How to Keep the Business in the Family

Many people dream of owning their own business. So you would think if one already existed, offspring would jump at the chance at inheriting a family-owned firm. Think again. Only 3 out of 10 family-owned firms are passed on to the second generation, and only two of them get as far as a third.

While many issues are to blame, lack of planning tops the list. In a survey of 500 family-owned companies conducted by Regeneration Partners, a Dallas consulting firm, a full 25% of "senior generation" owners said they had done no estate planning whatsoever. Marshall Paisner, founder and chairman of the board of Massachusetts-based ScrubaDub Auto Wash Centers, Inc., knows better and shares his insights in his book Sustaining the Family Business: An Insider's Guide to Managing Across Generations (Perseus Books, $26).

At 69, Paisner decided three years ago to hand down the multi-million dollar family business to sons Robert, 41 (now CEO), and Daniel, 39 (now president). Since then, ScrubaDub has expanded and now has nine outlets. Paisner shared with MWorld key points for keeping a family business alive:

Share the decision-making. Your children won't want to take over the firm if you're not willing to relinquish control. While the first generation of a family business is started by an entrepreneur with a vision and, often, complete control, the second generation needs to be ruled by "consensus management," especially if more than one personality is in charge. Before stepping down, establish a committee comprised of family and management executives who can handle the day-to-day and long-range decisions.

Create a "deadlock trust." Paisner says he withheld 2% of the voting shares and put them in the hands of an attorney. The attorney becomes a "deadlock trustee” should his sons in the future come to a deadlock disagreement on a critical issue. This is crucial because sibling may agree during the transition or in the beginning phase of the business, but what you want to ensure is longevity.

Protect your assets. Make sure that "other” family member, Uncle Sam, doesn't get a lion's share of your business. One thing you can do is re-capitalize the company's stock while the children are in the business, making 90% nonvoting stock and 10% voting stock. The U. S. government levies much higher taxes on voting (compared to nonvoting) stock and it can save thousands -- if not millions -- of dollars at the end of the year.

Plan ahead but don't go it alone. A well-designed estate plan can run anywhere from $5,000 to $50,000 (depending on the size and value of the company) and up to a year to develop. But there's really no alternative because to do it right you need the advice of specialists who speak the language and know the law. Consider hiring the following: an estate-planning lawyer, an accountant, an insurance professional, a valuation expert, and, if possible, a family counselor.