How to Avoid Conflict in Family Business Succession Planning

Older couple smiling with each other sitting on a bench

According to the Harvard Law Program on Negotiation there are three kinds of conflict in business and how to avoid them.  These are:

  1. Intercultural Conflict: Be Careful Not to Stereotype
  2. Conflict with Friends and Family: Discuss Difficult Issues Up Front
  3. Workplace Conflict: Test Your Assumptions and Choose a Role

This article will focus on exiting family businesses addressing both the family and the workplace conflict issues. Keep in mind the exit planning may involve selling to the next generation, to another buyer, going public, an Employees Stock Option Plan, or something else. To keep it simple the scenario that follows assumes a transition to a next generation family member. 

Keep in mind there are a host of other issues too. For example, are the existing owners going to remain working, be advisors, be on a real board of directors, be on an advisory board, have employment contracts, covenants not to compete and a host of other issues. These issues go beyond the scope of this commentary.

 

Family businesses, the family and exit planning

 

There is a lot more at stake when the family is involved and there is a business as part of the discussion. Often the original owners view the business as if it were another member of the family.  For example, if Mom and Dad built a business and a child came to work at the business but not the other three siblings, the family may be viewed by the founders as Mom and Dad, the four kids and the business. The business is the fifth child so to speak.

 

What does that mean when it becomes time for Mom and Dad to begin to plan for exiting the business?

 

  • Can they afford it?
  • Are they mentally ready?
  • What happens after they exit the business?
  • Do they want a role?
  • Can they afford to not have a role?
  •  

What about the child who is in the business today? 

 

  • Does he or she want to take over the business?
  • Is he or she capable?
  • Does he or she want to do something else?
  • Does he or she like the cash flow, but is not interested in really managing the business?
  •  

What about the siblings?

 

  • Mom loved who best?
  • Does the child get a disproportionate share since he or she is working in the business?
  • Is reasonable compensation or ownership percentages an issue?
  • What about future dividends or distributions?
  • Is fairness an issue?

 

What about other stakeholders such as vendors, customers, other shareholders and others? 

 

How will they perceive the exit plan?   There may be long term relationships at stake that could have significant impacts. That is why this is a process. Relationships have to be cultivated and renewed to ensure the new owners are doing as well or better than the old owners.

These are the kinds of questions that can arise when families, business and exit planning are involved.

 

First step in the process

 

Define the problem.  What do Mom and Dad want to do? 

This may take some time for Mom and Dad to really determine what it is they want to do. This business may have been their life together. They may not be able to imagine anything else.  They have to be emotionally ready to discuss the issue. Ideally this should be 5 to 10 years before they are actually ready to exit the family business.

Who is a trusted advisor they can talk to that will help them sort this out? With all these complexities they need a team. Where may they find advice? There are three national organizations with trained professionals that they may want to explore. These are

  • Exit Planning Institute - offers certification
  • BEI Exit Planning Solutions - offers certification
  • Pinnacle Equity Solutions - offers certification

 

These organizations can help Mom and Dad work with the right people. These are their trusted advisor, a financial planner, a certified insurance underwriter, a certified public accountant, a business valuer, an estate tax attorney, and a business attorney as a starting point. If Mom and Dad have all of these great. If not, or even if they do, they may way want to work with someone who can help them with this process.

 

Family issues

 

However, many times the certified exit planner finds there are issues within the family then what?

 

Therapist

 

Is therapy needed?

Sometimes the family has some serious issues to address as a family before Mom and Dad and the kids feel they can even begin the process of discovering interests and work the issues associated with exit planning. If that is the case maybe some or all really need to spend some time with a therapist to resolve some deeply rooted issues. 

 

Mediator

 

Is a mediator needed?

Sometimes it is not as serious as the need for long term therapy and instead what is needed is a trained, qualified mediator with business acumen that can focus on the problem at hand (exit planning). This type of mediation is called facilitative mediation (although it may use transformative mediation techniques) to help the parties focus on the issue of exit planning. It is important that the key players who are involved with the process discuss their interests going forward.

These may be both readily apparent and they may not.  For example, from the commentary above, it may assumed the child in the business will take over the business, but maybe that is not what that child really wants to do. He or she may be torn on liking the compensation and being the owner, but he or she may not be interested in maintaining and growing the business going forward.  Similarly, another sibling may want to be in the business, but not have the qualifications, or may not know if he or she really wants to be in the business.  These things need to be sorted out.

These are very valid concerns from the standpoint of the individuals. 

A qualified facilitative mediator can meet with the parties individually and then facilitate a mediated discussion between the parties to air the concerns.

This may allow the participants to clearly define interests so that the participants can be referred back to the certified exit planner.  The mediator brings a structured process to address the facts, the issues, the emotion behind the issues focusing on the interests of the parties to develop a client centered solution.  That solution can be brought back to the exit planner to work the solution with the right consultants’ long term.

The mediator is only a short-term fix.

The exit planner and the appropriate team are the long-term partners in the process going forward.

 

What does the exit planner do?

 

The exit planner is there for both voluntary exits that are being planned well in advance as indicated above and involuntary exits

when there may be a death, disability, divorce, disagreement or a disaster.  The exit planner is there to assist with the transition to a new owner that will be the same or better off as a result of the process. 

These individuals are professionals at what they do.

They see to it that the right people come together to provide the owner with advice to consider all of the elements associated with transition.  Not only the family to family, but outside buyers, going public, Employee Stock Option Plans (ESOPs) and other alternatives.

This is a great starting point to initiate the process with the owner(s).  If things go smoothly this long-term relationship works extremely well.  If things don’t move so smoothly with the family, the exit planner may want to refer the situation to a qualified mediator familiar with business acumen to assist the family with focusing on the process. If there are very serious issues, the exit planner may want to suggest the family seek professional help from a therapist.

 

Family businesses and exit planning offer unique challenges

 

This article focused on exiting family businesses addressing both the family and the workplace conflict issues. These can run very deep.  If that is the case a professional therapist may be the best choice. If the exit planner sees the need and the client concerns, a facilitative qualified mediator with business acumen may help the parties focus on the facts, issues, emotions and interests of the party to address exit planning. When everything works, the exit planner may be able to work with the owners, the family and other stakeholders to address how to reach a solution that meets the needs of those involved.   

 

About the author

 

Mike Gregory is an expert on conflict resolution business to government (IRS), business to business, and within businesses. As a qualified mediator with business acumen, Mike brings a unique set of skills to exit planning situations. Mike is an international speaker and he has written 11 books including Business Valuations and the IRS: Five Books in One, The Servant Manager and Peaceful Resolutions. Mike may be contacted directly at mg@mikegreg.com and at (651) 633-5311. [Michael Gregory, ASA, CVA, NSA, MBA, Qualified Mediator with the Minnesota Supreme Court]