Handing over the family business is never easy
Electrical contracting firms are mostly small family businesses and are going through a generation transition in the United States. It is predicted by the year 2013, nearly $4 trillion in assets will be transferred to the next generation. Within the next 5 years, 43 percent of family businesses will exchange ownership. Electrical contractors are aging. The average contractor is 50 years old with 26 years of experience. From this statistical information, it is clear that the face of the electrical contractor and electrical industry is in transition.
How will the next generation deal with challenges? They can maintain the status quo or push for change. The next generation has a different agenda, passion, motivation and attitude. They are better educated, but their experience has come mainly during prosperous times. Today, the electrical industry and family businesses are facing new challenges. So how does a family business meet these challenges and still make the smooth generation transition? Planning.
There are four plans families in family businesses should have established before generation transition can take place: the family plan, the strategy plan, the session plan and the estate plan.
The family plan is established at a family meeting. The head of the family, which in most cases is the same person that is the leader of the family business, directs the family meeting. The objective of the meeting is to allow open discussion from all the family members. The meeting should include extended relatives, and even in-laws. It provides a vehicle for exchanging ideas and information, and for answering questions and concerns. The business leader can use the meeting to give the state-of-the-business address.
The business agenda of the family meeting pertains to what the family wants the business to represent and achieve. That requires the family to develop a vision statement that reflects the family vision, culture, beliefs and goals. The agenda also promotes discussion on rules of participation in the company, such as titles, compensation and responsibility that family members will assume. This includes summer positions for the grandchildren, cousins, nieces, nephews, etc. All must know the rules and what is expected of each individual. Rules must be established that apply to both family and non-family employees equally.
For the head of the family and leader of the family business, this part of the plan requires a separation of duties between being a parent or president. Leaders must be cognizant of not overcompensating and accepting underachievement just because of their name or bloodline. The opposite also applies by setting unattainable objectives or requiring unreasonable sacrifices for family members. Training is necessary to be a successful manager in the electrical industry. Create a career path curriculum, for example, starting as an apprentice, then estimating, and then management. This path requires time, funding, commitment and dedication so the decision should be made early.
The most difficult decision that a leader must face is the selection of a successor. This decision is very emotional because it requires a parent to choose one relative over another. In planning for a successor, it is important to remember that this decision will affect every family member. The dynamics, self-esteem and relationship between parents, siblings and other family members can change. Since the family is attached to the family business, the successor must understand that he or she will not only undertake the leadership roll of the business but eventually also the family. The selection of the successor for the family business has to be based on the only criteria that counts—what is best for the family business.
Family businesses are made up of both family and non-family members. For the non-family members to appreciate and support the family decision requires communication. Non-family employees are affected by the decisions made and need to know the direction, objectives and goals that the family plan has produced. Therefore it’s important that the non-family members are allowed to speak openly, offer suggestions and be part of the planning process. This second stage of planning, which includes both family and non-family members, is called the strategy plan.
The first part of the strategy planning process is to establish a mission statement. The mission statement is a public statement derived from the vision statement. Once the mission statement is completed, a business plan is then developed. The family plan will then be integrated into a business plan.
The business plan has three parts: the business, financial and documentation sections. The business section is the action plan, which includes a marketing plan, and a blueprint describing what the company needs to do to meet the challenges and achieve its objectives.
The financial section describes and allocates the financial resources of the company and how those resources will be utilized to support the business and family plan. The supportive documentation section displays legal agreements, pending contracts and affiliations.
The purpose of the business plan in a family business is to give direction for the company and employees, project the family vision and preserve the family legacy. Therefore it is imperative that the family communicates the objectives to non-family members so that together both can achieve the company and family goals.
In parts of Pakistan, tradition dictates that if a business owner dies, the business assets are burned with the remains on the funeral pyre. The family is left to start over and the notion that you can’t take it with you is dispelled. In the United States, the tradition is that each generation tries to make a better life for the next generation.
Today’s family business leader, who is considering retirement, has three questions to answer so that the business continues:
• Is he or she capable of accepting a lesser roll in retirement and relinquishing control of the business to the new leadership?
• Does the leader feel confident and comfortable with the selection of a successor and how much conflict or support will they receive from family members?
• Does the successor have the dedication, knowledge, relationships, leadership capabilities and passion to continue the traditions of the family business and protect the legacies?
The answers to these questions form the session plan.
Before the business leader asks any of these questions, he or she must first make the commitment to retire. Remember, everyone will have to face this decision someday; you can’t work forever. It will not be easy for the business leader leaving the business behind and accepting a lesser role. Former leaders find comfort in assuming the lingering “consultant” role. Retirees pretend they have no influence or control of the company and they’re only there to help.
This can cause conflict. If the former leader doesn’t feel confident or comfortable with the successor, then perhaps he or she shouldn’t have retired. Business leaders need to develop a plan for training a successor and then set a retirement date and stick to it. This will allow everyone—including the business leader—the time to prepare for the changeover and to prepare and familiarize themselves with the new leadership.
An estate plan requires the expertise of skilled professionals who can produce legal documentation to protect the estate, family and business. That requires an attorney, accountant and financial advisor to perform the tasks. Although you can’t prevent the emotional impact on the family if the current owner passes on, you can protect the negative financial impact that can decimate a family and business. Unfortunately, there are no timetables or a crystal ball that can predict when a tragedy will occur so it is prudent for a leader to establish an estate plan, sooner than later.
The complexity of a family business is unique to each family. Each is different with its own personality and culture. It is difficult to summarize a single solution in a brief article. That is why family businesses have perplexed and fascinated business philosophers and educators for years. It is not supposed to survive but with each generation, it proves that it does. EC
MARTIN is a business consultant for Alan Martin & Assoc., consultant for SBA, speaker and adjunct instructor with NECA-MEI, based in Morris Plains, N.J. He can be reached at 973.540.1298 or firstname.lastname@example.org.