Chapter 5
Transferring to a family member

Succession at a family-owned business usually means transferring ownership and management to a family member. Transition to a family member raises unique management, legal and financing issues. This chapter focuses on the management issues; legal and funding options will be discussed in a later chapter.

Will it work?
The worst thing you should do is assume that your child or other family member will take over just because he is a family member. Answer these questions honestly:

Does the family member have the passion for the business? If a son or daughter has never expressed an interest in the business before you raised the issue, it’s difficult to imagine him or her as an acceptable successor.

Is the family member’s motivation appropriate? If your son is only really interested in the money and perks that go with owning and managing the business, consider whether his attitude is right for the job. Can the family member make a contribution? We covered this largely in the last chapter. Make sure the family member has the skills the company needs.

Does the family member meet minimum requirements? The scope of your operation determines what knowledge and experience a successor absolutely needs. At 25 trucks, perhaps a couple of years in operations and a great rapport with drivers will get him through. But running a 750-truck carrier likely requires at minimum several years experience as the chief executive of a mid-sized operation or perhaps a slightly lower position at a larger carrier.

Do you feel obligated to keep the business in the family? If your only motivation for transferring the business to a family member is that you feel that everyone expects you to do so, then you have a problem. You obviously haven’t identified a suitable candidate yet, and perhaps there isn’t one. In the end, you aren’t doing your family or your employees any favors by handing the business to someone who can’t handle it.

For now, we will assume that you have answered these questions and still are confident that a particular family member could replace you. That doesn’t mean that transition will be easy. There are a number of issues to work through.

Dealing with rocky relations
Because you likely are the family’s leader – or one of them – it may not matter much to you that family members don’t get along. But for the next generation, it may be a serious problem. If you already have family members in key positions within the company, consider whether your chosen successor – or any family member – can gain the confidence and loyalty of the others.

You may be able to work through even intense problems by coaching everyone to recognize their strengths and weaknesses and, in turn, their appropriate roles within the company. A facilitator outside the family may help. In some cases, however, the relationships may be so emotionally charged that a family succession is unworkable. You might have a capable successor, but family dynamics will doom the company.

Overcoming employee resentment
No matter how skilled and capable your child might be, you can’t ignore the fact that others in your company will presume that his pending promotion is due to family privilege, not ability. You will never convince anyone that you chose a family member solely based on performance, but the successor can at least show that he is working for the job.

As we have already discussed, it’s usually desirable for your successor to work at another company so that he has experience working outside the “old man’s shadow.” Then, while working for your company, the successor must show that he’s capable of working hard and putting in the hours. He should make a point of developing his own relationships with managers and employees in all departments. At least until the transition is complete, he should act humbly, avoiding fancy clothes and cars and keeping any luxuries he might enjoy very private. And as much as possible, family relationships and the company organization chart should be totally separate. In other words, in discussions with employees, Junior should refer to John or Mr. Doe, not Dad.

For your part, be clear with employees about the future direction. Once the decision is made that a family member is being groomed to replace you, communicate that fact to key managers and employees. True, everyone will notice over months and years that you are grooming him as a successor, but you don’t want the “announcement” to come from the rumor mill. Besides, if your successor needs to step in suddenly, it is better that everyone clearly understand who that person would be.

Don’t forget about customers. Let your most important customers know one by one at lunch or some other face-to-face setting. Ask them to keep it confidential until the announcement; they will appreciate this gesture of trust. Notify the rest of your customers by personal letter to arrive at the time of or immediately prior to your formal announcement. Don’t let them be surprised.

Finally, when the transition is complete, acknowledge it publicly. Throw a retirement party for yourself. Send a press release to the local newspaper and trade journals. Understandably, this often is a very difficult step for owners, but you need to do it for the sake of your successor and your company.

Handling compensation
In a family business, it’s not necessary for the would-be successor to sign an employment contract unless other top managers have them. On the other hand, he must have a clear understanding of what his role is in the company, your expectations of him, when raises and evaluations occur and what the strategy of the company is.

Pay your family successor – and any other family members – on the same basis as other employees. Salary should be based on responsibility, experience, skills and hours worked. You really shouldn’t be distributing your company’s profits to family members in the form of salary. Ask other trucking company owners, your CPA or perhaps an outside board for help in establishing a uniform compensation plan.

A firm policy, openly communicated, that you will pay based on the job performed – not the last name on the paycheck – helps you in two ways. First, it cuts down on jealousy from non-family members. Second, it helps you deal with jealousy among family members who may not receive the same compensation. That’s valuable today, and it will be especially valuable once one of those family members takes the company’s reins.

Dealing with daughters
Throughout this book, we use “he” in referring to the successor. Writing “he or she” becomes cumbersome when it appears dozens of times in just a few pages. But while the typical trucking company owner is male, exceptions are quite common. More than 5 million companies are owned by women, and the federal government says that about 3 percent are in the transportation industry. That means that roughly 150,000 transportation industry firms are owned by women, and a large number of those obviously are trucking companies of some type.

For purposes of this discussion, however, we will also assume that the current owner and manager is male. After all, if that’s not the case, then this discussion basically is irrelevant because gender clearly isn’t much of an issue in succession.

Is your daughter your logical successor? Experts on family dynamics have found that transition from father to daughter can be easier in some respects but harder in others. Fathers and sons tend to compete, resulting in disharmony. But a father may be inclined to view daughters protectively and treat them with kid gloves.

Just as you defined compensation for family employees based on job description, so too you must treat a female successor precisely how you would treat a male successor. You are doing her no favors long- term by sparing her any portion of the necessary training and education because of her gender. It’s unrealistic to believe that every manager and driver will overlook the fact that she is a woman. But that’s precisely why she needs to follow the same development path you would insist on for a son.

Helping the old folks
As we discussed earlier in this chapter, your successor needs a “changing of the guard” event. For his own confidence and for organizational clarity, everyone needs to know the moment at which he, not you, is the go-to person.

But where does that leave you? The torch passing that the next generation requires can be a traumatic experience for the retiring owner. And with today’s life expectancies, you could have decades left to fill.

You can continue your involvement with the company, although it’s best to do so behind the scenes. Retaining a seat on the company’s board of directors is probably the most common approach. You may become or remain chairman of the board. But don’t treat a board position as an opportunity to meddle. Board members should provide oversight and insight but leave day-to-day decisions to the chief executive.

Regardless of how you transfer your business, your succession planning should include a vision of how you will spend your ample free time in retirement. Even more pressing than these personal and psychological issues is how the owner converts his equity in the company into retirement funds, but we will deal with that concern in the chapter on financing succession.

Keeping good employees
In the life of a company, transition is the period during which qualified, loyal employees and managers are needed most. It’s also the period during which you are most likely to lose them. This is a danger regardless of how you transfer your business, but for the reasons we have discussed, the risk of losing key personnel is especially high when you are passing the business off to a family member.

At any time – but especially during transition – savvy owners try to tie key employees to the business financially. Among the options are deferred compensation, salary continuation, life insurance and bonuses.

Of course, an alternative to handing the business off to a family member is selling it to these key employees. We will discuss that option in Chapter 7. But next, we will consider selling your company to an outsider.