Handing Over the Family Business: Pumpers Discuss Questions About Money & Management

Handing the family business over to the next generation of pumpers requires careful planning and expert guidance.

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If you own a business and have children, sooner or later you, your spouse and your kids will have to face a complex decision: How and when will you pass your enterprise on to the next generation?

That question has two dimensions. One is about money; the other is about management. Both are critically important.

And before you even consider the mechanics of passing on a business, you’ll need to ask some other hard questions: Does your child even want to take over the business? And is he or she capable of doing so?

It’s never too soon to start thinking about any of these issues.

“The biggest mistake that I’ve seen owners make is that they look at succession as an event rather than as a process,” says Matthew Allen, a professor at Babson College – a small college in Wellesley, Mass., that builds its entire curriculum around entrepreneurship. “They’re thinking about that moment in time when they choose to step down and their son or daughter takes over.”

The real groundwork should be laid long before, when the child is in high school, or even middle school, Allen says.

Chances are, the youngster’s first job will be in the family business’s office or workshop. But don’t just assume that experience will be enough preparation to take the reins as an adult.

Talk about it

Which leads to what Allen calls the second most common mistake he sees: The failure of parents who own the business to talk about it with their kids.

Patrick J. Howley, a partner in the law firm of Shulman Rogers in Potomac, Md., agrees. “A lot of parents don’t want to talk to their kids about this – even the kids who are working in the business every day,” Howley says. “They get very secretive. It’s an uncomfortable conversation.”

Sometimes, Allen says, parents are thinking so much about the business on their own that they mistakenly believe their kids know a lot more than they do.

“Parents think that they’ve been very clear about what the expectations are and what the opportunities are, but the younger generation doesn’t have any idea what their parents are thinking,” Allen says.

More than once, he’s asked business owners, “So have you talked to your children about succession plans?” The answer he typically gets is “All the time” – but when he talks with the adult children himself, he learns that they’ve heard virtually nothing.

Parents instead need to talk openly about the business and how it works. They also need to listen, so that members of the next generation have the space to express their own feelings about going into the business – or not, if that just isn’t where their ambition lies.

More than once the time has come to hand over the business to a son or daughter who’s been working there for years, only to get unexpected disappointment in return.

“The parents have been surprised to find the kid has no interest in the business – even though they think they do, because they’ve been coming to work every day,” Howley says.

Go out? Or stay home?

A key turning point in any succession is the grown child’s first full-time job, probably after high school or college. Even when children are interested in the business, the standard recommendation is to send them out into the world first, into jobs with outside companies that may offer some preparation but also provide a new vantage point.

“They get to go out and prove themselves when they’re not in the shadow of their parents,” Allen says. “They get to develop their capabilities and their talents without someone looking over their shoulder.”

The experience can also build their credibility when they return to the family business, putting to rest the assumption that they were hired because they were the owner’s son or daughter.

Some family business owners take a very systematic approach. They might send one of their adult children off to work in a specific area of business in which they’re interested in expanding their own firm in the future, or in a related industry that can offer important insight into their own business issues and practices. And they might also require that the youngster demonstrate concrete success – staying on the job for so many years and earning promotions there along the way.

But sometimes bringing the children up in the business from the start is the best option. Allen says that’s especially true if the business is in a distinctive sort of trade with skills that don’t easily translate from other lines of work.

In that case, it’s almost always best to bring Junior in on the ground floor, treating him or her like any other employee. “You don’t want to put the kid in the position where they’re essentially the enemy of the other employees – not trusted, or creating the feeling that they’re not having to earn their keep,” Howley says.

With any key employees, a formal employment agreement is highly recommended, he adds. “And don’t treat your child differently when it comes to that, because the other employees are going to know.”

Money matters

When it comes to the financial side, Howley notes, many business owners have a lot of mistaken ideas about how to transfer ownership.

“The tax laws are way more favorable than they’ve been in the past in terms of transitioning wealth,” he says. At the same time, issues of timing, of who really controls the company even after ownership has been transferred, and how much is being transferred at a time all make it impossible to take a “one-size-fits-all” approach.

For that reason, it’s important to get competent professional advice when you begin to think about succession in a family business. And as good as your regular lawyer might be for your everyday affairs, Howley urges finding someone who is much more versed in the details of business inheritance laws and related topics.

It’s worth the expense, he notes, to get an expert appraisal of the business when valuing it for a transfer to the next generation. And because the child’s interests are going to be different from those of the parent in any deal, each side of the transaction – even when it’s in the family –  should have a lawyer.

Even outside the financial realm, in considering the “softer side” of bringing family members into the business, there are professional consultants skilled in the subject, and it’s worth your time, energy and investment to seek their guidance.

There are few legacies you can give your heirs that compare with a well-run and promising family business. By taking the time to prepare, thoroughly communicating with your kids and hiring expert help for every facet of the process, you can help maintain that legacy at its highest potential.



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