You have spent a substantial portion of your life building or continuing a successful family business, and you have some children (or other family members) who are active in the business and others who are not. How do you handle an equitable distribution of your estate without adverse impact to family relationships and/or operation of the business? We find that it takes significant thought, discussion, introspection and planning to do it right.
To get started, among the issues you will want to consider are:
- What is your vision for involvement and ownership of the next generation in the business? Is your vision consistent with the vision of the members of the next generation?
- Do you envision a philanthropic component to the business transition?
- Do inactive family members (and/or their descendants) want to become involved and/or be owners, and if so, do the active family members want the inactive family members to be involved and/or be owners?
- If so, is there a path to becoming actively involved?
- If so, does the company have, or want if it doesn’t have, voting or nonvoting ownership? If so, at what level (voting or nonvoting ownership; recapitalization to issue voting/nonvoting?)? Should inactive family members have the right put their ownership interest to the active family members? If so, at what price and under what terms? Include tag and drag along provisions?
- If not, how do you value the family business and make equal distribution of other assets, and what if there are insufficient other assets to equalize among the family members? Is it important to you to consider the potential post-succession appreciation or depreciation in the business in the context of equalizing property distributions to inactive non-owning family members?
- Is it important to you to take into consideration those family members who are active in the business and receive compensation, and perhaps dividends or other distributions from the business (in addition to company ownership they have or will have upon implementation of a succession plan), and those family member who are inactive do not? If so, how do you ensure reasonable compensation to and incentivize those family members active in the business, while maintaining fairness to those family members inactive in the business?
- Some operating issues to consider, whether or not inactive family members are owners:
- You and the next generation should work closely to plan for clear goals and an operational plan at the next generation to avoid an excessive honoring of family and tradition from preventing continued success and/or growth of the company. And, once the transition to the next generation has occurred (if during your lifetime), you, as the founder or former leader, will need to be open to and hopefully supportive of changes in those goals and operations made by the next generation – it will likely be somewhat to very difficult, as the business has been yours prior to the transition, and intellectually and emotionally letting go or significantly scaling back does not happen overnight.
- Plan for internal succession issues among active family members at the next generation and beyond, such as rotating leadership, co-officers, term limits, retirement age, removal provisions for non- or poor performance, voting provisions if there is more than one descendant in the next generation and beyond.
- Consider adding nonfamily Board members before or after succession to the next generation to avoid deadlock in the event of interfamily conflict.
- Include reasonable compensation issues for active family members in the company documents.
- Include termination or other actions for poorly performing active family members in the company documents.
- Adopt policies for business asset use among active and/or inactive family member owners.
- Consider and include buy-out provisions for incapacity, death, divorce (annulment/separation), creditor issues, etc. in company documents.
- Consider and include buy-outs of inactive members in company documents if they are to be owners (but even then such a “break-up” can be extremely contentious and drawn-out, particularly if litigation is commenced over value or breach of duties or other action or inaction by active family members).
- Identify in company documents those persons, trusts or entities who are permissible transferees for lifetime transfers and transfers at death.
- Include dispute resolution provisions to handle deadlock and/or disagreements among voting active and inactive family members in company documents.
- Be aware that breach of fiduciary duty and other duties by active members may be asserted by inactive family members, even those owning a nonvoting interest in the business.
- Consider in advance whether it may better for the family and/or the business for active or inactive family members to spin-off or establish noncompeting new ventures under the company structure or outside of it.
- Consider for active family members whether a certain number of years’ outside work experience with transferable skills and experience, training and mentorship prior to taking significant role within business is beneficial.
- Examine closely the nature of the family members’ interrelationships to determine whether involvement and/or ownership by all of them is a good idea …often times it is not, despite a natural desire for all family members to be involved and/or be owners.
We have seen successful business succession plan implementation during lifetime and/or at death include: significant education regarding the planning issues and process among you and all other involved parties; and, a coordinated effort among your advisor team, including legal, accounting, financial, and often times a family business counselor and/or family business psychologist. More often than not, there are, or may be, latent or patent family conflicts or issues, such as rivalries, hostility, distrust, ego, guilt, control issues, and/or spousal input, which must be addressed as part of a successful planning process. The psychological part of planning process is often a significant hurdle in that family members, including yourself and others in the founding generation or existing leadership, are sometimes reluctant to engage in and/or acknowledge or commit to addressing issues. We find the succession planning process is much more effective if all parties are open to discussion, self-reflection, and resolution of current or future conflicts and relationship issues –as well as seeking professional help, as needed.
Planning ahead is critical for a smooth business transition. We recommend starting this process sooner rather than later. Without any planning, the result can be intrafamily discord, potentially including litigation, and short-term or long-term damage to, the demise of, or loss of control over and/or ownership of the family business.
Each family and family business has its unique issues and goals, and succession planning involves significant and complex tax considerations, so it is important to work through them with advisors who have extensive experience in this type of planning. We have decades of experience with family business succession and counseling regarding the above and other issues, and are available to help you design and implement a plan, and to revise that plan along the way if desired or needed.
Dana Reid is a trusts and estates attorney with 20 years’ experience advising clients on all aspects of estate planning, including business succession and intergenerational planning, and gift, estate, and generation-skipping transfer tax matters. Her work also includes charitable planning, with a focus on creating and supporting private foundations, nonprofit public charitable organizations, and charitable remainder and lead trusts. Dana can be reached at firstname.lastname@example.org or directly at 206-757-8116.