How do we plan for our parents to retire in our family-owned business?

If you are like the multiple small businesses run by families, your parents (Mom/Dad/Uncle/Aunt) usually want to retire or slow down by their late 60s or early 70s.

We only get so many healthy years on this planet, and it’s very reasonable to reduce workload, smell the roses and plan out retirement.

When the founders or owners see their children can do the job with sufficient experience and competency, it usually means it’s time to take on a much more significant role with equity, risk, and decision-making capability.

Most families are generally not great at discussing their long-term and short-term fears, desires, and challenges, especially in business. Even the most loving and healthy families have difficulties inside a family business; combining so many layers of relationship complexity is challenging.

When the founder(s) are ready to retire or slow down – the major talking points are as follows:

The founders need to be emotionally & financially secure through this process while not placing an extreme burden on the next generation.

They must be ready and seriously willing to give up control. It cannot be make-believe or only symbolic gestures; they must be truly prepared to move into this next chapter of life.

The 2nd generation must agree to and understand the terms set forth by the founders.

This needs to be a win/win for both parties.

The 2nd generation needs to plan ahead and anticipate future ownership and family challenges when the parents are no longer involved.

Equity ownership, roles, income, profit sharing, personal expenses, work ethic, and skill set all play a part and must be truly hashed out.
It is also essential to plan how to gracefully “get out” if, after 5, 10, or 15 years someone wants to move on before the business is sold.

In a perfect world, I would recommend starting with the following:

Seek a business coach/advisor specializing in family-run companies (yes, these people exist).

This coach does not need to be an attorney. The skill set and experience this coach or advisor needs are as follows:

Understands family succession planning
This person has TRULY worked inside their family-owned business – I believe they should emotionally relate to your situation
The coach can talk through the ownership structure in addition to business roles and family dynamics
Can help lay out the groundwork for formalized structure for ownership, roles, and family dynamics

There is an easy read written by a woman named Sara Stern, who laid this out in paperback form on her website https://www.thesagepages.com.

*The process of planning out the ownership rules, succession planning, and family agreement from all parties can take anywhere from 6 months to 10 years, depending on urgency, situations, and ages. So this process can be somewhat fast or take considerable time.

After some investment of time and planning with an advisor, it should be relevant to bring in an attorney that understands succession planning.

I recommend seeking out counsel and a legal specialist who deals with succession planning and understands 1st to 2nd or 3rd generational planning.
This attorney should understand the dynamics of families while giving legal structure to buy/sell agreements, insurances, and equity and protect the family from future issues.
How will equity be gifted or bought into among a plethora of other details?

Of course, a great attorney can bring a ton of value and expertise when you are ready to formalize agreements.
*I recommend hiring a coach/advisor first before legal for 2 reasons
Coaches/advisors typically charge less than attorneys and are usually not spread as thin as attorneys (so you get more attention and time)

Seek out a family business group or affiliation – you are NOT alone.

There are business groups that exist only for family-run companies.
I live in northern NJ and have experience with https://www.fdu.edu/academics/centers-institutes/rothman/family-business-alliance led by Dr. Dale Caldwell.
There is also a group called Entrepreneurs’ Power Hour; you can contact Beth Renga for more information at beth.renga@hfco.com.

This should be happy and exciting for your family!

–Vincent Finaldi