Handing over a business that's become an extension of yourself--even if you're passing it to a family member who's competent, experienced and respected--is heart-wrenching for many entrepreneurs.
Some founders just can't do it--even when they know they've become less effective than the succeeding generation. Others transition easily and look forward to leaving daily aggravations behind in pursuit of those interests they shelved during the frenetic early years of running their company. Either way, the heads of most family businesses want to stay connected to the business in some form. Many entrepreneurs achieve this through a consulting arrangement.
Patricia Schiff Estess writes family business histories and is the author of two books: Managing Alternative Work Arrangements (Crisp Publishing) and Money Advice for Your Successful Remarriage (Betterway Press).
Setting up a consulting arrangement may sound simple; after all, the company has probably structured dozens of these arrangements with outside consultants over the years. But when you're dealing with the head of a family business, emotions and nuances often cloud the usually businesslike agreement.
"The founder and the succeeding generation have to talk honestly about their needs and what arrangements can be reached to satisfy both," says David Geller, president of Geller Financial Advisors, an Atlanta consulting firm for family businesses. But, he admits, it's hard to have this frank conversation.
For one thing, "The founder is not used to being asked what he or she needs," says John Davis, a family business consultant and senior lecturer of business administration at Harvard Business School. "It puts the person in a vulnerable position."
The founder may not want to admit that without the business, he or she feels purposeless. He or she might not even be fully conscious of what would constitute a satisfying consulting arrangement. "A good friend or external advisor can often be more helpful than a son or daughter when it comes to probing what the retiring leader really wants," Davis suggests.
When the retiring family business founder's financial and emotional needs are minimal, the consulting arrangement may be very informal, like the one the Ruddens have in their family real estate firm in Bethesda, Maryland. Ron, 64, who retired when his son Gary, 34, took over the firm four years ago, is available as a troubleshooter, gofer and voice of experience whenever Gary needs him. "And it's an unwritten rule that when I go on vacation, he takes over," Gary says. There is no official contract, and Ron doesn't receive any compensation for his work.
But that loose arrangement would not work well if Ron had any misgivings about his retirement. "If there's even the slightest possibility of a confusion of roles, it's important to have a written consulting agreement," says Geller, who outlines some of what should be covered in such an agreement:
*What the business founder will do. It should be something specific that he or she loves doing and is especially good at. It can be anything from market research or developing a piece of machinery that would improve production to enhancing relationships with key customers.
- How much time the consultant/founder will commit to the task. Whether it's one day a week or five depends on the project. But everyone the retired leader has contact with--employees, customers, and his or her successor--should know when he or she will be in the office.
- How much authority the consultant/founder will have in making basic decisions or implementing the project. This area is tricky and depends on the size of the organization and the relationship of the family members. "Both generations have to remember that a consultant's role doesn't give the departing leader the license to do his or her own thing," says Davis.
- What kind of compensation will be paid. "One of the things outgoing leaders should be assured of is that their reasonable economic needs are met," says Davis. Therefore, if the founder's financial position isn't secure, be sure to provide a consulting fee. To ensure the founder is financially secure, many family-owned firms draw up deferred compensation agreements "whereby the business promises to pay the retiring leader a certain amount of money regardless of how much work is done," says Geller.
But retired family business leaders who are financially secure often prefer working without compensation, "especially if they have estate tax problems already and don't need the additional dollars," says Geller.
- What the time frame of the agreement will be. Don't forget to establish an end date for the consulting assignment, including an option to renew. It just may be that the retiring leader won't want to (or can't) act as a consultant forever. The agreement should also allow the consultant to end the arrangement after giving a certain amount of notice.
In order for the consulting arrangement with a member of the senior generation of a family firm to be successful, members must understand that once the senior retires, the two generations are no longer management partners. From that moment on, authority rests with the person signing the checks, the one with daily control of the operations.