Family business, the hand off...

I'm assuming there is no small number of you that are part of a family business, either on the elder or younger side of the equation. I'm looking for what worked and what didn't work when it was time for you to pass it down, or take it over.

I'm generation #3 and probably less than 10 years from my dad stepping out, and I have absolutely no idea how he plans on doing this. I watched him buy out my grandfather, I saw a few things that worked and a few that didn't. I know enough about it to start being worried not having anything in the works at this point.

So, what worked and what didn't. Thanks in advance.

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Charles

I'm in a similar situation to yours. My dad is 60, and I will eventually be taking over the business. After the hand off, he plans on working for me part-time. Hopefully, that will make the transition a little easier.

I look forward to see the advice given here.

Aaron

The best and most important thing to do is to have a good set of books and to work with an atourney or other entity to help you set up an agreement well in advance of the actual day of reckoning.
This is especially important if there are other siblings around. There is nothing worse than trying to sort out a multigenerational business after there has been an untimely death. The true colors of the most loved family members starts to show through.
Your father needs to take control of this now. Things need to be put in writing and you need to be aware of the fact that if you borrow any money from your father or become finacially involved in any way that you are imediately considered to be in a conflict of interest situation. Check with your atourney on this as I am not one. I just have a lot of fisrt hand experience in this.
Beware of family members trying to look out for mom and dad. In my family it was when my mothers health started failing that the eldest in the family told my father that he needed to have someone be power of atourney so that they could look into putting mom in an assisted living.
Three days later this person is sitting in the family bankers office telling them what they can and cannot do. Everything from that point on was done behind my fathers back and my 5 sisters were won over by the announcement that the eldest son was protecting them.
I am telling you this to show you how far people will go once there is money involved. Think long and hard before you join the family business. From that day on the finger will be pointed at you forever.

siblings...

Rodl said:

This is especially important if there are other siblings around.

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The sibling scenario is an issue here. Right now it's not a matter of trust or competing interests. My brother is great at people skills and handles the sales side of the business, I'm the shop floor guy who knows how to put it all together. I don't do "people skills" , so I'm glad to have him here. What I can anticipate though is if we, somehow, end up with near equal ownership; who's to say we won't want out at very different points. There are days where I'm not entirely sure I want to have this passed on to me, all I've ever known since I've been here is a tooth and nail fight to keep the doors open. It wears a person out. But I do love the work. I'm a Mechanical Engineer by education, but a Machinist by birth. I don't know if I could handle going back to riding a desk 8 hrs a day.

Looking forward to hearing more on family business hand offs... Keep the experiences and advice coming.

My first thought is to have a planned, not rushed, sit down talk with your dad, brother, and yourself as well as anyone else who may have an iron in this fire.

Decide what each of you want to happen. Decide what would be a win-win situation that would make each person satisfied. If it takes more than one meeting, fine.

After you have decided what you want, draw an informal agreement that each could sign, THEN take it to an attorney to have it put into legal form. If justified, each person with any kind of claim could/should have their own attorney represent them. An attorney cannot serve two masters, let alone three or more. Choose an attorney who wants a resolution, rather than one who just wants to stir things up for his own make-work profit.

If you have your informal agreement well done, and stick to it, the attorney costs should be reasonable.

Cover all bases such as a retirement or untimely death/disability of each party.

I'm glad you are thinking of the succession in good time. My great-grandfather founded an engineering business which passed down through three further generations. Fortunately there were no sibling issues in the inheritance, but unfortunately our menfolk live forever and tend not to retire, which meant that each inheriting generation was well past the normal retiring age by the time they could take up the reins.

The result was a very slow and gradual decline because after the 1930s there was no youth or energy in the business, and it finally closed in the 1990s when my uncle died (in his nineties) and my cousin retired because he didn't want to carry on a business with no assets, no customers and no enthusiasm. A fate you would do well to avoid!

George

Georgineer, thats a very good point and story, hopefully a few old boys will tune in and it'll make them think....if you're leaving the business to someone you care about, its should be done with the view when the time is right for both of you.

I've some experience with transaction business sales, M&A etc and boy, the answer to the OP's Q is a book It's probably like that famous AA line though; recognizing it as a concern is half the battle. Most people don't like to face their own demise, and a lot of entrepreneurs have this psycho everything is a state secret approach....so if you can get Dad on board that its something to openly discuss and work on, yeah, you are probably half way there. If Dad's talking, congrats.

I've come to the conclusion that buying private businesses is 2% financial and 98% psychological. What i mean be that is the the owner thinks its a dollars and cents thing, but really the most challenging part is when he realizes this job, this company is his identity and how massive (scary) the life change will be not being the man anymore. I don't think succession is much different insofar as the psychology involved plays a major role in Dad letting go. Be aware of that; make sure there's a role for him afterward, that he'll still be valued, needed etc. A deal starts off all business and finance but dies when the owner realizes he's not selling shares he's selling his identity. Vertigo sets in. Same psych applies here i think.

Accounting firms have put a lot into succession planning as its a hit issue with the baby boom bulge that will be wanting to retire. Lots of clients who don't understand succession planning and need help. Talking to a decent account firm might be a good start. The one thing they will all say it is a process that should start years in advance which is true

No one size fits all, but guiding principles might be planning and professionalism. What I mean by professionalism is, insofar as deciding what to do, forget its family and think of it as a third part sale of a business. The son/daughter should approach it as if they are buying a business; how will they ready themselves? What skills will they need that they don't have? should they go back to school, learn accounting, learn finance, learn sales, what areas of the business do they know, where are they weak, should they work outside the firm, obtain certain degrees or certificates etc etc....the kid has a responsibility to be ready to do an even better job than Dad did and Dad wants to see that as well or he'll be nervous handing the reigns over.

The parent should approach it as if they were readying the business for sale. This takes years but is basically putting the house in order, cleaning things up and documenting the business. Making sure there's a team and process in place such the world doesn't revolve around the owner. It is a process readying a business for sale (to maximize its value) and that same process will make for a smooth transition.

Lastly, you need to plan for relationship transfers. Think this through and do it slowly. In most businesses there are external relationships that are meaningful or even critical to the bottom line - planning on this transfer is part of what you'd do for readying a business for sale. While the business isn't being sold in this case, follow the same methodology; failure to do so would impair the value of a business when its being transferred (whether sale or succession). For example, if you were reading the business for sale, over a period of years shift key customer relationship to managers other than the entrepreneur - in the case of succession make the prodigal the transferee. You can't transfer a relationship over one lunch, plan over time how to get the successor interfacing with the people and trust will be built.

You need to have a succession plan put in motion as they take years to be hammered out.

You need certainty, you don't want your father to suddenly die only to find that he had a secret mistress and he has left it all to her (while it may sound silly it has happened)

certainty, certainty, certainty is the key...

El Mustachio said:

I'm a Mechanical Engineer by education, but a Machinist by birth. I don't know if I could handle going back to riding a desk 8 hrs a day.

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I'm the same. I have Masters in Mechanical Engineering. I had almost all possible positions in plants and machine shops. One day I decided to start my own and to do different than other machine shops. No milling, no turning, no grinding and welding. I made my business to be specialized in shaping internal splines. I'm alone and I'm fine.
Try to find something unique to do, try to be different.

McGyver, and all of you, thanks for such a thought out response(s). That's exactly the type of direction I'm looking for.

Mcgyver said:

If Dad's talking, congrats.

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Yeah... Dad and talking don't really mix. We've learned we have very different personalities. I need plans, his motto is "we'll make it happen" the plan comes later. At least I have this going, he's said when he wants out, in the next 10 years.

Mcgyver said:

Accounting firms have put a lot into succession planning as its a hit issue with the baby boom bulge that will be wanting to retire.

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We have a firm we've dealt with for years. I think getting a third party involved would really help. If it's just me saying "We really need a plan", he's going to be tempted to just brush off my concerns and tell me to trust him. I love my dad, but we do not see financial management anywhere near the same. Up to this point it hasn't mattered because I am ultimately an employee first, son second (when it comes to business). But if we're talking about succession, I'm going to have to be in the loop to feel at all comfortable with this.

Mainly, you're all reaffirming what I feel in my gut, "we need to talk about this more". Now comes the diplomacy of politely putting my foot down on needing this planned out without just pi$$ing him off .

If you've got more, keep it coming. Thanks.

there is a guy named Irv Blackman... wrtes a column in modern machine shop every month. He deals with taxes, handing the business down and full wealth transfers... start by reading his column every month.
Your local guy may or may not know how to transfer a machine shop.....best done while everyone is still breathing to have plans in place... too late once the bucket is kicked to fix the plan.

One thing I learned as a little kid is that when I didn't get the answer I wanted out of Dad, ask Mom. Whether or not your Mom is involved in the business, she will probably have some say in getting Dad involved in the discussion.

Every situation being different very little I can add. I am the son for a company that my mother started 30 years ago. Here are a few things I have learned, keep in mind you are giving the best days of your hard working life.

Make sure pops has a trust setup where everything is spelled out. No one is planning on it. but one day he could kick. Last year big mama was found about 3 minutes from death. Luckily she was saved and luckily she had a trust that spelled out plans in the even of her incapacitation.

Not sure if the hand off will be in exchange for money. Some form of price should be discussed now. If you are working hard now, you are increasing the value. It would be painful to have to pay later for your hard work you are putting in now.

Prenups for you and your brother are a must. If you two are partners, and he makes a poor choice in a spouse, you do not want that coming to bite you and your family. Remember your responsibility to your employees.

Good Luck,

Jason

You know, I have heard several folks on this board talk about my dad's business in glowing terms - at the ripe old age to 21, I had an ulcer working for him and could never do anything right. One of his favorite sayins was "What the hell is the matter with you, you got shit for brains?". The fact that you are able to work with your dad now even though things aren't always rosy speaks a lot toward you being able to work something out.

It sounds like your gut is telling you that conflict is more the rule rather than the exception - if you value your relationship with your dad - try to get someone involved that he respects. You are in a tough spot and it is good that you are establishing a point of reference now.

Easy to screw up a family and a family business - best of luck in working out a solution where everyone feels like they got a good deal.

there is a guy named Irv Blackman... wrtes a column in modern machine shop every month.

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I will second this advice.

Get Blackman's # and call him up. He is a real professional in setting up the transfer of a business. The big thing you got to plan for is TAXES! He, or another qualified accountant, can help you get a plan together that makes it fair for everyone involved, except the IRS!

You want to make sure the stinikin' government gets the least amount possible.

Greg

cnctoolcat said:

I will second this advice.



Greg

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Third.
[email protected] is Irving Blackmans' email, as listed in his column.
I have no connection with him other than reading his advise.

Blackman's column is free......I think you can get it on the mms web site. Read it and all the back columns you can find. If you don't come out with intelligent questions for whoever you end up going to you need to read em again. Irv only talks to the folks with some serious cash to defend personally, most of us little fish don't have to worry about the full brunt of the death tax. It definitely need to be updated for changes in tax code.
One thing is for sure... you are never gonna find the answer if you don't even know the question,,,, blackman's column gets you smart enough to be in the room without relying on some guy who transfers small farms for a living to transfer your billion dollar machine shop the same way....

Blackman, Blackman, Blackman...

So am I seeing a theme here... Blackman? Actually Blackman's articles have been a steady member of my bathroom bookshelf over the years (right next to mach's bedside reader ). Reading those is what probably lit the fire under me on this issue (it wasn't just the jalepeno chilli). The only thing I have to say about him is that most of his advice is geared toward good sized companies, often with significant assets. He does sometimes throw in a small scenario. The crux of the articles I've read all come down to one thing; "be deliberate". That much, I get.

I really need my dad to sit down and communicate how he plans on doing this, if he has a plan at all. Right now my brother and I have no "real" stake in the business; we are not officers, we do not own shares, nothing. I'm not out to grab his money either, if he'd rather sell to a third party and not us, ok, but please tell me earlier than later, this could affect the next 30 years of *my* family's life and I'd like to see some advance warning.

Back to the grindstone... steadily tring to pull information out of my dad. Thanks for so much help on this everyone.

I might be off where the topic was heading but I had to do a business transfer that will be exactly a year November 1st. My father started a compnay a while back and I always took much intrest into the business. I worked for him for a number of years now. He was diagnosed with cancer a few years ago and was doing pretty well until the end of last summer. Things blew up pretty fast. We had to shut the company down and figure out what to do. He was not supposed to live more then a week when he was in the hospital. He amazingly managed to come home and recover a little bit. We spent a few hours over a few days talking about different options. Finally I was asked if I would like to run the business. I jumped at the chance. My situation may be a little different then yours. I felt I needed to carry on the dream my father put his blood sweat and tears into. I had also shared this with him myself. The business transfer is really not that hard. A lawyer can draft a transfer agreement for fairly cheep and pretty fast. I was lucky My siblings were either not intrested or have no clue what a file is.


Getting a transfer agreement is pretty easy most lawyers can draft one up. Getting the bank accounts and stuff like that transferd into my name as the owner of the business was a little bit of a hastle.

The best thing that I have seen people say is to have it prepared ahead of time incase the worst happens. My situation was really stressful with my fathers life hanging in the balance and the future of the business as well.

The last thing I can really add is to make sure your hart is in it 100%. I gave up most of my life outside of work to keep this going. I work 7 days a week sometimes I go weeks with no days off. It is very common for me to work 17 hour days. If I did not like what I did I would never last.