Almost by definition, a family-owned business consists of multiple generations of owners and operators. The different generations may have different visions for the business, but they are usually all aligned on wanting what is in the best interests of the Company. When it comes to issues of succession planning, however, there is an inherent tension between the generation giving up management authority or equity ownership and the generation receiving it. Issues of timing, valuation, economics and joint control or ownership are almost always sources of tension in these conversations around succession planning.
Yet many family-owned businesses retain one set of advisors to help them through this process – usually the same set of advisors that have historically represented the company’s interest. More often than not, this set of advisors was selected by the first generation – or at least the generation then in control of the company – and receive their instructions and their fees from this same generation.
This can mean that, no matter how cordial and cooperative things are in a succession planning process, no one is looking out for the interests of the upcoming generation.
In a recent Family Business Legacy Series event entitled “After the Sale", one of the panelist spoke directly to this issue. He pointedly commented that there are inevitably divergent interests between the outgoing generation and the upcoming generation, and the outside advisors are always going to listen to whomever is “writing the check.
In many instances, this does not make a practical difference to the process because the outgoing generation does not give the upcoming generation any real input into the process. It is their business and they are passing it to the next generation the way they think makes the most sense. But a large number of family-owned business successions are crafted as a discussion and process in which everyone is invited to have input. In these circumstances, would it not be appropriate for everyone with a distinct interest in the process to have some form of outside advice?
It is always worth remembering that, in practical terms, inviting separate advisors into a process like this could have the possibility of making everything more adversarial than it would be otherwise. But savvy members of an upcoming generation could frame the need for separate advisors as something that did not have to be threatening to the outgoing generation. And good advisors would understand their role - not to advocate for their client but to confirm he or she was as informed as possible in making decisions and providing input into the process.
As with everything, this is not always the right choice. Every family, every family-owned business and every succession process is different. In any event, though, a member of an upcoming generation should always consider carefully whether he or she really understands the terms on which they are entering their family business and the tax, legal and other implications to them individually. If not, they should consider reaching out to their own advisors.
Drew Steen is a business transactions attorney at Davis Wright Tremaine, LLP. He represents both buy-side and sell-side clients in mergers and acquisitions, venture capital investments, joint ventures, equity co-investments and restructurings. He also serves as regular corporate counsel for several closely-held and family-owned companies. Drew can be reached via email at email@example.com or directly at 206.757.8081