Transition Planning

By Gerald Le Van

How to speed up the rewards of succession without retiring.

Jack Jr. has a fancy title, but lacks the authority to go with it. In notso-subtle ways, his father keeps reminding Jack Jr. that he's being paid more than he is "worth." Jack Jr. is forever being groomed, warming up in the bullpen. Jack Jr. has no written job description, no clear career path. Succession is never discussed. He feels his options slipping away. If he leaves the business, his resume won't be very impressive-18 years in the family business. His life is a series of frustrating todays spent in the hope that on some tomorrow he will finally have a chance to explore his talents and exercise his brain.

Jack's sister, Karen, doesn't work in the business. Yet she too, is having problems with the present and the future of the family business. Over the years, her parents have given her stock in the business. Because the business has grown, her stock now is worth several hundred thousand dollars. Yet the business doesn't pay dividends. Karen had not needed extra cash before-she is an engineer and has a good job with a large company. But she and her husband want to start a family, and she would like to take a year off with their first child. Karen's husband, also an engineer, wants an MBA degree to round out his education.

Karen would like to sell some of her stock to generate the money for these important "today" needs. But Karen is afraid of offending her parents if she raises the question. She doesn't want to sound ungrateful. Like her brother, Karen has always thought of spendable family wealth as a "tomorrow" thing, something she would have after her parents' death.

Both are frustrated today by the problems that can only be solved-or so they think-tomorrow, by the death of a parent. That makes them both feel angry and guilty. The issues that confound Jack Jr. and Karen shouldn't be dismissed as hang-ups of the "Now Generation."These are not just spoiled kids with shiftless lives demanding yachts.

These are children trying to answer some of life's most basic questions in the context of the family business. And unfortunately, the only answer they seem to hear is that will be no solution until their parents die.

Business owners with grown children on staff may still feel healthy and energetic, and not ready to let go of the business they spent a lifetime building. 'Me kids will have plenty of time to run thebusiness after Dad or Mom retires (an event the parents have given little thought to) or dies (an event they have given no thought to).

Meantime, the children are frustrated. Their fancy titles and fat salaries were intended to keep them satisfied, at least for a few years. But without authority, the titles and paychecks only serve to remind them of their doubts about their worth.

For entrepreneurs such as Jack Sr., work is life; retirement is death. He wants to postpone any withdrawal from this monument to his success. He wants to savor his accomplishments and believes his children will have plenty of time to enjoy their own.

The only happy solution involves both generations sharing the today benefits. Karen has at least two options. She can ask the business to lend her money, secured by her stock, to help fund her husband's education and tide them over while they start a family. (Or, if the business has a liquidity problem, the business can go to a bank on her behalf and co-sign on a loan.) While her parents can probably afford to loan their "little girl" the money, it is healthier for the funds to come from the company, with no emotional strings attached. Or Karen might offer to sell her stock to her brother, with an option to buy back shares later if she wants.

Jack Sr. and Jr. need to sit down and talk. Dad probably has no idea about the extent of his son's frustration. Both men have legitimate needs, which seem to conflict. But it doesn't have to be all or nothing. Dad doesn't have to retire today. All he needs to do is find areas of the business in which Jack Jr. can assume control. Here are some ways the generations can reconcile their needs:

If Jack Sr. wants to retire eventually, he can take off one extra day a week, each year, until he is phased out completely. In seven years (no, not five-he was working seven days a week) Jack Sr. will be out for good. Another approach is to hire an outside, transition CEO, to take over part of Dad's duties and pass them along to the son eventually. Meanwhile, Jack Jr. should take charge of all new projects and ventures. If Jack Sr. wants to stay in the saddle, he could revise the organization chart, so that no more than five people report to him. Everyone else should report to Jack Jr.

It sounds so easy. But the toughest part is facing the fact that a child has been put in the position of waiting for the parent to die. It doesn't have to be that way, of course.

 

Gerald Le Van is an attorney and president of the Family Business Foundation, a consulting firm in Baton Rouge.

 

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Issue: 
December 1990

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