Succession Planning for the Family Owned Business:

A Blueprint for the Future

To Kyle Fager

There are only two things that can happen to your business. Either it succeeds or it fails.

If your fortune is the former, the expert critics who like to frequent your local coffee shop will say that your business succeeded only because you are a lucky son of a gun. If your fortune is the latter, these same critics will claim that your business failed because you’re a dumb son of a gun.

Either way, you’re a son of a gun.

But all kidding aside, let’s talk about the reality of the situation. What the experts at the coffee shop don’t realize is that running a business is very much like pole vaulting. It’s an awful lot harder than it looks. It has required the focused application of your time, talent, temperament, and total dedication to succeed. If I may enter a mixed metaphor, the wolves have always been at the back door and yet you’ve always managed to avoid them. Maybe you pole vaulted over them.

The bottom line is that you are a successful small business owner. As such, it can be stated that you have survived this long on the back of grit and determination – and, yes, you were indeed the recipient of a little luck, here and there. Other members of your family and, of course, your employees have perhaps been a big help, as well.

Now that all that time and trouble is wrapping up, you may feel like you’re coming to a crossroads in your life. Crossroads or no, something (other than the flashy cover, of course) prompted you to pick up this book. As the great New York Yankee philosopher Yogi Berra once said, “If you come to a fork in the road, take it.” It may seem absurd, but we couldn’t have put it any better. At the heart of this rather cryptic advice is a strong and true message: When you reach a crossroads, it’s time to take action. Develop a plan. Communicate that plan to your family. And take action.

Procrastination, after all, is very rarely a good thing. The long term success of your business and your family may well be at stake, after all.

The book that you are now holding represents a long and sometimes arduous effort to solidify an extremely complex topic as succinctly as possible. Obviously, in undertaking such a vast subject, we must admit that, here and there, the owner of a family business is likely to encounter problems that are not addressed herein. As always, it is best to contact a trusted financial or legal professional when such situations arise.

Of course we cannot summarize the writing process of this book without offering special thanks to George Abraham of BES Appraisals. The appraisals chapter would have been forever stuck on the drawing board if not for his insight and expertise. Special thanks should also be extended to Kelly Epperson. Her expert tax knowledge as well as her sharp editorial eye greatly improved many of these pages.

So in closing, we hope that you find this book of value. We hope it helps you “take that fork in the road” and accomplish all your major goals for retirement and business succession. Good luck and good planning.

Mike Fager and Dave McKinney

Chapter 1

Begin the Planning Process Now
He Who Hesitates Is Lost

Point of fact: Most family businesses fail to navigate the rough passage across generational tides. Without proper planning, the business that you and your family have worked so hard to bring afloat may wind up losing direction and crashing on the rocks of inability or carelessness when passed to future generations.

How do you know if you’ve planned properly for the future of your business? Ask yourself this question: “Have I spent more time planning family vacations than I have on planning the transition of my business?” If the answer to this question is “yes,” then your business is either vastly unprepared for the future or you enjoy some extraordinarily well-run vacations.

“So You’re Involved in a Family Owned Business.” Upon perusing its chapters, you might think that this title – though remarkably cheesy – could have been considered for the book that you are now holding. Simplicity, they say, is often the most effective hook. While it is true that within these pages, you will find no centerfold spread or snapshots of celebrities’ babies, the subject matter, to the small business owner, will hopefully be every bit as riveting.

Although some of our chapters carry spellbinding titles such as “Estate Planning Issues” and “Financing the Transition” and, as a result, would seem rather broad – perhaps a book in themselves – what you will find is that they are all specifically geared toward several topics commonly associated with family owned businesses.

But since there are clearly many concepts that would seem more pertinent to the owner of such a business, the question then becomes, “Why focus on succession planning now?” It’s an honest question – and one that you should ask before it’s too late.

The answer is simple: He who hesitates is lost. The reason we’ve taken the time to sit down and pen this book that purposely addresses succession planning for the family owned business is that it is absolutely essential.

We realize that planning for the future of your business can seem a rather heroic task, especially when faced with all of the short-term problems that most small businesses must endure. In response, we kick off this chapter by addressing all of the reasons to not begin the planning process now.

Reasons Not to Begin the Planning Process Now

1. Things are going exceedingly well – “The Good Times Will Never Change” Complex

It is easy to get sucked into the trap. The “good times will never end complex” might sneak up on you without you even noticing. From about the time we hit puberty, when met with success, the human tendency is to adopt the pathos of almost euphoric infallibility. Oftentimes, we are perhaps less reverent of potential failure than we should be. Especially when disaster – and, as a result, failure – can strike at any time, usually without warning.

“The good times will never change!” Unless your business is called “The Land of Oz,” you must realize that this career

Candyland does not exist. Nothing is perfect. At least, nothing stays perfect.

Even those of us who do maintain an appropriate level of career-related paranoia may not realize the importance of planning for the future. Many times in a successful business, the pressure of “how do I maintain this success while I’m alive?” often clouds the more significant issue of “how do I ensure that this success continues after I’m gone?”

It is important to note that these are separate issues and that this dichotomy is absolute. There is no such thing as a business that can pass without proper planning and preparation from generation to generation without tribulation, without disagreement, and without fail.

We realize when things are going exceedingly well it’s difficult to imagine a time when the opposite is true. But if you wish to watch your successful business pass safely to your children and then your children’s children, you must bite the bullet and overcome these common biases. You must prepare for a successful succession. It does not happen magically.

2. It’s difficult to play a good fiddle when Rome is burning at your desk

There are always 43 other problems reaching up over your desk to devour you. Gruesome, yes – but almost always true. You know what it’s like to operate a family business or you wouldn’t be reading this book. It’s difficult. Everyday, you are met with new challenges and – because there just aren’t enough hours in a day – these challenges tend to stockpile and a sense of urgency begins to take over.

We realize that your 43 problems are more easily addressed than succession planning. The topic itself may seem morbid or unpleasant, if not just entirely difficult. Ensuring the future success of your business is oftentimes far more trying than the many challenges waiting on your desk.

The most common cause for the absence of succession planning can be accounted for fairly simply: we tend to do the urgent and the easy long before we even think about the important. It is completely normal to feel just-too-busy to plan for the future. “Just-too-busy,” however, is just a state of mind, one that can be easily overcome. Take a step back and think about what is most important to you in life. If “getting caught up at work” is your answer, then perhaps this book isn’t for you. If “leaving the legacy of a successful business behind – one that will help my family maintain a comfortable lifestyle for many generations to come” is your answer, then you owe it to yourself to put your 43 problems aside and take the time to build a detailed succession plan.

3. “Of course I will live forever and always be of sound mind and body.”

Nobody wants to think about death or disability. They’re humbling issues – and who wants to be humbled? In response to this common reaction, people tend to do something very silly: they develop a subconscious sense – or, rather, a denial of reality – that they are somehow above their own mortality.

Yet the fact remains that the potential for death or disability bears some small part in everyday life. Because disaster could strike at any time, you owe it to yourself to look past the discomfort associated with addressing your own vulnerability and take the steps necessary to ensure that those who love you are cared for and well directed in the event that they suddenly need to fill your shoes as leader of the family business.

4. “What will happen to my key employees after I’m gone?”

During the tenure of your leadership, it is likely that you have developed strong relationships with many of your employees. It is equally likely that, without several key employees, your business would not have met such wonderful success. If this is true, you have probably pondered the following questions. If not, let’s ponder together: What if some of these employees are members of your family? Should they be entitled to all or part