Tuesday, February 17, 2015

Preparation Is Key To Transitioning Family Business To Next Generation

In order to prepare a family business for transition to the next generation and for other reasons, a successful family business needs to consider setting up a formal means of obtaining outside advice and perspective.  This can be done by placing appropriate persons on the board of directors or through the use of an advisory board to the board of directors.  By having these advisors in place years before the death or retirement of the founding generation can help preserve and protect the family business during the transition to the second generation.  They can also help the founding generation prepare for the sale of the business upon the death or retirement of the founders or for the transition of the management of the business to the next generation.  It is a fact that the majority of family businesses do not survive the transition to the next generation.  Proper planning in advance can shift those odds to favor either an orderly sale of the business at its highest price or the orderly transfer of the management of the business to the next generation with advisers in place to help insure the continued success of the business.

Here is a checklist on how to set up an advisory board.
Keep it small.
We recommend that an advisory board have three-to-five members.  Although the board does not have decision-making power, it is still good to have an odd number so that a vote results in a consensus recommendation.  Beware of boards that are too big and unwieldy.
Do not pick wallflowers for the board.
Look for diversity of expertise, ideally people who have knowledge where your managers have less depth.  Many business owners turn first to people they know, and that is fine as long as your golfing buddy or long-time friend is willing to speak up and do more than rubber-stamp whatever you are doing.  An expert from academia may give you someone who has the time to study trends and see the big picture, but other members should be people with hands-on experience in running a business.  Look for critical thinkers who can voice constructive opinions that will help you manage and grow your business.
You get what you pay for.
We think you should pay the board because compensation tells them that you want them to take their advisory role seriously.  The specific amount varies with the expertise needed, but a typical range is from a few hundred to several thousand dollars per quarterly meeting, plus reimbursement for any travel costs.  To be effective, they are spending time preparing for the meeting in the same way public company directors do their homework.
Formal is better than casual.
Again, following the public company model, give your advisory board structure.  Prepare agendas, meet in a business setting and keep minutes, all of which will set the right tone.  We recommend that at least part of the meeting take place without managers present, which will encourage the board to speak freely about issues they see. While the board cannot fix anything on its own, a closed-door discussion may make them feel more comfortable about approaching you and offering perspective on a problematic area.  They will need time alone to come up with a way to tell you that your brother-in-law is in over his head as CFO.
Open up the books.
You are going to have to tell them how the business works and that may mean sharing financial data and other sensitive information.  Closely held businesses are often reluctant to open up their books, but without knowing your debt, revenue, EBITDA and other such data, the board's advice is more guesswork than analysis.
Your legal counsel can help.  Your attorney can prepare non-disclosure agreements for board members that will ensure the confidential information you give them does not fall into the wrong hands.  We also recommend that your legal counsel be accessible to the board to answer any legal questions that come up in their meetings.
Overall, the advisory board will be as useful as you want it to be.  Select serious people, task them with issues that matter to your business and give them the data they need.  And do not wait for a crisis.  Reach out when things are going well to build the advisory board that can help you identify potential problems and opportunities and position your business for the future.

For help with your legal needs contact a business, tax, and health care law attorney at the offices of AttorneyBritt.

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