How to keep the 'family' in a family business

Some firms owned or dominated by family have achieved monumental success. Others have found the transition process to be more difficult. Relentless competition and struggle for customer loyalty, combined with the thorny issues of family dynamics, prove challenging.

When preparing to transfer a family business, the first step is making certain each successor is fully committed. Talk to them well in advance and explain the benefits and pitfalls from the perspective of an owner.

Prior to joining the family business, outside employment in a related field is beneficial. “Working for an accounting, finance or legal firm can help a member of the younger generation gain confidence and stature while attaining valuable knowledge,” says Howard Greenberg, managing member of Semanoff Ormsby Greenberg & Torchia.

Smart Business spoke with Greenberg about the characteristics of different generations, family dynamics and the importance of outside help.

How would you describe a typical entrepreneurial founder?

Typically, entrepreneurial founders do not have significant resources, but they do have lots of resourcefulness, drive and passion for the business, talent, and willingness to work very long hours with little pay. These characteristics, along with an intense drive to succeed, help an entrepreneur create something that can be passed on to the next generation.

What characteristics does the second generation typically possess?

The second generation watched Dad and/or Mom exert their efforts into their venture, witnessed their passion, and it rubbed off on them. They feel the responsibility to further the business and want to look good for their parents. Although they might not have quite the same drive, they may have the privilege of greater resources and more education. They are often successful at maintaining, growing and managing the business.

What changes with the third generation?

This is where problems arise and where some outside help is required. Often, the third generation has more resources, more education and more alternatives than the founding patriarch/matriarch had. But they may have other interests, lack the same abilities, and there are usually more of them.

How should management issues be handled?

You shouldn’t staff your business based on family. Staff it based on talent. Perhaps your family has talented managers, or people in finance. If not, you need to fill the gaps in with non-family members. Similarly, if the third generation isn’t ready to take the reigns, bring in interim managers as caretakers until the younger generation is ready for its role.

What problems can arise with shared third-generation ownership?

The people who run the business often resent producing for the people who just inherited the business. Conversely, those who inherited the business often resent those who run the business because of their salaries and compensation.

It may be better to provide the people not actively running the business with other assets from the estate. To reward long-term performance for a successor generation running the business, it’s advised that the company recapitalize to lock in the current value with preferred interests. This provides the generation ceding control with the value of their interests, and provides the next generation to control with the value of their future contributions. Include these provisions in shareholder and operating agreements as well as employment agreements and continuation plans.

Why use outside consultants?

It’s nearly impossible for the first or second generation to objectively evaluate the talents and value of their children. And if the second generation comprises more than one sibling, there will be arguments concerning rewarding the third generation and picking leaders. And trying to make things equal for everyone is a mistake because people are not equal. Outside advisers can help make those decisions objectively. They can assist in preparing the comprehensive agreements that are carefully tailored to the particular family business. Doing this in advance of the generational transition is highly recommended.

Howard Greenberg is a managing member of Semanoff Ormsby Greenberg & Torchia, LLC. Reach him at (215) 887-3042 or [email protected].

Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC