by Hanah Cho on April 30, 2015
posted in Nerd Wallet
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If you ask Amish Gupta, joining the family business was never a sure thing.
Five years ago, his father, Virenda Gupta, was ready to step back and travel more to his native India and see other places. He asked Amish to join and eventually take over RETC, a property tax consultancy in Dallas that the elder Gupta founded in 1986.
Before making the move, which had major professional and personal implications, Amish initiated frank discussions over compensation, ownership and authority. The father and son eventually agreed on a succession plan that is working well for the two men and ultimately the business.
“I wanted him to have complete rein and freedom,” Virenda Gupta says. “So I gave him marketing and sales and pretty quickly he became CEO. I took a back seat and he makes day-to-day decisions. … I believe a father-and-son team is only going to work if the son is given responsibilities and complete authority that he can exercise.”
A complicated transition
As a business owner, planning for an exit can be hard enough. But throw in a desire to maintain a family legacy and succession can become complicated — even messy. Your children or other relatives may not have any interest in taking charge, or family squabbles over the direction of your business could sink a smooth transition.
What’s more, the business itself may not survive the ebbs and flows of market and industry changes, says Monika Hudson, an assistant professor and director of theGellert Family Business Resource Center at the University of San Francisco.
The center helps families balance business issues, ownership questions and family dynamics. It’s important that all three factors be in sync for a business’s long-term survival, Hudson says.
She cites the example of an expanding family business with children who did not get along. They fought so badly that it led to attorneys getting involved. The family is now splitting parts of the business.
“We have all the emotional issues that are part of being a family interfacing with those business decisions that need to be made around scale and the future,” she tells NerdWallet.
So it’s no wonder that few family businesses survive for the long haul. Only 30% of family businesses make it to the second generation, according to the Family Business Institute, a consulting firm in Raleigh, North Carolina. Just 12% of them last into the third generation and only 3% are viable into the fourth generation and beyond.
Succession planning is key
What makes family business succession so difficult? For starters, few business founders prepare and train their children or relatives to take over, according to Wayne Rivers, co-founder and president of the Family Business Institute.
“You started the business, you’re the founder. You make all the decisions,” Rivers says. “So now, you have three children, two girls and a boy, they begin to have trouble making decisions. What counsel can you give them? You have no tools in that toolbox. You say, ‘What can’t you just get along?’”
Ensuring your business survives — whether in the hands of family members or outsiders — takes a lot of planning. Give yourself enough time to consider all possibilities, including selling to outsiders or even employees, Rivers says.
It’s important not to confuse estate planning with succession planning, according to Rivers. “And now here is a document saying, ‘If I get struck by lightning, this is what happens to my assets including my family business.’ That is not a succession plan, it’s a drop-dead plan,” he tells NerdWallet.
A survey last year by the Alternative Board, which provides industry guidance for businesses, points to the lack of planning in family business transfers. Less than a third of family business owners have a succession plan.
Of course, your child may not want the business. And maybe it’s the other way around: Your son or daughter may not be the best person to take over the business. Here’s a reality check: 42% of family business owners say nonfamily employees are more qualified, according to the Alternative Board survey.
“In some cases, the parent is the owner and feels like [the children] don’t have the right profile: They don’t love the business. They don’t have a head for business,” says Dave Scarola, vice president of the Alternative Board.
Establish a game plan
That wasn’t the case for Virenda Gupta. He began thinking about the future of his business when he turned 60. He had faith that Amish was the best person to lead RETC, a 20-person firm that also has offices in Austin and Houston. Amish knew the business well, having worked at the firm at various times as a high school and college student. Plus, Virenda says, he was more confident in his son than an outsider taking over the business.
Virenda also knew Amish would bring skills and experience he gained at other jobs. Amish worked at consumer products giant Procter & Gamble, doing marketing and product management. He also got an MBA at the Kellogg School of Management at Northwestern University.
Sure, Amish felt the pull of family, but he also wanted to make sure joining the family business would make sense for him too. Being an entrepreneur was a big plus. So was having the flexibility to pursue his other business ventures, according to Amish. On the flip side, Amish would be giving up a coveted job with global investment firm the Carlyle Group in Washington.
“It wasn’t a done deal. He was the one who called me and said you should come back,” the now 35-year-old Amish Gupta says.
Before committing, Amish pushed to establish a “game plan” on major issues such as authority and responsibilities as well as compensation and equity. He hashed out with his father issues such as control over day-to-day decisions and long-term strategic goals for RETC. The company has a third board member who acts as a tiebreaker vote in case father and son can’t agree on a decision. Amish says he recalls only one instance in which they butted heads before reaching a consensus.
Even though talks over money can be difficult, Amish says he wanted to make sure he would be fairly compensated, especially since he had given up a lucrative career path. Pretty early on, Virenda says he gave Amish “a critical share” of the business.
“For folks like me, our opportunity cost is serious. I graduated business school in 2007 and I’m now at an age where my friends are becoming partners at consulting firms and banks. We’re talking folks who are making half a million plus or a million depending on the industry they’re in. That was the path I had given up,” Amish says.
With a succession plan in place, Amish joined RETC as its chief operating officer in 2010. Under Amish’s leadership, the firm has shifted into taking on more sophisticated tax cases for bigger clients. The firm also saw a major staff turnover, a typical occurrence under a new leader in any business. Over the years, Virenda, now 68, has scaled back his work to accommodate his travels.
Words of advice
Father and son say they have learned some lessons along the way about making a transition. They offer these pieces of advice on succession planning for family businesses:
- Don’t pressure your child or children to take over the business. There is a lot of pressure especially on children of immigrant entrepreneurs, Amish says. But forcing them to come back doesn’t help the business. Even if the child wants to work or take over the family business, it may be prudent to get outside experience. Amish credits his time at Carlyle and other companies for establishing “credence with my employees who respect me and my clients who respect me.”
- Have tough conversations upfront about how the succession will work. This should be done not just with parents but also siblings who may or may not be part of the business, Amish says. A year ago, a family friend approached him for advice because he was facing a similar decision to the one Amish faced five years ago. Amish told him this: “You have to ask for things upfront and ask for things before you agree to come back. If you ask afterwards, you have no recourse. You can’t really quit. You can, but with any other job, you make a clean cut; you can’t do that with family stuff.”
- Get your children or other interested family members involved with the business without any commitment, Virenda says. “It’s important to experiment. Even though you know your children and you know their intentions, once you work together, it’s a different matter,” he says.