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Plan A Successful Succession

By Jenny Callison, posted Feb 9, 2018
There’s an old adage about family businesses: The first generation starts the company, the second generation builds on that foundation, and the third generation runs the business into the ground.
 
Mark Edwards says that he and others at Atlantic Appliance and Hardware laugh about that saying, as the third generation of family becomes more involved in the Wilmington company. Mark, son of founder Gene Edwards, represents the second generation of his family at Atlantic Appliance. Wade Tillery, grandson of founder Hampton Tillery Sr., is a member of the third. Each family has a 50 percent share of the business. The issue of succession planning is never far from their minds.
 
Wade Tillery – in his mid-40s – is well established at Atlantic Appliance. His father, Hampton Tillery Jr., is still involved, but has passed most of his shares of stock to Wade, Edwards said.
 
Meanwhile, the family’s third-generation members are younger and in the early stages of their careers.
 
“From what I see right now, they seem to be very involved as well,” Mark Edwards said of his son, Chase, and his niece, Kayleigh, both 27.
 
But asked about Atlantic Appliance’s planning for the company’s formal transition to the third generation, Edwards said the partners are not in a hurry to create an official succession plan.
 
“We want to make darn sure this is what they want to do and that they bring the same level of interest as the second generation,” he said. “They are pretty settled, but they are pretty good at other things too.”
 
Tony Stroud, president of Stroud & Company CPAs in Wilmington, says this wait-and-see approach is very common.
 
“We are watching this happen inside families, and I’m doing it in my own practice with younger partners,” he said. “We always advise that you confirm the next generation is interested. Then you look at how you introduce the next generation. Do you introduce them as a minority partner? Do I have them form an entity in which they partner with the current entity?”
 
If the existing business corporation forms a partnership with a member or members of the next generation, and it doesn’t work, it’s easy to dissolve, Stroud added.
 
“It’s like putting on a temporary crown on a tooth while you’re waiting for a permanent crown. You haven’t sold anybody any shares of stock. You haven’t done anything permanent to cause the threat of hard feelings,” he said.
 
If the fit is a good one and the family members decide to move forward, Stroud suggests that the child or children gradually grow the percentage of their interest in the partnership.
 
“At the end of it, once the child takes a majority share, we would dissolve that share into the [original] corporation,” he said.
 
Randy Long sees succession planning as a process that typically takes three to 10 years. It involves transfer transactions but also involves much more, he said.
 
Even though you might end up transferring the business to a child or an employee, “build and run the company as if it will be sold to an outside buyer,” said Long, CEO of Long Business Advisors. “Even though [a business owner] might assume that they will sell to an employee or a kid, a lot of times those don’t work out. [The employee or child] might not have the aptitude or the mindset.
 
“Look at your business through the eyes of a buyer rather than the eyes of an owner,” Long added. “Impose stringent criteria. If you are running it the right way, in an efficient manner, that reduces the risk to the buyer so they will pay a higher price.”
 
Both Stroud and Long cautioned that family business decisions have the potential to cause hard feelings if all family members are not treated equitably. That means communicating clearly with everyone and making accommodations for those who do not having a continuing role in the company.
 
Succession plans that favor some and alienate others can damage relationships, Long said. “When mom and pop are gone, it’s the end of the family,” he said. “We look at what is the best outcome for everybody.”
 
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