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Seven Tips to Keep It in the Family

Transferring a business to the next generation can be your family's biggest challenge.

If only my last name was Yuengling -- I'd be in line for brew master of America's oldest brewery, now in its sixth generation of family ownership.

But I'd just as soon go for the name Teutul and be building custom

Orange County Choppers with my dad and two brothers on the Discovery Channel.

According to a 2006 online member poll conducted by the

National Association for the Self-Employed, nearly a quarter of microbusiness owners plan to pass their business to another family member.

Still, keeping a business in the family isn't all cheers and fast bikes; it can be more like one of those destructive dinner-table discussions we all try to avoid. According to findings by Joseph Astrachan, editor at

Family Business Review

, more than 30% of all family-owned businesses survive into the second generation while only 12% survive into the third.

A Family Affair

Bobby Knell, president of

American Leak Detection, would have sold his Dallas franchise -- which he estimates will be worth about $2 million in the next two years -- if his son had not expressed a desire to work for him and eventually take over.

But problems arise when Knell considers his impending retirement. At that point, his son won't be able to pay him the value of the business, but Knell can't afford retirement if he hands it over for free. Knell is therefore thinking about hiring an exit-strategy consultant to help sort out the tax implications of a gradual payoff, in which Knell would stay on the company payroll as a consultant.

The next generation can bring fresh ideas to a business, especially if they have been through management courses, says Louis Stanasolovich, CEO of

Legend Financial Advisors. Even with the right training, though, the takeover is never smooth sailing.

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With that in mind, these seven guidelines from seasoned advisors can help small-business owners avoid disaster.

1. Don't push it.

Gene Fairbrother, the lead small-business consultant for NASE, has consulted with tens of thousands of businesses. He often sees parents pushing their businesses onto the next generation despite resistance or lack of interest.

When the next generation doesn't care about the inherited business, however, they may put it up for sale, run it into the ground or create a negative atmosphere, which is bad for the whole operation, he points out.

2. Make them leave the nest.

No matter what the business, says Fairbrother, real-world experience is essential. He suggests college graduates go to work at another company or in another city for at least a year before starting at the family business. "

The younger generation needs to see what other people are doing and then come back with eyes wide open," he says.

3. Withhold handouts.

Fairbrother recommends developing a structured transition plan to bring the next generation up through the ranks instead of handing them control. "

The son/daughter has to prove 120% that they can do the job, not just because they're the boss' kid." Slow integration will also help to keep your entire staff happy and more willing to respect the new generation of owners.

"I'm not an advocate of handing things to people," says Stanasolovich, who recommends progeny buy the business over time while simultaneously proving their ability to keep the company competitive.

4. Combat sibling rivalry.

Problems may arise, says Stanasolovich, when one child decides to work in the business but those opting out still want a piece of the assets. Parents can resolve this by giving the noninvolved children more passive forms of ownership, such as a limited partnership or nonvoting stock.

5. Bring in an outsider.

Most of the time family transitions are done incorrectly, says Fairbrother, because of the sense that "family is family," and members let emotions and squabbles abound. To avoid a family feud and a botched takeover, hire a third, disinterested party like a business consultant or accountant as an intermediary.

6. Learn to let go.

Most importantly, as the child begins to take over more responsibility, the parent must back off. Parents cannot micromanage, says Fairbrother, or they risk child-parent animosity that can filter down to employees. "Instead of getting reasonable decisions, you get no decisions," Fairbrother says.

Sometimes stepping back for the parent means taking a part-time position in the company and gradually allowing offspring more responsibility. "You can't give anybody respect without giving them authority," Fairbrother explains, adding that parents also need to expect and accept mistakes as part of the learning process.

7. It's never too early.

Finally, keep in mind that 19% of family business participants have not completed any estate planning and only 37% have written a strategic plan, according to statistics from the Raymond Institute/Mass Mutual 2003 American Family Business Survey.

Family-business owners make the mistake of thinking they have plenty of time, when in fact they should begin writing up a transition plan as much as 10 years before they hand the business over to the kids, says Stanasolovich. A smooth generational transition takes time, money, and a good attorney. While prices for a good plan can reach five figures, it's like insurance for your business -- you can't afford not to do it.