How to Pass on a Family Business

Keeping a business in the family isn't for the faint-hearted--even Tony
Soprano has his moments of doubt. But while only a third of familyowned
businesses succeed under a second generation of ownership,
with the survival rate dropping to about 10 percent when the third
generation takes over, it remains true that 40 percent of Fortune 500
businesses are family owned. Start now if you dream of passing your
firm on to your grandchildren.

Difficulty: Moderate

Instructions

1. Draft a family-business constitution. Include both a future vision for the company and a set of guidelines for handling potential challenges and crises. Bring in a consultant who specializes in family businesses to help--and to referee.

2. Start early. It takes years to devise an effective succession strategy. Form a family council specifically to discuss succession issues. Schedule regular meetings with structured communication between family members. Consider making some of the meetings off-site retreats (see 220 Plan a Company Retreat).

3. Consult with your accountant and lawyer to minimize estate-tax bills. Don't leave your successors with a tax bill so large they're forced to sell the company to pay it. Tax problems rank with family discord as the great destroyers of family businesses.

4. Recognize that management does not have to equal ownership. Some family businesses select one relative to operate the business but split overall ownership among several relatives.

5. Take a realistic look at family members under consideration for succession. Evaluate their education, past career histories, work ethic, strengths and weaknesses. Examine their relationship with nonfamily employees, suppliers and customers.

6. Diversify potential successors' work experiences. Have them work outside the family business for portions of their careers. During their early years in the family business, have them report to supervisors they're not related to. They need to have worked in the firm's lower echelons and not just skipped over the bottom rungs of the management ladder.

7. Develop a training program to groom the chosen successor. Start this at least a year before the final change by gradually increasing his or her responsibilities.

8. Accept the reality that a successor from outside the family may be the best choice for the health of the company. Remember that the survival and prosperity of the business are the ultimate goals.

Tips & Warnings

• Get a financial valuation of your company to facilitate estate-tax planning.
• Introduce all potential successors to major customers, legal advisers, suppliers and other important contacts as early as possible in your planning.
• Understand that some conflict among relatives is inevitable. In addition to sibling rivalry, spousal complications often arise. Experts consider these conflicts facts to be dealt with, not insurmountable problems--as long as they are not ignored.
• Keep shareholders informed about company performance and major strategic decisions. Surveys show that a large percentage of family firms hold only one or two board meetings a year. Some firms never hold them. Avoid letting rumors foster distrust. See 218 Organize a Shareholders Meeting.

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