Realizing that at 65 it’s time to talk about succession of his family business – especially Buxboro State Bank, Big Daddy Ernest Bux identified his checklist: Identify Successions, Identify Decision Makers, Plan for Contingencies, Establish Goals, Plan Entity Structure and Transfer, Complete Estate Planning, Determine Exit Strategy, and Implement Document Maintenance and Control. To succeed, what does identifying successions and decision makers look like for Big Daddy’s family business?
A PricewaterhouseCoopers survey revealed that 50 percent of sampled family businesses had no succession plan in place. Half of that 50 percent had no designated person to take the reins. KPMG’s gurus report that, of those family businesses transferred to the next generation, 70 percent will not survive into the 2nd generation, and 90 percent will not make it to the 3rd generation.
Failing to Plan is Planning to Fail
Whose fault is this failure – the owners or their trusted advisers? Both. Owners like Big Daddy often wait too long to plan and then get inadequate assistance. Trusted advisers often focus on the fun part – planning and drafting the technical component of succession (i.e., cutting taxes, creating trusts, buy-sell agreements, wealth management, etc.) – leaving undone the hard part of communicating and working collaboratively with the people and the non-technical component of the family business succession process – the “Family Factor.”
Familially – The Family Factor
The Family Factor is really two components – the management succession process and the ownership succession process. Classically, trusted advisers focus on ownership succession – the technical and easier of the two – and hope that someone else will handle the arguably-more-important management succession process. The recommended order is first management succession (the decision makers), which is then reflected and supported by the ownership succession plan.
The Family Factor must focus on managing family expectations and family dynamics by actively integrating the family into the process. The Family Factor – the people – will ultimately decide whether the succession plan works.
The strictly legal aspect of accomplishing succession of the family business is, undoubtedly, wrapped up in the terms and conditions of the technical components of succession – the company agreement, family trusts, buy-sell agreements and the like – which are all essential. But, if there is a business to be run, relying upon the documents alone is tantamount to constructing a building and expecting a successful business magically to appear inside.
Having the right legal plan in place is certainly necessary, yet, it is not the end of the road. While that may be the last task for many trusted advisers, the best legal plans fall flat when not properly implemented. The Family Factor – both management and ownership succession not properly put into practice and nurtured – is where most succession plans fail.
Tilting the Scales – Weighing in for the Family
Consider these guiding principles for successful family business succession –
- Be wary of any succession plan driven by taxes, cost savings and processes permitting a contentious, one vote-winner decision. Encourage processes that will lead to consensus and general agreement.
- For longevity, create a legacy – a lasting legacy based upon guiding family principles.
- As to family business ownership, consider first rewarding those active senior family members who made the business successful the hard way – they earned it.
- Pay active family members fairly (not necessarily equally or based on entitlement) in a way that reflects, as much as possible, their fair market value if they quit to work elsewhere. Consider using an objective, third party consultant.
- Engage the next generation of leaders/owners in the succession process – especially in both the management process and the ownership process, being mindful to address the different generations and compatibility among family members aspiring to leadership and ownership roles. If you succumb to the reality that family lineal ascension will often trump individual competence, plan for it. Surround family leaders with competent managers and continue to groom them to become good leaders.
- Facilitate informed decision making. Communication of timely and pertinent information to all family members is critical for them to make an informed decision. Then, provide an open and family-friendly forum enabling assessment of options, round-table discussion and a safe-harbor environment for them to express their personal views.
- Exit strategies. More on this in a later blog.
This Reminds Me of a Song
Do you remember? “Got to Get You Into My Life” by The Beatles
Family Business Resources
At Gray Reed, we have a robust family business/family office team. I work with them to pick up the pieces when one or more of these estate planning stumbling blocks erupts into a full-fledged fight between families over their businesses, family offices and estates.
Related Tilting the Scales articles: Can a Family Business Succession Plan Succeed? Can a Family Business Succession Plan Succeed Without a Contingency Plan for Divorce?