In 2008, after a five-year succession process, Greg Harth became a 100% vested owner of Harth Builders, begun in 1996 by his father, Allyn. As the economy bottomed out, Greg and Allyn wondered if the sale had been set at too high a price. “As a young business owner, it scared me that we may have to renegotiate,” says Greg, who worked six years in the business before taking it over.
“You should continue thinking of succession plans even during a recession,” says Dr. Otis Baskin, associate of the Atlanta–based Family Business Consulting Group and a professor at Pepperdine University. In some ways, a recession can be helpful. For example, if the value of the business declines, you can gift more shares per year to your heirs.
During a recession, the older generation may be less inclined to take risks, wanting to preserve what they have built before they pass it on. Or they may feel they could better weather the downturn. “But what the kids need is the opportunity to run the business,” Baskin says.
To make that more likely, he suggests that the parent’s retirement and lifestyle not depend upon a monthly check from the business. They should diversify their assets and have a separate retirement plan.
The Harth’s agreement was a front-end lump sum and a seven-year commitment, until Allyn turns 85, for him to be a CEO (but not an owner), continue in sales with a small salary plus commission, partake in profit sharing at certain milestones, and to get a new vehicle every four years. Allyn also has pension income from a previous career and other retirement income such as rental property and a 401(k).
Due to the down economy, father and son did recently renegotiate — “A father wants to see his son succeed and may be more willing to alter the arrangement,” Greg says — but decided there was nothing to change that would affect this one-year economic blip.
Father and son make strategic decisions together; Greg makes all day-to-day decisions. Things are running smoothly. “A good succession plan, when it’s finally executed, should be old news,” Baskin says. “Everyone inside and outside the business should say, ‘Of course, that’s what we knew would happen.’”
—Stacey Freed, senior editor, REMODELING.