How to Pass a Family Business on to the Next Generation

Dec 13, 2012

family businessThere’s a new breed of entrepreneurs out there, and they’re not looking for funding. They know their business well, perhaps a little too well, but they need some new ideas. Some might call them fortunate, or even fortune-seekers, but they all have one thing in common – they are the next generation of a family business. From birth they knew that one day the baton would be handed over; they just didn’t know when.

If you’re looking for some advice on passing your family business to its successors, whether they are your children or another heir, you will want to make sure it’s done right. In a recent article published by Fortune and, retail CEO Jack Mitchell takes readers through the important steps one must take to successfully pull off the succession of a family business.

In “Family business: How to pass the baton,” Mitchell takes readers through the founding and succession of his parents’ clothing store in Westport, Connecticut, which he and his brother Bill joined in the mid-1960s. Having been “passed the torch” himself, he learned a bit about business succession before his sons came onboard in the 1990s. His family business is now in the hands of a third generation of Mitchells, and it has grown to become the largest family-owned upscale clothing store in the U.S.

The Mitchell family was fortunate, but it was not a “slam dunk” for them to build a business from the ground up which now boasts sales exceeding $100 million. Few people can imagine spending more than half their working life beside their father, mother and brothers with everyone getting along; let alone adding in their kids and nephews later on. The secret, according to Mitchell, is to create an environment of mutual respect, one where each partner trusts the other and they learn to function as a team. Families who can take on these intellectual and emotional challenges with grace are a rare find, but they share a special bond; not to mention the financial rewards of a successful business.
What is the “secret sauce” that makes a family business go smoothly? Here are a few highlights from the article:

Pass the torch with passion: This one is at the top of the list for a reason, because without the passion to pass the business on to the next generation, it will be a lifeless transition. Business owners must truly desire to see their children shoulder the responsibility and reap the rewards, and their children must embrace this same aspiration.

Never hesitate to ask for help: No one is a “natural” at succession planning, so why try to do it on your own? The Mitchell family realized the value of networking with similar family businesses when they formed the Forum in the mid-1980s and invited a consultant to speak about passing on a family business. They learned so much that they decided to hire him to work on their plan.

Use the five-year rule: This may be one of the hardest rules to enforce, but for many family business owners it is non-negotiable. In essence, the five-year rule prohibits a successor from entering the business right after college. The rule specifies that after finishing college they must first work somewhere else for five years. While it might seem a little harsh or unnecessary, they need to know what it means to be hired, promoted, pushed, pulled and otherwise “managed” by someone who is not a relative. It also helps them to know for sure if running the business is really their passion.

Pass the equity on early: When parents entrust a large percentage of business equity to their kids, they become much more invested and responsible at an early age. Even if they are not yet involved in its operations, they will watch it more closely and begin to see themselves in a leadership role.

Keep communication transparent and candid: By realizing that a family business has its challenges, all stakeholders must agree to complete transparency. Even in the closest families, a lack of honest and open communication can be a catalyst for friction and discord. Insist on frequent meetings about various topics and make sure everyone gets a chance to express their views.

As challenging as it may be to keep a family business running smoothly, it is worth the effort to make it work. Starting a business from scratch may give you more freedom, but it comes with a lot more risk. Whether you are entering a family business as a senior manager or you are stepping up to take the reins from a retiring parent, the rewards of business ownership are much greater with a comprehensive succession plan.

Photo Courtesy of Ambro /