United States

Keeping the business in the family: Third generation's challenge


Background and business concern

In the fall of 2017, RSM’s Center for Business Transition (CBT) advisors began working with a family just starting to plan for transitioning management and ownership from generation two to three. As is typical of many of the privately owned companies we work for, the majority ownership rested with generation two. In this case, one brother held a significant minority ownership position, but was not involved in the company, and the other, with controlling interest, was the long-time CEO.

The challenge of planning for management and ownership transition was made more complicated because the two second-generation brothers were at odds with each other regarding company issues. In addition, the company’s financial performance had been declining over the past several years. The emotional stress created by the brothers’ poor relationship was of significant concern to all of generation three, especially the CEO’s eldest son who was in the process of succeeding his father as CEO.

At 39 years of age, the son had worked at the company during various times in his youth, but he had moved on to become extremely successful in an industry very dissimilar from the family’s manufacturing company. Returning to the family business meant he was giving up not only a substantial income stream, but moving from an established residence in a southern community back to a small Midwest town.

Our approach

Our CBT planning process started with one-on-one confidential owner interviews, including interviews with those not active in the business. In all, nine shareholders and two non-owner executives were interviewed. What we heard and learned from the owners and executives was not only critical to the development of a successful ownership transition plan, but significant to the CEO succession as well.

In addition, just as important as understanding the individual owners’ dreams and goals was understanding how ready the company was for transition. Working with top management to gain this understanding, our CBT team used a licensed third-party assessment software tool that measured the quality of operations and risk level within the company. Through this effort, we learned the business was not ready for transition. Significant operational and financial improvement would be required, all of which would fall on the shoulders of the returning son.

Finally, we assessed how well top management was aligned with the company employees. Key employees selected by the CEO and returning son were requested to complete an online confidential corporate alignment survey. The questions covered 10 areas, including: company purpose, organizational structure, leadership, personnel, planning, controls and accountability, coordination and communication, culture, functions/departments, and outputs/results.

Following this, the CBT advisors prepared a transition report identifying significant recommendations, including key areas on ownership and company readiness as well as other considerations. Note the following:

Ownership readiness

The second-generation father, the current CEO, wanted to retire at the end of 2019 and then take on a consulting role to advise his son who would succeed him at that time. The CBT advisors recommended the son be elevated to CEO in the next four to five months at which time the father would become executive chair. RSM advisors were able to assess through their interview and survey work that the son was already bringing a new level of excitement to the organization and was well accepted by the employees and management. The company needed to be under new leadership; waiting two years demonstrated ownership was not willing to take the steps necessary to bring about that change. A real positive was that all of the shareholders were supportive of the son taking over and felt change was needed now.

The son, still in the process of learning the business, would need support. While his father would be available, as well as his uncle, it was recommended that a mentor/coach be engaged for support. This person would need to have appropriate real-life experience in manufacturing, not just a purely theoretical perspective.

The father had not planned for realizing the value of his equity ownership. Now he was faced with figuring out how to get his stock ownership over to his son. The decision on how to accomplish this transfer, equalize his estate between his other children and insure his wife’s needs would be taken care of could not be planned until the father, with his wife, developed a personal financial plan.

Corporate wealth transfer

There was a stock restriction plan, dated September 1971, to control stock ownership. It had been amended four times to restrict stock handed down to generation three. Based on owner interviews, members of generation three (except for the returning son), while appreciating the family company, were not really interested in having ownership and were willing to sell their stock if it helped. Yet generation two members provided their shares to be handed down to generation three in the event of their death. A review of the stock restriction plan was recommended as well as determining if it would be possible to hand down cash instead of stock to generation three in the event of a death in generation two.

Executive compensation plan

The returning son gave up a lucrative profession to return to the company. He wanted to be assured he would be compensated for improving company performance and increasing value. It was recommended that a compensation specialist be engaged to develop an executive compensation plan.

Successful transition

Generation two had a difficult time discussing business issues without emotions getting in the way. Generation three was very concerned with the stress this was putting on the fathers. The stress also carried over to the company. If there were to be a successful CEO transition and improved financial performance, it was imperative that family members work together effectively. It was recommended a family psychologist be engaged to help address the emotionally charged issues surrounding transition. 

Company readiness

Planning – The company assessment revealed that many of the challenges facing the business were the result of a lack of corporate governance. While the company did have a board of directors, it was comprised of shareholders who held just one meeting a year. To help guide the company and give the new CEO the support and structure he needed, it was recommended to put in place an active board of directors. It was further recommended that all of the generation three directors, except the returning son, terminate as directors and five independent outside directors be installed. This would optimize governance going forward and put in place the discipline to insure the following issues were addressed:

  • Preparation of a three-year business plan by management, reviewed and approved by the board, including the appropriate strategies and tactics to increase the value of the company
  • Support and counsel to the new CEO
  • Annual budgeting with quarterly financial performance review and discussion
  • Annual executive compensation management and performance
  • Annual CEO and management evaluation

Operations – The existing enterprise resource planning (ERP) system had not been upgraded in many years. As a result, there was a significant amount of time spent generating management and operation reports which created inefficiencies. Advisors recommended updating the ERP strategy to improve timely reporting and understanding of financial results.


Our client accepted all of our recommendations. The last formal step in our transition planning process was to deliver their transition road map in a formal meeting, which included RSM’s client relationship leader. At this meeting we provided steps and helped set priorities to address our recommendations. This client has already begun addressing the issues and plans to have them accomplished over the next 24 months.



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