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Planning key to passing on family businesses

Published: Thursday, April 11, 2013 5:30 a.m. CDT

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CRYSTAL LAKE – The Curran family isn’t leaving the fate of its Crystal Lake-based company to chance. 

The fourth-generation-led family business has been preparing the next class to take over for more than a decade. Similarly, the third generation of the family had paved the way for today’s leaders.

“They set a good example for our generation,” Curran Group Co-President Tim Curran said of his predecessors. “And we’ve done a lot with the fifth generation.”  

This type of succession planning, which can be especially difficult for families, is vital to ensuring a family’s wealth – and values – are passed on, experts said. 

Even so, the leaders of many family businesses have done little to plan for retirement, pick a successor or prepare for estate taxes, according the 2007 American Family Business Survey. Succession issues were a top concern.

Succession and transition plans should prepare future generations for their role in the family business and give them the tools and support necessary to be successful, according to veteran business advisers. Failure to plan ahead puts businesses at risk. 

More than 30 percent of family-owned businesses are passed on to a second generation, according to the Family Business Review, a scholarly journal of the Family Firm Institute. About 12 percent will be viable into the third generation. Three percent make it to the fourth generation and beyond.

“The key to passing on the business is in the succession plan,” said Carolyn Friend, principal at Inheriting Wisdom, a consulting firm in Chicago that designs legacy plans for families and trains wealth advisers on legacy issues.

Planning for the future

At Curran Group, the older generation now running the business has taken the younger generation of cousins on trips to Mexico and Alaska and organized other events to help them get to know each other better and introduce them to the family business. 

“The trips are a lot of fun and the kids get to do their thing, but then we also take time to talk about the business and what their ultimate responsibilities are and what the business is all about,” said Tim Curran, a fourth-generation leader of the business. “We want to get them acclimated because some day they are going to sit in a conference room and have to try to decide who runs the business.”

Members of the fifth generation have already demonstrated their ability to work together by starting and running a nonprofit organization, Alpine Children’s Charity. The organization has raised about $1.25 million to help find cures for childhood diseases since being founded in 2004, Curran said. 

The charity has given the younger family members a chance to give back to their communities and develop practical skills. For example, they’ve set up a website, organized fundraising events, and sought donations from business executives. 

“At the time it started, they were young teens,” Curran said. “It was really impressive to watch.” 

Preparing for transition

Depending on the complexity of the business, planning for succession can take years and cost thousands of dollars. But the end result may well save the family business. 

Leadership transitions are “one of the most disruptive events a company can go through,” said Christine Mooney, assistant professor of management at Northern Illinois University’s College of Business. 

Advance planning, with clear and open communication throughout the process, can make these generational transitions easier, Mooney said. 

Large public companies, such as General Electric, often set up a horse race among executives for the top spot. While this approach has worked for GE, pitting family members against each other is likely to create discord, Mooney said. And forcing a reluctant child to take over the family business could backfire. 

“We see large companies mess it up all the time,” she said. “But there are some best practices. Family-owned businesses must create plans and put structures in place for succession.”

Letting go

Giving up control is a common problem for business owners facing retirement.

“A lot of leaders, especially founders, have trouble letting go,” said Harry McCabe, owner of exit and succession planning firm Harry McCabe Advisors in Chicago. “For them, ‘retirement’ is a bad word.” 

Others agreed, underscoring the prevalence of the issue.    

This tendency often complicates the decision-making process, said James Weiner, who works with his wife, Friend, at Inheriting Wisdom. 

“No one else can move on until they move on,” Weiner said. 

McCabe, the author of “Pass It On: The Entrepreneur’s Succession Playbook,” said reluctance to hand over the reigns is natural, but has the potential to derail the succession process. 

Others take a different approach. 

When Jack Curran retired from his family-owned holding company based in Crystal Lake, he walked away completely. 

“He knew that to stay involved ... would eat him alive,” said son Tim Curran, who runs the family-owned holding company with his brother, Mike Curran.

Not all transitions go smoothly. Family negotiations can be so complicated that McCabe said he often hires a psychologist or social worker to consult on cases. 

Family discussions involving the business and money can turn personal and may be uncomfortable, but owners “shouldn’t be afraid of succession planning,” Friend said.  

Having plans in place for the future of the business can make a significant difference. 

McCabe recommends assessing the value of the business, locking up key employees through deferred compensation agreements, and making sure the company’s books are accurate and in good order. 

Talks on succession planning should start about three to five years before retirement, McCabe said.

“I encourage every private business owner to look down this path,” he said. “Ideally, every business plan should have an exit strategy.” 

Limited pool of potential leaders

Public companies often have a large pool of potential CEOs, but smaller family-owned businesses have a much more limited selection of future leaders, said Henry Krasnow, founder of the Chicago law firm Krasnow Saunders Kaplan & Beninati LLP, and author of the book “Your Lawyer: An Owner’s Manual.”

Keeping the business in the family can make the succession process “uniquely difficult,” he said. One reason is because a successful entrepreneur’s children aren’t always interested in or qualified to lead the family business 

“The fact that you were a good leader does not mean your children will be,” Krasnow said. “Leadership, in any business, is critical. Without appropriate leadership, the business will stumble or fall.” 

Selling the family business 

Other options, such as selling the business, can pose additional challenges. 

“Selling a business is not like selling a used Mercedes,” said Krasnow, a fellow of the Family Firm Institute, an organization designed to perpetuate trans-generational family business wealth. “You have to be patient.” 

Finding the right buyer and the right price can take time. Pressure to sell quickly might mean accepting a lower price, Krasnow said. 

Rodger Brandt, the 70-year-old owner of Wayne’s Country Market in Marengo, is ready to retire.

His 2.99-acre property is listed for sale at $1.7 million. Brandt said he would like to see the business continue, even though he talked his grandson out of taking over the family business several years ago. He said he didn’t want his grandson to inherit 70- to 80-hour work weeks.

“I hope someone would take it over, but I’m not exactly sure if that is going to happen,” Brandt said. “I’ll probably be here for a few more years with the way the economy is. Nobody’s buying.”

Even so, he’s prepared to sell when the right offer comes in.

Support for successors

Even without the perfect CEO, families can find ways to continue the business.

In some cases, the business may be bought by the family members who have shown the most interest in the company or put in the most work. 

In other cases, picking a successor isn’t so easy. 

“It can really tear a family apart,” Friend said. 

Wiener and Friend said they look for ways to buoy next generation leaders, such as bringing in consultants or finding key employees to help round-out the successor’s skill set. 

“We ask, how can we make the successor successful?” Friend said. 

Questions for succession

Ownership transference to family or key employees:

Which family members are involved in the business, or are there key employees?

What impact will your exit have on the business’s sales, profits, and growth?

Will there be potential conflict with other non-family owners or non key-employees?

Selling the business:

To whom would the business be sold and for how much?

What events would trigger the sale?

Where will the buyer get the money?

Liquidating the business:

What is the value of the business as a going concern?

What is the liquidation value of the business?

How will you or your family replace the income from the business?

What events would trigger the liquidation of the business?

Source: Adapted from http://harrymccabe.com/succession-planning/

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