It's critical that every family-owned business have an exit strategy.
The typical owner rarely wants to give up the controlling reins, nor does he want to face his own mortality. As a result, a family retail, service or manufacturing business often creates an uncertain and risky future.
Instead of burying their heads in the sand, owners should give equity positions in the company to younger managers so they are in the position to control the business when the boss gets sick, dies or retires, said Rhodes Craver, a Durham lawyer who specializes in business and family law.
That's especially true when where there are no family members to take over. What's more, future bosses need incentives to stay with the company often in the form of some equity ownership.
A successful succession plan is based on open communications between the owner and other family members if the goal is to bring children into the business, said Cooper Biersach, co-director of the UNC Kenan-Flagler Family Enterprise Institute.
In addition, it's a good idea for the children to work for another company before joining the family business. "This way," Biersach said, "they gain experience, make mistakes and learn their ABCs in a different workplace."
She maintains that the family business would benefit from an independent board of advisers, which would operate somewhat like a board of directors. A priority on their agenda is to guide the CEO into sound succession planning.
According to the Family Business Institute, 89 percent of current business owners believe that their family will control the business during the next five years. Yet, statistics do not support that optimism since only 30 percent of business survive into the second generation, and about 3 percent continue under the same family for four generations.
When management is unable to find a successor or make arrangements for key employees to purchase the company, it faces two alternatives: finding an outsider to buy the company, or closing down the operation.
Son buys the business
Jeff Monsein, 52, president and owner of the Aluminum Co. of North Carolina, worked at the window installation company started by his father, Melvin, in the early 1960s. Jeff Monsein was employed part time while a high school and college student. In 1983, his father, ill with emphysema, wanted to retire.
"His immediate goal was to sell the company then grossing $1 million in sales, but nobody offered him the amount that he thought it was worth," Monsein said. "My dad really wanted to continue working, but he was not well enough to work full time."
The quandary was solved when Jeff, at age 25, bought the business on a 10-year payout; his father died several years later in 1989.
Monsein has four children. The three daughters, who are 24, 23 and 20,haven't shown much interest in taking over the business. His youngest child, Ryan, is a high school student and is working at the company this summer. He has the potential to get involved with the $12 million business.
"As of now, I have no other succession plan," he said. "I've talked about it with my accountant, but that's as far as it has gotten. I have no intentions of stepping down any time soon."
Father prepares plan
Ray Sparrow, 65, already knows his son Jim, 41, will succeed him as head of the Water Specialist, a nearly 40-year old water treatment company in Hillsborough.
The business, which repairs and installs water systems, is an outgrowth of a plumbing company that Sparrow's family started in 1954.
To prepare for a management turnover, Sparrow attended workshops conducted by the SCORE office in Chapel Hill that covered the steps to be followed in an orderly succession of ownership. As part of the workshops, Sparrow prepared a plan to be followed by the new owners.
"My succession plan is rather simple," Sparrow said. "I don't want to sell it to Jim since it means he'd be faced with financing the purchase. When I die, I'll simply will it to him."
Meanwhile, Jim Sparrow does not sit in the wings wondering what's next. According to the father, Jim is already in charge of 80 percent of the business, which grosses more than $1.2 million a year in sales.
As Water Specialty's CEO, Ray Sparrow no longer focuses on day-to-day operations. Instead, he concentrates on improving the company's management methods, and thinking through its strategic business plan.
Owner hands off
John R. McAdams, president of the land development company bearing his name, has for the past several years been making the transition to new ownership. McAdams founded the Research Triangle Park company 30 years ago.
McAdams' plan, which has been in effect for several years, calls for him to divest stock to several longtime, key managers. By the time that he's 70 in eight years, ownership will have switched hands to them.
"We have already designed who will succeed me as president," McAdams said. "The intent is to be orderly about the transition for the reassurance of both company personnel and our clients."
The recent sluggish economy has, however, resulted in suspending the transition for several years since stock purchases are funded, McAdams says, through bonuses.
"In response to this slowdown in the changeover, I'll be selling shares at a greater rate in the years ahead to get us back on track in the management change,"McAdams said.
