AR Business Article: Legal Succession

Family Business Succession – How do you gift “experience?”
- Valuing the Intrinsic Asset

As a second generation partner in our family accounting firm, I often find myself providing a particular service to clients that I never took a formal course on. In fact, there are no degrees to be sought or formal credentials to be had in this area of practice. Rather, it’s the actual everyday experience of trying to balance personal family relationships and a professional life, which has allowed me to become “certified” to advise clients as they too transition their own family businesses.

The questions usually arise from my family business clients as to when they should be shifting ownership interest, whether they will sale or gift such interest, and at what price. These basic business valuation questions all have answers that can be mathematically calculated with a bit of time and software. However, it’s the following questions, which cannot be so quickly answered:

  • At what age should the child be given more responsibility within the family business? Some corporate documents set a specific age, such as 35, before the second generation can have majority control.
  • To what extent does the first generation include the second generation in major decision making processes? Is the first generation solely responsible for all Human Resource Personnel decisions like hiring and firing employees; who has to sign the personal guarantees with the bank; etc.
  • How transparent should the family business’s financial position and net worth be? Does the second generation know about certain loans that may be cross collateralized; do they see only a specific portion of the financial statements at a certain time; do they know the difference in liquidity and net worth, etc?

More often than not, I see the first generation unwilling to forgo control of the business or attempting to protect the second generation from the perils they experienced as a new startup business. Yet, it is exactly those experiences, learning from failures and failed attempts, which made the first generation successful. As not only a CPA, but also a second generation family business owner myself, I have quickly learned the value of experience. My father, Richard Bell, and I often joke about him having the “gray hair,” so to speak, while I have the additional credentials. There is no proper GAAP reporting standard for experience or dollar value to be assigned for experience in a Business Valuation. There is no exact manual on how to transition a family business between the generations or formula that can be applied uniformly. Rather, experience is the single asset that is the key to successful succession planning.