Planning to Transition a Small or Family-Owned Business
Estate planning often involves the transition of a small or family-owned business to the next generation. Despite best plans and practices by estate planners and business coaches, this transition often fails, leaving dissatisfied families and employees in the wake of the transition. Unfortunately for estate planning attorneys, the failure of business transition does not lie in the legal documents, but instead lies within the psychology of those in the business.
Often the first generation business owner is reluctant to relinquish control. He/she has spent the majority of their adult lives creating and building a successful empire. Much of their identity is consumed by their position within the business. Not to mention years of forgone vacations, hobbies, and other leisure activities where that time was instead spent building the business. While many are making a natural transition into retirement and look forward to pursuing leisure, the small business owner no longer identifies with activities that provide a satisfying retirement. Many first generation business owners feel as if transitioning ownership, control, and/or authority is like “signing their own death warrant.”
However, while the first generation business builder does not want to relinquish control, the younger generation (be it family members, partners, or key employees) are frustrated by the lack of control, and lack of ability to provide direction for the company. The first generation often is stunted by their own success, and the second generation feels input falls on deaf ears. This leads to a lack of fulfillment and often exodus from the company.
These competing psychological stressors are often the reason why small and family-owned businesses fail to successfully transition to a second generation. When the transition is made, it is not often during the lifetime of the first generation owner(s). However, there is research which indicates that businesses which do transition, often enjoy growth.
So, while many first generation small business owners like the idea of a transition or slowing down, even actually putting a plan in place, they often neglect the psychology of the transition which then becomes a barrier to making it happen. So, what can be done in order to facilitate a successful transition?
- Training. A first generation owner who wishes to transition a business must begin training his/her successor early. Business ownership requires understanding both the product as well as the business. Training must begin with the product, and the first generation owner must first be confident that the potential successors understand the product and how it is made. The second step is then in understanding the business.
- Distinguish between ownership and control. A first generation owner often has trouble letting go of both. However, once the first generation owner is comfortable with the skill set of his/her successor(s), then transition does not have to happen all at once. There is a difference between control, management, and leadership and ownership of the company. Psychologically, a transition of management before ownership can ease the strain on the first generation owner.
- Have a financing plan. In many cases, transition can be a burden based on the financial need of the first generation owner or the ability (or inability) of the second generation to purchase the business However, funding options exist and, with family businesses, often estate planning can facilitate funding or ownership transition.
- Get a life. Resistance to transition and the subsequent psychological strain are often what makes a first generation business owner hesitant to turn over the reins of a company. Many owners report depression after the sale or transfer of a business. However, those who have things to look forward to are more likely to make a successful transition.
- Support your successors. Often second generation owners or potential owners are frustrated by what they perceive as a lack of support. This is often subconscious on the part of the first generation owner and can be as simple as employees deferring to the first generation owner or discussing important business decisions or human resources decisions with the first generation. If the first generation is intent on his/her successor, then subtly and slowly shifting the culture to treat the successor as the leader is key to transition.
There are certainly other considerations which are critical in transitioning small business ownership. However, the psychology of the transition on the part of the first generation owners, second generation owner, and the employees is often overlooked. This, however, is what most often causes transitions to fail. As with anything else, planning is critical.
Ask Kit Kat: Tracking Wildlife
Hook Law Center: Kit Kat, what can you tell us about the latest efforts of scientists to track the whereabouts of wildlife from outer space?
Kit Kat: Well, this totally is a concept that is out of this world! From the International Space Station which is 240 miles from Earth, scientists will now be able to track the movement of animals and insects. Logging devices have been improved to the point where they can record much more than an animal’s location. They can also record information about the animal’s physiology and environment. The new system is called ICARUS—International Cooperation for Animal Research Using Space. In the past, recording devices developed in the 1990s were in some cases as large as the size of lantern batteries. Fast forward to today in which some trackers are the size of 2 fingernails and weigh less than 3 grams—about 1/10 of an ounce! On top of this, the trackers of today are significantly cheaper. $500 might sound expensive to you, but that price is a bargain. Also, many of today’s trackers can last an animal’s entire life, and they can even be re-used! Finally, the data held by the trackers can be retrieved electronically—no longer is it necessary to physically remove it from the animal.
The significance of these developments means that scientists can monitor more than a few animals at a time. They will now have the ability to track herd movement. This means they will be able to realize when a herd or group moves, and they will be able step in and possibly aid them if they are in distress. ICARUS will enable scientists to track herds of elephants who are pursued by poachers or to note the location of bats which carry disease. Furthermore, Dr. Martin Wikelski, the director of migration research at the Max Planck Institute for Animal Behavior in Germany, comments that for example, movement of animals may indicate an earthquake or volcanic eruption is about to occur. He has noted that cows and domestic goats and sheep in Italy seem to sense when these natural phenomena occur hours ahead of people. “We think something smells wrong to them and there is static in the air. So they move into wooded areas where they have shelter.”
Such great information obtained without even disturbing nature! Isn’t science wonderful?
(Jim Robbins, “With an Internet of Animals, Scientists Aim to Track and Save Wildlife,” The New York Times (Science), June 9, 2020)