Business Succession Planning - Part III

Most people who own a business and have a family, at some point, will look at their company and think of it as a “family business.” This can make you feel warm and fuzzy, thinking of leaving a thriving business to grateful heirs, who will take the company to new heights of success. Who could ask for a better business succession plan than that?

In many cases, that’s what happens. In some cases, however, the reality doesn’t live up to the fantasy, including finding out that it never was a “family business” to start with. Either family members aren’t in the business and don’t want to get into the company, or family members working in the business don’t actually want to own it.

Moreover, passing on a business to family members can significantly change the family dynamics in ways that some families are ill-equipped to handle: if not dealt with the right way, tensions, frictions, conflicts, and jealousies can disrupt the family and the business at the same time, a lose-lose situation that nobody wants.

Being clear-eyed about some key issues will help you decide whether keeping the business in the family is the right thing for you, your heirs, and your company:

Know What It’s All Worth: As an owner/founder, it’s all too easy to let your emotional attachment to the business, and years of investment, skew your view of what it might be worth to someone else – especially when your heart is focused on passing on that value to your heirs. If you, as the leader, aren’t willing to make a cold, hard assessment of the company’s true market value, then nothing else about the process is going to work.

Know Who’s In and Who’s Out: One of the biggest mistakes business owners/founders make is waiting too long to pitch the idea of passing the business to the family. You can be left with no option but a rushed, outright sale if they turn you down. And even if family members work in the business, you’ll know who is just in the business versus who is committed. You need to start the conversation early about whether they want to own it because training your successor is a deliberate years-long process, not simply a last-minute hand-off when you’re ready to go.

Separate Family Culture From Business Culture: Too often, dysfunctional family dynamics make their way into family-owned businesses. Decisions get too emotional. Personal conflicts and allegiances can drive business and financial decisions. By contrast, successful family firms communicate well and have a no-nonsense approach to running things, in which everybody knows: you all work for the business, not for each other. Family time and family issues have their own time and place, and it’s not on the clock or on the job.

Sometimes “Equal” is the Most “Unequal” Thing in the World: Too often come across family businesses where every family member working in the business gets paid the same, regardless of what they do. It’s understandable that parents, for example, would want to pay all their kids the same, as they love them all the same. But within the business, pay should be commensurate with roles and responsibilities, just like in any business. Someone working 60 hours a week should not get the same pay as a sibling working 20 hours a week – that’s the most unfair and dispiriting thing in the world. The place for “equality” is in the estate plan, where you can easily correct for necessary and appropriate inequality on the business side.

Decide Whether You Want to Leave Them the Business or the Value of the Business: Don’t bequeath ownership stakes to family just for the sake of it. Having ownership, even for family not working in the business, still comes with serious responsibilities. Is that something they want? If they don’t, and you leave them shares anyway, that could lead to dysfunction and distrust down the road as the family members running the business will be answerable to those who don’t want to be involved. There are plenty of options for leaving your heirs the equivalent value of their share of the business (e.g., annuities, lump-sum payouts, etc.) without actually leaving them a big ownership responsibility they don’t want.

Include Only Those Family Members Who Are Working in the Business: Estate planning can, and often should, include everyone in the family, as they all will be beneficiaries of the estate but may have very different individual needs and priorities. Business succession planning, however, is a very different thing. Ensuring the future success of the business concerns only those family members with an ownership stake and a role in running it. Children, grandchildren, nieces/nephews, spouses, and other family members who may inherit value from the business will have their needs met during the estate planning process. But deciding the nitty-gritty of roles and responsibilities, titles, compensation, ownership stakes, strategic growth planning, transition planning, and other matters should be decided by those who will be taking over the company after you have left.

We always tell clients that in any small or closely held business, succession planning is a key component of strategic planning from the very founding of the company. That advice holds double for a “family business” because the interpersonal dynamics can be complex, and estate planning is more deeply tied into the business planning.

But with time, open communication, and hard work, seeing the next generation take the business to greater successes than you ever thought possible is the best kind of business succession plan.

If you have questions or just need a sounding board for issues in your family business, we’re here to help.