Ownership transfers in family owned businesses have a lot of complexity from both a business and a family standpoint. These transitions can involve many components, including sale of stock, deferred compensation arrangements, and gifting. Regardless of the transaction structure, governance structure should change when transitioning ownership to the next generation.
There are three key reasons for this:
- Senior generation owners who are exiting probably have more intuitive knowledge of the business; they just know what to do. Next generation owners usually do not have the same feel for the business and adding some structure can be a big benefit to them.
- Exiting owners usually become significant creditors of the business in a family transfer. They are often holding notes for the payments associated with the sale of their stock. Adding governance structure can allow them to maintain board seats so they can stay informed about the company’s operations and monitor the their position as a creditor.
- Exiting family members can be a support mechanism for the remaining family shareholders and act as a sounding board as they take over the business.
Increased governance usually takes the form of quarterly board meetings to report progress and ensure accountability. It takes discipline and structure to add increased governance to a company that may not be accustomed to it. However, there are enough benefits for all parties to make the effort worth it.