Choosing the Best Path for Your Family Business

by Marty Kirshner, Gray, Gray & Gray, LLP

Is your successor inside the family business, an outsider, or a white knight?

The future of your family business rests on a crucial decision: choosing your successor. This responsibility entails more than simply selecting an heir. It requires careful planning, introspection, and communication, all while considering the needs of your family, the future of the business, and your own personal aspirations. While many owners look toward their own family for the next leader, it’s important to recognize that the ideal successor may lie within the company, outside the family, or even not exist at all. This article will guide you through the process of exploring each option, helping you make an informed and confident decision for your business’s future.

Passing the Torch Within the Family

For many family businesses, the first and most natural inclination is to look within their own lineage for the next leader. This approach fosters a strong sense of continuity, preserving family values and traditions within the company culture. However, choosing a family successor necessitates objective assessment and careful preparation to ensure their success. Here are four important steps to consider:

• Evaluate potential candidates: Identify family members who possess the necessary skills, experience, and passion for the business. Consider their educational background, work ethic, leadership qualities, and understanding of the industry.
• Formalize a training program: Provide the chosen successor with comprehensive training and mentorship opportunities. This can include shadowing experienced personnel, attending industry conferences, and undertaking specialized training programs.
• Communicate openly and transparently: Discuss your expectations and the succession plan with the chosen successor, as well as other family members. This fosters transparency and helps manage potential conflicts.
• Develop a buy-sell agreement: This legal document outlines the process for transferring ownership and ensures fair compensation for departing stakeholders.

Choosing a successor from with the family comes with both benefits and challenges. On the positive side, elevating an internal candidate helps to preserve the family’s legacy and values, promote loyalty and commitment, and provides a sense of continuity and stability. On the other hand, you may be faced with a lack of qualified candidates within the family. There is also the potential for family conflict if you choose the “wrong” person to succeed you. This is one of the difficulties of separating personal and professional relationships.

Choosing a Successor from Outside the Family

Looking beyond the family for a successor can offer a wider pool of talent and expertise, providing fresh perspectives and potentially accelerating growth. This option, however, requires careful consideration to ensure the chosen individual aligns with the company’s values and culture. When looking at a non-relative to take over you should:

• Develop a clear profile of the ideal successor: Define the essential skills, experience, and leadership qualities you seek in your next leader.
• Conduct a thorough search: Leverage professional networks, industry publications, and executive search firms to identify qualified candidates.
• Evaluate candidates objectively: Assess their experience, track record, and cultural fit through interviews, reference checks, and assessments.
• Onboard and integrate the new leader: Provide the new successor with comprehensive training and support to help them understand the company’s culture, operations, and strategic vision. Be ready to absorb higher transition costs.

Looking outside the family gives you access to a wider pool of talent and expertise, which can lead to improved performance and greater innovation for the business. It can also head off nasty family conflicts. At the same time, you should be prepared to lose a little (or a lot) of the close culture that goes along with family enterprise.

“None of the Above”

Sometimes, the most strategic decision may be to sell the company altogether. This can be a wise choice if no suitable successors exist within or outside the family, or if your personal goals no longer align with running the business. Selling to an outside interest can provide you and other family owners with financial security and liquidity, and the freedom to pursue other interests. And it certainly can reduce the stress and responsibility of finding an individual capable of continuing your work. But it means loss of control and influence over the company’s future, and potential job displacement for employees (including family members) who may have devoted years of service to the organization.

Having assisted in selling multiple energy businesses, our company has identified five “top line” issues to contend with during a sale:

1. Set realistic expectations: Research market conditions and determine a fair asking price for your company.
2. Engage professional advisors: Partner with experienced business brokers, financial advisors, and legal counsel to guide you through the process.
3. Prepare comprehensive documentation: Gather financial records, legal documents, and other relevant information to present to potential buyers.
4. Market the business effectively: Utilize online platforms, industry networks, and confidential marketing channels to reach qualified buyers.
5. Negotiate and finalize the sale: Ensure a smooth transition by carefully outlining payment terms, ownership transfer, and employee contracts.

Ultimately, the best path for your family business succession depends on your individual circumstances, values, and long-term goals. Regardless of the chosen option, thorough planning, open communication, and professional guidance are crucial for a smooth and successful transition. Remember, there is no “one-size-fits-all” solution and the most important factor is making a decision that ensures the continued success and profitability of your business.

Marty Kirshner leads the Energy Practice Group at Gray, Gray & Gray, LLP, a business consulting and accounting firm that serves the energy industry. He can be reached at (781) 407-0300 or mkirshner@gggllp.com.

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