In New Year’s weekend, 2007, while less industrious souls slept off their revels, two bankers in northern Minnesota were moving into new offices. Steven Wilcox was leaving the president’s office at Grand Rapids State Bank to become the bank’s chairman of the board. Meanwhile, his eldest son, Noah Wilcox, was moving in, becoming the fourth generation of his family to lead the institution.

“My dad and I had long conversations, both personally and through our strategic planning process over the years, about what that succession would look like,” Noah Wilcox says. “We did not make the announcement to the staff far ahead of time, but I think they knew that sooner or later that would happen. My dad came to work at 10:00 a.m. the first work day of the new year, and it only took until about 11:00 before somebody bypassed me and went to him with a question. He just said, ‘Listen, it’s not my call. It’s not my team. You have to talk to Noah about it.’ End of discussion.”

Not all family business successions are so drama-free, Wilcox says. “We’re very, very fortunate that we have a family that can sit down and have a conversation about redeeming somebody’s stock or transitioning ownership,” he says. “It can make for interesting Christmases. But I think you have to be willing to have those open conversations. Because if you don’t, there are concerns and needs and issues that don’t get addressed, and at the eleventh hour, those things crop up and can really be a problem.” 

A Matter of Gravity 

One of the most common challenges families face as they hand down a business from one generation to the next is the emotional difficulty of relinquishing control. 

“There are some people who want to just cut it clean and leave cold-turkey,” says Earl Cohen, managing shareholder at the law firm Mansfield Tanick & Cohen in Minneapolis. “But what happens more often is Dad or Mom say they’re letting go, they transfer ownership and control, and then they’re there every day telling the kids what to do. It does not go over well.”

That’s what happened to Mark Halla, owner of The Mustard Seed Landscaping & Garden Center, a Chaska plant nursery. Halla was the third generation to take the helm of Halla Nursery, the business his grandfather started in 1942. His father transferred land and company stock to him, but then couldn’t follow through. 

“As much as we’d put in place, my dad just wasn’t willing to give up control,” Halla says. “And there were some insecurity issues. My dad believed he should actually make as much money, with exactly the same benefits and more, as he did when he was actively participating in the business. He thought that any gain in the business, that he got large share of that value. While I was buying him out for about four times the book value, in his opinion he was giving it to me. It was two different viewpoints, almost like two different worldviews. I felt like I was purchasing something; he felt like he was giving it away. And I think that’s very common. Even though in business it might be an incredibly fair buyout, it probably doesn’t feel like that on the selling end.”

The situation deteriorated until a distraught Mark Halla left his family business and started The Mustard Seed. “Clearly, this was what I wanted to do with the rest of my life, and I knew that,” he says. “So it really was a good fit for me to continue on with the business. But I think I also just needed to be able to express my own individuality and not be underneath someone else’s control. It’s hard enough, I think, for most of us to have someone else exercising control on us. But when it’s a family member, it just becomes all that much more difficult.”

Even in the best cases, says Sheryl Morrison, principal at Minneapolis law firm Gray Plant Mooty, family business succession is often a long process. Entrepreneurs usually identify extremely strongly with their business, to the point where they may lack outside interests and may not know what to do if they’re not in the office. They also want to protect their legacy.

“They have to feel confident that if they do step away, the business will still go,” Morrison says. “That involves identifying and grooming successors. It’s not an immediate action; these things take a long time. And then training them and letting them take on responsibility so that there is a level of confidence that it will work. It seems silly, but we sometimes advise clients to do a bit of a fire drill: ‘Imagine I’m not around—what happens in this situation?’”

The ultimate fire drill is the business sabbatical championed by the transition services consulting firm Platinum Group, LLC, in Eden Prairie. Partner Steve Coleman explains that many owners and CEOs have trouble letting go because they don’t have a new interest or challenge to take on.

“They go through their departure ritual, but if they don’t have something better to go to, they’re back,” he says. “Gravity wins, pulls them back in. ‘Oh, I’ll just stop by the office, stop by the shop and see what’s going on.’ And the next thing you know, they’re in it up to their eyeballs, much to the unhappiness of whoever is in there after them.”

Coleman advises business owners at this stage in their careers to take a minimum of 90 days off to unplug and decompress. Before they leave, the execs give their managers a very clear set of business plan instructions, with rules about what they can and cannot do. Then they take off—to sleep, sit on the beach, travel with family, write a book, give presentations to colleagues, or whatever floats their boat.

When they return, much has changed. Usually, Coleman finds, the company has done better than it did while the owner was there. Meanwhile, the owner is full of new ideas and has re-prioritized, often becoming interested in philanthropy and community-building.

“When the time ends and the owner returns, we’ve found that it’s important to renegotiate roles and responsibilities,” Coleman says. “In an effective sabbatical, the managers keep the higher ground that they have been given as the sabbatical began, and the owner typically doesn’t get so much or at all involved in daily operations. Their work very often has a lot to do with new business development, being an ambassador, traveling around looking for new ideas, new problems to solve. 

Coleman adds that it is psychologically helpful for the owner to not reoccupy the same office. “They’re in the building, but they have a different office because they’re going to have a different role,” he says.

The Next Generation

Richard Brown, CEO of JNBA Financial Advisors in Bloomington, became the leader of his family business in an abrupt manner that was far from ideal. “My mom started the company 30-plus years ago, and then my sister [joined her] the next year,” he recalls. “Then my sister any my father both became ill within like a 30-day period. We were actually in a hospital waiting room when we had the conversation. My mom was like, ‘What am I going to do with this business?’ I told her that I would do it, but I didn’t want to do it the way she did.” 

Under Brown’s mother, JNBA was a one-person registered independent advisory business: Brown’s mother saw every single client herself. But that could no longer continue. Brown re-imagined the company as a team-based advisory business with far more growth potential. 

“At that time, being a financial advisor was not my strength,” he admits. “Running a business was. So within 60 days, I actually reorganized the whole thing. I had conversations with the employees. Most of them either I let go, or they decided to go a different direction.”

What Brown did wouldn’t have been possible without the vote of confidence from his family. And even then, it was a tough row to hoe, because he had no history with the company. Often, employees resent a new boss whom they perceive to have gotten the job solely because of his or her family ties. 

“Family members who take over businesses often have to overcome the notion that it’s just because they’re the son of the founder, for example,” Morrison says “That’s why the grooming and training and such are important. It’s also important that the founder instills and makes public the notion that this person is the successor.”

Cohen says if children have an interest in joining the family business, they should start work in the firm early. “This probably should start in high school,” he says. “It might be in the mailroom. It may be in distribution. It may be somewhere that they can use the limited talents that they currently have. You wouldn’t put them in the finance department and make them the assistant CFO, of course. They have to start from scratch, and they have to learn the business from the ground up.”

Cohen emphasizes that children of family businesses should always get a college degree—in something relevant, if possible. And they should continue to get additional vocational training after college. He recalls the case of his college roommate, the scion of a packaging firm, who after attaining his bachelor’s degree, embarked on a term at “cardboard school” to learn the technical aspects of his future job.

Many up-and-comers get jobs at other companies in their industry before rejoining the family business and beginning to take management or ownership control. “I went and worked for a big bank out of school for several years,” Wilcox says. “I guess I felt that was necessary for me to have real perspective on the value of a family owned business. When I came back to work, I didn’t come back to work as the bank president. I came back to work in another capacity, and over time have gone on to acquire a pretty good portion of the shares of the bank, and am currently the president and CEO.” 

The Devil is in the Details

Lawyers and accountants aren’t the only professionals who can help guide family businesses through these transitions. In many cases, consultants who specialize in succession planning can offer valuable advice.

At the time of her father’s death in 2004, Jessica Richards-Palmquist, co-owner of Jones Metal Products, Inc., in Mankato, says her mother chose to become more involved in the family business, deciding to take the role of board chair instead of being a passive owner. In 2007, she made her three children minority partners; she has since made them full partners. All three children chose to become involved in operations.

“We had been outside managed for a long time, so it was a big and difficult transition for us,” explains Richards-Palmquist. “So we hired a family business consultant [Mary Daugherty, a University of St. Thomas professor and Family Business Center fellow]. We knew that we needed to figure out a succession plan, that our mother wasn’t going to stay in her position as sort of chairman of the company forever. That was critical, because even if we weren’t at odds over who was going to do what, or what we ultimately wanted to happen, it was difficult for my mother emotionally. So it really helped us that we found someone that our mother was comfortable with and could talk to, and confide things in, and would also listen to and take advice from.”

Richards-Palmquist’s sister, Sarah Richards, aspired to become CEO, but the board (including their mother) didn’t immediately agree that she was ready. For a time, a member of the board served as CEO and mentored her. “That was very bumpy,” says Richards-Palmquist. “And there again, our consultant really helped us. It was not smooth, and it hasn’t been pleasant in many ways. We’ve gone through two managers, and now my sister just took over as CEO January 3. So we are finally there.”

“Anybody who has a family business and is looking at succession planning should bring in an independent, trusted consultant to give advice and to evaluate the family members’ strengths and weaknesses,” Brown advises. “Some are good at some things, and some are good at others. It’s simple if you take the emotions away. You’ll never probably make everybody happy, but it’s better when it comes from an independent person.” 

Halla says if there’s one thing he would recommend to family businesses so that their transitions might go more smoothly than his did, it would be to start working with a succession consultant early—far earlier than they think they need to.

“Put things in place now while we’re younger and clear-headed, and we’re not making decisions based on fear at the moment,” he stresses. “Perhaps that includes a mandatory retirement age. Perhaps that includes a stock buyback that’s actually part of the bylaws. Maybe you can create a clear definition of how the stock is valued so that it can be gifted or purchased. What’s most important is that the transition is actually planned 15 to 20 years before it ever happens. That makes sense whether it’s part of the family or not.”

The financial side of succession.

Acquiring shares and property is another piece of the family business succession puzzle—one that lawyers and accountants can help make simpler. Sheryl Morrison, principal at Gray Plant Mooty, says there are a number of ways an advisor who knows tax law can help business owners pass assets down more easily and efficiently.

For instance, she says, “If you give a gift, that asset isn’t included in your estate for estate tax purposes. So let’s say my business is worth $5 million now, and I give it to my son. If I die 10 years later, and at that point my business is worth $10 million, the fact that I gave the gift earlier means that it’s not in my estate. So that additional $5 million of appreciation . . . [is not taxable]; if I’d held onto it when I died, I would have had $10 million in my estate that was subject to tax. So there could be a benefit of gifting early.”

Morrison says if the family’s end goal is to transfer stock to the next generation over time, advisors often recommend giving stock to heirs in increments. Fractions of family stock are subject to a “minority and lack of marketability discount” for tax purposes, because they offer no control and can’t readily be sold on the open market. So stock given piecemeal ends up being taxed at a lower rate overall. 

Tax advisors can also help family businesses time their gifts to their best advantage. “If I really wanted to sell my interest or part of my interest to my kids, now is a really good time to do a sale,” Morrison says. “My kid’s not going to be able to buy my shares outright. They’re going to have to pay over time. The IRS says if you do that, you have to charge reasonable interest. If I had sold my business in the 1980s or 1990s, interest rates were 8 and 10 percent. But right now, the interest rates for an installment obligation like that, for 10 years, is somewhere around 1 or 2 percent. That’s a very good deal for the kid, and it’s also a good deal for my taxable estate, because I want to die with less.”