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Passing the baton or intergenerational partnership in the family owned business

On his forty-seventh birthday Michael made a mental note that he had completed twenty-five years in the service of the family owned business his father had founded. This, of course, was not counting the summers he had spent there, as well as cutting classes in favor of the packing department.

With satisfaction, he thought about how much sales had grown under his management, how quality and inventory management had improved since he introduced the ERP system, and how much the new financial system had contributed to controlling the cash flow. He smiled as he thought about the new products he had introduced, which accounted for a considerable part of sales. He admitted to himself that he was paid an excellent salary and that his family lived in comfort in the beautiful house his father had bought him. But his friends, his own age, were already corporate CEOs, and some of them even owned small companies of their own. What about him? When, if ever, would he get to be the owner of the family firm? And how would the partnership work out between him and his two sisters?

Michael’s father founded the family business forty years ago. A graduate of the Technion – the Israel Institute of Technology who had lost his father at a young age, he bore the burden of supporting his younger siblings, his wife and baby son. Michael’s mother worked with his father since he started the business. The factory grew and flourished, and along with it, so did the weight carried by the founder. At the age of seventy-three he might have liked to shift some of the responsibility, but there were still plenty of dreams he hadn’t realized and plans that had yet to be transformed into a reality. Besides, the kids weren’t ready yet… they didn’t know how to communicate with the old customers, spent money like water and were afraid to make decisions. No doubt one day the business would be theirs (theoretically, it was for them that he had built it in the first place…), but in the meanwhile, there was no rush. And beneath the statements that may perhaps sound like excuses, lies a complex dilemma.

What happens to me (the founder) the day after I pass the baton?

Contrary to the prevalent view that founders refrain from transferring assets to their children at an early stage because they are domineering and thrive on the sense of power, I find, again and again, that this is rather the result of a sense of responsibility to themselves and the business. Disengaging from one’s lifework, from one’s primary (and often only) area of interest or activity, from a way of life and the identity of the “owner” is liable to leave an unfillable void and may even be dangerous. No one walks off into the sunset happily. In most cases, both the business and the family need training, advice, wisdom, and the founder’s experience, even if they don’t need his everyday involvement in running the show.

In addition, I have learned that founders are not always sure of their family’s love, once the financial dependence is no longer there. If one hasn’t developed the ability to talk and spend time together outside the context of the business, there is (genuine) concern of losing one’s loved ones the moment the business and assets are out of one’s hands. No one can afford to take a risk of such magnitude!

So when does one pass the baton?

Every family is a “country”, and as such, has its own rules, especially in Israel where there is no estate tax. We have met small business owners who chose to transfer complete ownership of the business to their children when the latter were in their early thirties. The children measured up to expectations and the business developed and grew. They were spared Michael’s dilemmas, but the sense of abandonment was there in the background, particularly at critical junctures. Even more important is the principle that children want to be sure that the parents are economically safe and secure. If the parents have transferred the assets without assuring that their needs are provided for when they grow old, they are liable to be dependent on the decisions of their children, now owners of the business. This situation is a bad one for all concerned.

More well-known are cases where the founder bequeaths the business and assets to his children after he reaches the age of one hundred and twenty. Until then, Michael and many others of the successor generation who have chosen to work in the family firm will be doing so as salaried employees and “future owners”. Considering today’s life expectancy, they may well become owners when they are close to retirement age. The practical significance is that a family that owns a business must work collaboratively on many diverse levels long after the generations in other families have parted and gone their separate ways. We believe that this embodies an opportunity to build an intergenerational partnership which will serve as a platform for strengthening the family and business growth.

Intergenerational partnership rather than passing the baton

 Today, more and more families choose to hand the business down to the next generation gradually, so that over a long period two (and sometimes even three) generations hold the firm’s shares. Some choose to leave most of the shares in the parents’ possession and divide the rest equally among the members of the successor generation. Others leave a control share with the founders and distribute the ordinary shares to the successor generation. Either way, this allows for the beginning of an intergenerational partnership and an opportunity to together build the business and the family, protect the older generation and teach the young generation responsibility and ownership.

Transferring part of the ownership of the family’s assets to the successor generation during their parents’ lifetime may also take the sting out of the “paper rich, cash poor” syndrome, which is so typical of the third and fourth generations in family owned businesses. Giving the successor generation shares enables the young people to benefit from dividends, align income and expense levels at their choice, and above all – to be financial grownups and choose their own lifestyle. The parents, for their part, can respect their children and treat them as partners, once they are free of the role of benefactors of their adult children.

Finally, an intergeneration partnership requires solid preparation of the younger generation.  They need acquire business knowledge and managerial skills, like any other senior manager.  In addition, they need to develop the ability to handle complex emotional situations and to form a good working partnership with the senior generation.  Good consultants are available to guide the family through the process of deciding when and how to forge an intergenerational partnership and how to properly address the accompanying financial, tax and legal aspects.

Remember that not only the solution needs to be right; it’s important that the process itself will serve as an example of the principles on which the new partnership will be based. It must be executed with transparency, while encouraging open dialogue and clearly defining the place, rights and obligations of each of the partners.