Keeping a Business in the Family

Every business owner eventually faces a difficult proposition: how and when to pass the torch to new leadership. For channel pros, one option is to hand the business off to children. "Keeping a business in the family is an appealing option for many executives," says Wayne Rivers, president of the Family Business Institute, a Raleigh, N.C., firm that provides consulting and professional services.

Yet a family transition isn't without potential pitfalls and challenges. There are emotional, legal, financial, and basic business issues to work through. "It can be an extremely difficult thing to navigate," Rivers says. This includes handing the reigns to a child who doesn't necessarily want the job, choosing the wrong person, and interfering with the successor.

But there are ways to navigate the potential minefields and increase the odds of success. Says James Foxall, president and CEO of Bellevue, Neb.-based Tigerpaw Software Inc., a firm he took over from his father about six years ago: "You really have to think through the process and engage in the necessary planning. Otherwise, you wind up with a lot of problems and you can potentially destroy the business."

A starting point for approaching a business transition to a family member is to find out who is interested and who is qualified, Rivers explains. "One of the biggest problems is that people make assumptions. They don't know whether their kids are truly interested in taking over." Of course, an unenthusiastic successor isn't as likely to succeed. But it's also crucial to determine who has the business skill to run things.

When Foxall took over at Tigerpaw, he admits he wasn't quite ready. "I thought I was going to knock it out of the park. I thought I had all the answers after being the operations chief for several years. I discovered very quickly that there was a tremendous chasm. I had to learn a lot on the job and feel my way through. It wasn't a smooth or easy transition," he confesses.

What's more, his father—who had run the business in an entrepreneurial and somewhat autocratic way—began meddling periodically and even asking employees to rate Foxall. "It put them in an awkward positon and it undermined my authority." Even worse, some employees weren't sold on the changes. In the end, about 70 percent of the staff turned over, though it wasn't all unplanned, he notes. "I hired an excellent CEO coach, I found my bearings, we created a set of business metrics, and I learned how to run the company."

Business, the Next Generation
There are key ways to smooth the transition. Rivers believes it's critical to have an honest and open discussion with children who might take over the business. "One of the biggest problems is that people are afraid to ask tough questions and discuss things. This often leads to bigger problems," he says.

No less important: Begin the planning process 10 or 15 years before retirement. That way, it's possible to help the successor gain the skills and knowledge necessary to serve as CEO. When it comes time to make the transition, it's wise to tap the services of a lawyer, CPA, banker, financial planner, and possibly a business consultant. Finally, for an owner who has just exited the business, Rivers recommends going golfing or finding a hobby and staying away. "Meddling is demoralizing and destructive."

Foxall says the rewards have been enormous. He loves his job and the company. He now has a son attending college and a daughter in high school. Says he: "If they are passionate about the business and want to work here in the future, great. But I don't want them to think about taking over as a convenient path or simply a way to make a lot of money. A child must want to take over the business. They have to desire running it for the right reasons."