, feel free to contact them at (508) 459-8037, or visit their website: www.ftwlaw.com.
And, as always, we are here to answer your questions or to provide more information on Succession Planning or any other organizational issue that is keeping you up at night.
Contact Beth Chartier at 781-343-4008 or BChartier@wsa-intl.com to set up a complimentary, no-obligation conference call with one of Senior Consultants
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