Having a successful business involves three stages — starting it, running it, and passing it on to the next generation. The trouble is people usually only think of the first two. That last one only crosses most people’s minds when they start realizing they need to retire or when they get hurt or sick and someone else suddenly has to step up and run the show.
You could save yourself and everyone in your company a lot of stress if you think about exit and succession early, especially when it involves handing the business down to your children, say Wendy Wolff Herbert and Doug Zeltt, two attorneys who focus on business and transition matters at Fox Rothschild at 997 Lenox Drive in Lawrenceville. As Wolff and Zeltt often counsel business owners, getting out of business takes a lot of advanced planning — often more than it took to get into the business. That is because if you’ve built a solid business, you have to contend with what happens to a lot more futures than just your own.
Wolff and Zeltt were scheduled to be part of the Mid-Jersey Chamber’s Breakfast Forum panel, “Planning Your Exit: Tips on Maximizing Business Value and Successful Transitions,” on Thursday, October 29, but the event was cancelled shortly before U.S. 1’s press time. A new date has not been announced.
That Wolff and Zeltt make much of their living counseling business owners on the business of transitioning is no accident. Both grew up with fathers who ran their own businesses for years, only to see them go under. Wolff’s father sold and repaired televisions and radios until a Kmart moved in, and the business never made it to a second generation. Zeltt’s father was a serial entrepreneur whose most successful enterprise was a home improvement company that he turned over after 40 years. But the successors “didn’t take the reins,” he says, and the second generation of the business lasted a mere five years.
Wolff earned her bachelor’s in political science and economics from Rutgers in 1979 and worked as a paralegal and judicial law clerk, eventually earning her J.D. from the University of Pennsylvania in 2003. She joined Fox Rothschild in 2005.
Zeltt earned his bachelor’s in economics from Tufts in 1988 and his J.D. from George Washington University in 1991. He served as a law clerk for the Office of the U.S. Attorney, District of New Jersey and joined Fox Rothschild in 1992.
Family business realities. Though no family members took over the businesses from Wolff’s or Zeltt’s parents, the realm of family business succession is a staple topic for them. Both are trying to improve the sober statistics that make family-owned businesses increasingly rare as the generations change.
According to the Family Business Institute, while 88 percent of business owners believe a family member (usually a child) will one day take the business over, only 30 percent of family-run businesses actually survive into the second generation.
The numbers just get worse from there. About 12 percent of family businesses make it to a third generation and only 3 percent make it past there.
Sometimes, as was the case for Wolff’s father, the world changes enough to make a business type less viable. But when it comes to businesses that can continue, she says, there’s no reason they shouldn’t, as long as business owners and family-member coworkers do something they surprisingly seem to rarely do — talk.
Start early. Conversations, started early, can really set a business on a good course. “You can’t plan too early,” Wolff says. Zeltt adds that identifying who is going to assume which roles in the business is a key aspect of this conversation.
Unfortunately, he says, the reality is that most people who call Fox Rothschild about transition planning do so in “fire drill” mode; in other words, they only think about what to do when the owner gets sick or dies suddenly and the business is thrown into chaos. “Rarely is a good plan one that comes about in an emergency,” he says.
While Wolff says that one of the biggest hurdles for any entrepreneur is to learn to diffuse responsibility and authority in the business he has built, a business owner must learn to let go over time. He must delegate and converse with those who will lead the next generation, especially when it will involve family taking over.
Equally important, however, is for the family members to talk among themselves. Rarely, she says, do family members try to figure out who is going to act as president, who will be CFO, or what to do about the one sibling who wants nothing to do with the business but still expects a share.
Zeltt adds that knowing how each person sees the future of the business and what each thinks will be the right course are important considerations. And his perspective is not an academic one. His father-in-law was a dentist who worked entirely alone, without even an assistant, for years. Zeltt’s brother-in-law wanted to come into the practice, but add a receptionist, an assistant, and a computer system. The conversation, Zeltt says, didn’t start until late, when the difference of opinion caused a lot of arguing.
Such topics, Wolff says, aren’t necessarily pleasant ones, but knowing the answers to such questions as early and as thoroughly as possible will more likely put a business in that rare company of those that survive past the first generation or two.
Remember the goals. For owners, Zeltt says, it’s important to know what you actually want to leave your successors, family or not. “Does the owner want to leave monetary wealth and that’s it,” he says, “or does he want to leave a legacy that will carry on? You have to ask, what’s your goal? Do you want to liquidate or do you want to perpetuate?”
Advisors are built, not found. Wolff and Zeltt advocate that business owners have solid advisors for exit and succession planning. Leaving a business involves a lot of jobs, a lot of titles, and a lot of money going to a lot of destinations. Financial advisors, therefore, are essential. In fact, the reason Wolf and Zeltt are doing the October 29 presentation with financial professionals from Glenmede is because they want to impress upon business owners the importance of sound money management for the business to continue and for the owner to be compensated once he’s left the business.
But Wolff and Zeltt caution against trying to find advisors — financial, psychological, and strategic planning — late in the game. “One thing I harp on is that business owners can’t just pick up a phone and say ‘I’ve got to build my team,’” Zeltt says. “It takes time to build those relationships. It’s not something you get instantly, it’s something you earn.”
Wolff adds that, given so many businesses these days have three generations working together, younger workers should not be afraid of tapping into the experience and advice offered by those who have worked in the industry, if not the company, for a long time.
There is no one-size-fits-all answer to what your business needs for its transitional stage, of course, but there is the inescapable advice to start the conversation when times are good and it’s still early enough to think about nailing down the specifics.
“People usually call us at a crisis point,” she says. “That’s not good.”