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By Ian Campbell
Special to the Financial Independence Hub
Synopsis
Love, hate or tolerate U.S. President Donald Trump know that the business-focused reality show he personally hosted for some years was not named “The Apprentice” without careful thought. No doubt that also was true of his hiring several of his children into his businesses.
Over the past 50 years I have advised many “strong personality” owners of both small and very large privately held companies on matters involving business valuation and transition. That experience suggests business owners – likely in combination with more than one advisor – often work to include one or more of their children in management positions in their businesses.
While there are exceptions, in my experience nepotism infrequently works as well as it is planned. That said there are some sparkling successes, where the latter often lead to successful multi-generational business transition – and long-term family business legacies.
So what high-level reasons cause private business owners to hire younger family members – effectively creating an “apprentice environment” – and to often do that when they themselves are in their “prime business years?”
This commentary explores those reasons: none of which are particularly complicated, and none of which are hard to understand in the context of family business owner aspirations.
Family business transition defined
In this article “generational business transition” means the transition of business ownership – and often management – to one or more succeeding generations. Multi-generational business transition means business transition beyond two generations.
Principal “family hire” reasons summarized
There are always exceptions to generalities. Further, in the case of family business transition senior family generation members in control of a family business may make wrong-headed assessments of next generation children or make ill-conceived business management related decisions about one or more of them for over-emotional reasons or simply as a result of bad judgment.
That said, the following is a list of reasons why subsequent generation family members are hired – often at comparatively early ages – into family business management and sometimes – although in my experience infrequently – management training programs.
1.) The current owners and family-member executives want to work toward perpetuating a family business legacy.
2.) The current owners and family-member executives believe the business has a high probability of continuing to be viable as a going concern in the long term. This having regard to factors both outside and within their control.
3.) The current owners and family-member executives understand, or believe they understand, the risks related to their business, its free cash flow generation capability, and its value better than they understand the risks the attach to alternate investments – in particular financial market risks.
4.) The current owners and family-member executives understand that it takes time for someone to develop the necessary skills and operating knowledge required to successfully operate their business. That time typically is measured in years during which both hands-on successes and failures are experienced – this irrespective of formal business and business related education. This provides a “coaching opportunity” for current owners and family-member executives that for many of them both satisfies personal needs and answers the question “how do I want to be remembered”.
5.) Current family member owners and family-member executives recognize what they agree to be management talent in members of the next generation, and understand the value of coaching and mentoring that talent over time. This where:
- in due course the business is all or in part transitioned pursuant to arm’s length sale, or a generational or multi-generational transition.
- the next-generation family members who are targeted as potential senior management material are believed to be interested in, committed to, and have expressed strong interest in working in the family business – although this sometimes subsequently proves not to be the case. Being involved in the business at a comparatively young age can provide an unusual business knowledge growth, maturation and apprentice opportunity available to comparatively few.
- current ownership and family-member executives are able to maintain control of the family business during the training period – and often beyond.
- current ownership and management are able to maintain most of their decision making flexibility during the training period – and make decisions and influence to varying degrees thereafter.
- current ownership and family-member executives are able to continue to be involved in the family business into their retirement in a Board and perhaps ultimately an advisory role.
- current ownership and family-member executives are prepared to make reasonable and agreed compromises to ensure smooth transition.
6.) Current ownership and family-member executives recognize that there is risk attached to the business in the contexts of the disability or unexpected death of current management, and they decide to work through family management – and ultimately ownership – succession to mitigate that risk.
7.) In the current and prospective economic and business environment the current owners and family-member executives believe the family business over time will yield the best source for them of both income and long term capital appreciation returns. See Family Business Succession Planning: Obstacle to Business Sale?
8.) Planning and embarking on management transition earlier than later enables an opportunity to militate against family member disputes and ownership liquidity issues around both business ownership and management. This is particularly the case where doing that results in a well-drafted shareholder agreement executed by family member owners, or alternately reinforces and endorses an existing shareholder agreement.
Estate planning
Estate planning may minimize taxes on the death of older shareholders. Depending on jurisdiction there are various methodologies available to family business owners who look to organize a “tax on death” minimization plan. An estate plan is not by itself a business transition, although it may sensibly be one component of a given business transition plan and execution. See Succession Planning Best Practice: Estate Freezes – No Panacea!
Business transition related tax planning has not been included in the foregoing list of “family hire” motivations as it does not always lead to the hiring of family members who may simply be included in a tax-related plan as passive continuing shareholders.
Shortcomings to watch for when hiring family members for senior management roles
Here are some shortfalls to watch for in family member management candidates:
1.) Lack of academic achievement at a college or university level.
2.) Lack of hands-on employment experience in at a reasonably senior level in a business that has at least some characteristics in common with the family business.
3.) An inability to effectively separate and prioritize intellectual and emotional intelligence in problem solving.
4.) Value system differences with other family members.
5.) A lack of interest in the business.
6.) A lack of entrepreneurial drive.
7.) A lack of energy.
8.) An entitled attitude.
9.) Poor social skills.
10.) and the list goes on.
Conclusion
Family business ownership transition and management transition are two quite distinctly different things. Neither do or should always work in tandem. However, as a practical matter they often do.
Employing next-generation family members in a family business in senior operating roles can be highly satisfying and rewarding for both those family members who employ and coach, and those family members who are employed and learn. The trick is making these two things come true. Not all families succeed in this.
Ian R. Campbell, FCPA, FCBV is a Canadian business valuation and transition expert. He is the author of several Business Valuation texts and of 50 Hurdles: Business Transition Simplified.
The Canadian Institute of Chartered Business Valuators recognizes Ian’s contribution to the Canadian Business Valuation Profession through the annual The Ian R. Campbell Research Initiative. Ian curates economic and business news relevant to business transition and valuation filtered from world media sources. He writes, with other contributors, The Business Transition and Valuation Review newsletter for business owners and their advisors. The Registration Page (free) is http://goo.gl/s76gpm.
Email icampbell@ircpost.com, or phone 905 274 0610. This article was originally published at Ian’s site on April 24th and is republished here with permission.
