Passing the Baton

Approximately 90 percent of the 21 million businesses in the U.S. are family-owned. Over the next five to ten years, as baby boomers retire en masse, many of these businesses will attempt to transition from the first to the second generation.

“There’s going to be a massive transition of wealth,” said Chuck Miller, senior VP and Commercial Lending Team Leader at Heritage Bank.

“Tag, you’re it!” doesn’t work

Keeping the family business in the family isn’t that easy – only 30 percent survive the transition from business founder to second generation (the other 70 percent either dissolve, or are sold to non-family members). Chris Cline, Wells Fargo Wealth Management director for Oregon and southwest Washington, said that 60 percent of business succession failures are due to lack of communication.

“Honest and open communication is the foundation upon which a successful inter-generational business transfer is built,” said John Cameron, senior vice president and manager of Investment Advisory and Brokerage Services at First Independent Bank. “Without transparent communication, a family business will ultimately fail.”

However, many families avoid communication. They may associate “communication” with criticism or conflict, said Cameron, and the older generation may tend to dominate conversations. Also, many family-owned businesses view business succession as an event, not as a process.

“The earlier communication begins, the more successful the transition will be,” said Cameron.

Cline suggests that the communication process start with each family member clearly defining what their own goals and expectations are. Some examples of questions family members should ask include:

“What are my major concerns related to the business?”

“What would I like to see happen to the business in the future?”

“Which of my personal goals would potentially impact the future of the business, and vice versa?”

“If I could wave a magic wand and change the business and family relationships any way I wanted, what would they look like?”

Next, Cline said, an inter-generational family meeting should occur – the first of several – where each member shares these goals and expectations with the rest of the family members – even those who are not actively participating in the business, including in-laws.

Rich Clark, president of Vancouver firm Rex Plastics, said that when his father started transitioning the family business to Clark and his brother in 2003, they had several family meetings where they “talked about our wants and everyone’s perspective.”

In addition, Cameron said the family should assemble a team of key trusted advisors that are agreed on by both generations. These advisors could include attorneys, accountants, financial advisors and bankers. For example, Clark said his family worked with a local attorney and accountant to help formulate the business succession plan.

Laurie (Campbell-Leslie), Chris, and Sam CampbellIt is also important, according to Cameron, to set ground rules for constructive communication from the very beginning. As a case in point, consider Laurie Campbell-Leslie, president of Vancouver pet product manufacturer Campbell Pet Company. Campbell-Leslie, who is in the process of transitioning the company her parents founded 26 years ago, categorized communication between her, her brother, and her father as “open, but cautious with words.”

“Taking something back is a lot harder than being patient,” she said.

It may help, added Cline, to have a consultant facilitate the family conversations, because in many families, “candor isn’t sought out or recognized.”

Write that down!

All the talk in the world, however, is not enough.

“Get things up front, and get it in writing,” advised David Gregerson, partner with Vancouver law firm Gregerson and Langsdorf PS.

Cline said two types of documents are necessary for a successful transition: business structure documents and estate planning documents. It is important, he added, to review both sets at least every five years, or whenever a major family event occurs, such as a death or marriage. But even after the documents are finalized, communication is still important.

“There is no document so bad that a capable family can’t make it work,” explained Kline. “And there is no document so good that it can make a contentious family cooperate with each other.”

When problems arise during transitioning a family-owned business from one generation to the next, Kline said the issues are rarely about the business or money.

“It’s always about family issues, such as ‘mom always liked you best’ or ‘you beat me up when I was eight,’” explained Cline. However, through constructive communication, Cameron added, “a family gains consensus, ultimately creating alignment in mission and clarity of vision.”

Know where you came from

A recent Oregon Family Firm Institute study group indicated that having a strong connection with the founder of the business – father, grandfather, etc. – was an important factor in the success of their business.

“Knowing where you came from is essential,” said Cline.

The study group’s opinion was that it was the work of the current generation to capture the business’ story and pass it on to the next generation.

“These [stories] should be seen as a gift one generation gives to another,” said one study group member.

“If you don’t know the story behind something,” explained Cline, “you’re tempted to throw it away – whether it’s a $50 million business or a teapot.”