NEW YORK - Given the emotional trouble many entrepreneurs have selling or passing on their businesses, you'd think they were giving away one of their own children.
In many cases, that's exactly how they feel about the entity they have helped nurture, cultivate and watch grow over the years. So when it's time for that baby, as well as the entrepreneur, to move on to the next phase, there are a variety of issues to iron out before they can even begin thinking about things like getting the best sale price or minimizing tax implications.
"The psychological barriers to implementing strategies are amazing, and you cannot even get to the planning and structure until you deal with them," said Joanne E. Johnson, a wealth advisery practice leader at J.P. Morgan Chase & Co.'s JPMorgan Private Bank.
"It's normal for the patriarch or matriarch who has created the business to look at it as another child, and they don't want that child to leave the nest," she said. "It's the only child left that they have control over."
But it looks like a lot of owners are going to have to cede control in some way, as a giant power shift is anticipated: About 39 percent of family-owned businesses will change leadership within the next five years as their chiefs retire or semi-retire, according to the 2003 MassMutual Financial Group/Raymond Institute American Family Business Survey of more than 1,000 family-owned businesses. Yet, more than half of those business heads have yet to chose a successor.
"That is really telling," said Len Green, who teaches entrepreneurial and family business classes at Babson College, Wellesley, Mass., and Fairleigh Dickinson University in New Jersey.
"They've built up the business with pride; they don't want to admit what the value of (the business is), they don't want to lose power, and they don't want to pick a successor because that (could create) conflict and they will have to admit someone will change the business," said Green, who is also an entrepreneur.
His family-run company, The Green Group in Woodbridge, N.J., operates 14 units whose holdings include 60 shopping centers, an accounting firm and a thoroughbred outfit with 100 racehorses.
Owners also stand to lose the many perks that come with the top job, the company jet, cars and other benefits, which could result in an unwelcome change of lifestyle. However, there are a variety of things owners should do to choreograph a smooth exit and ease the transition. Many consultants advise beginning the process about five years in advance.
"They need to answer two questions," said Jeff Saccacio, director of West Coast Trust and Estate Services at Citigroup Private Bank. "One, when do they want to depart and two, what do they need financially to depart and support themselves."
Those answers can help determine whether they need to sell to an outsider to get the highest bid possible, or whether they will perhaps sell or transfer the business to a child or another family member. Often, the lines of communication between the owner and management team and the owner's family aren't clear, or they may have different ideas about the business.
In that case, it's a good idea to bring in an outside consultant, business psychologist, or even to form an advisery board, akin to a board of directors at a public company.
For instance, Green created a five-member advisery board for his company - where each of his three children run their own units - comprised of people completely independent from the firm, including colleagues from Harvard University, a rabbi and a professor. Each of his children also chose one member to serve as a mentor. The board meets twice a year and members are paid about $1,000 a session.
To help identify the goal for a family business, Johnson, of J.P. Morgan Chase, suggests having each family member write a mission statement, much like a philanthropic organization might do.
"Ask every family member to write down what their goals are and what they feel about the business, how you want to work together as a family and try and pull it together," she said.
One of the most difficult things owners will have to do to is work their way out of the business and pass the torch onto a well-groomed successor and management team.
"They have to work to make themselves obsolete and this is one of the hardest things for a business owner to do," Saccacio said. "The more important I am to the business, the less they will pay me (for the business). Secondly, if I decide to transfer the business to an insider and I still want cash flow from the business, and it still needs me, what does that imperil? My payout."
In certain situations, different classes of stock - voting and nonvoting - can be created so that the owner can pass a greater stake of the company onto the new guard, whether it be his children or key staffers, while still maintaining somewhat of a voice in decisions.