It can seem like a maze when addressing conflicts in a family business. Running a business is hard and complex. Running a family business increases the potential for conflicts even more. Finally, when considering the next step around succession planning the stress level can really go up. That’s why many avoid the situation. With so many businesses in this situation this article focuses on common issues to consider when transferring a business to children. It is important to address the process and concerns years before finalizing the process. Those that are experts in the industry suggest initiating the process five years before the big event.

Why do it?

For many business owners, they see the business as an extension of their family. That is if they have two children the owners may see the business as their third child. As such there can be a strong desire to keep the business in the family. With the sale of the business to a third party there is an overlap, but at some point, there is a clear separation. With the sale of the business to children the family ties continue. This can give rise to common and sometimes devastating concerns. It is important to identify those concerns early, discuss them and take appropriate actions to address the concerns to set up the process for success.

The owner still wants to maximize payout, but may be willing to accept less to keep the business in the family. Other options may be explored such as selling the business to a third party, having an Employee Stock Option Plan (ESOP), merging with another entity and other permeations on these themes. However, when selling to the next generation, generally, the owner wants to maintain control until the final payment is made. Of course, the owner wants to minimize risk from the signing of the agreement until consummation of the process. This can be a win-win for everyone involved. However, this doesn’t just happen. It takes planning and preparation to ensure good communication, understanding and a process to make sure everything come off well.

Concerns to address

Financial security

This is often the biggest issue. Many times, the retirement plans of the owner’s tie into how well the business will do in the future. This is often their biggest asset. They cannot afford to have someone who will not manage the business effectively oriented towards growth and the future financial success of the business. Who has how much control and how quickly? This is critical. When do both parties agree now is the time to let go. A critical question is when is the next generation ready to truly take over?

What if everything doesn’t turn out well. Is there an employment agreement? A covenant not to compete? The time to plan for the divorce is before getting married. Everyone hopes everything will go well, but hope for the best and plan for the worst. Make sure the situation is covered should disaster, divorce, death or something else take place.

Consider timing

When discussing time frames, generally the next generation feels they can take over sooner and the experienced older generation sees the time frame as longer. The next generation generally believes they already have enough experience technically and managerially or will in short order. However, the older generation has seen a lot including changes in the entity, the industry and the economy that have shaped their long-term view. Generally, the longer the buyout period the greater the risk to the owner, but this requires balance with the ability of the next generation to take over.

Family matters

Who loved who most and what childhood memories negatively impact decision making? Favoritism, skills sets, family dynamics, direct or no involvement in the business and fairness issues are real. Those versed in family conflict can help the family address these issues. A mediator or facilitator skilled in conflict resolution and business valuation in this area can be very useful. In more serious instances a therapist may be needed. One thing is for sure, this area needs to be addressed. It cannot be ignored, or there could be serious consequences to everyone involved.

Strategic planning

Reviewing through the mission, vision, goals and values of the firm and collectively taking part in strategic planning should be part of the process. This should become a regular (for example quarterly) process. Besides the business as a whole, issues related to ensuring family harmony and potential areas of conflict associated within the family need to be addressed. Unless this is addressed up front and managed continually this could lead to family squabbles as indicated above. Communication is key. Keeping everyone in the loop as needed helps avoids negative perspectives arising when not informed.

Other concerns

Standing back from the situation, does the next generation have the same values and vision as the current owners? Is that a problem? Who will do what? What will the compensation be to family members? Is there a philosophy regarding dividends or disbursements to shareholders?

What is the aptitude, education and assertiveness related to the next generation? Do they have the moxie, the desire and the attitude to make the business a success? Have the parents looked at everything objectively? When emotion is involved it is quite likely that negative qualities can be overlooked in family members. We tend to look over the faults in others that we truly love.

So, what is an owner to do?

To overcome conflict and to promote collaboration related to family succession planning it is important to ensure:

• Good communication by having built strong connecting relationships with those involved
• Actively listen to all of the participants. What do you and what do they want to have happen? Really work this to see if it is possible for everyone to be on the same page.
• Work collectively with experts in succession planning and educate everyone involved with the process so that the decisions being made are clearly understood by the participants.
•  

Experts to contact

The experts involved with family succession planning often are a trusted family friend (in smaller communities this is often the local banker), a financial planner, the CPA, a CLU, a tax attorney, a business attorney, and a business valuer. In more complex situations this group can expand significantly[i]. If the plan appears to be coming together, but the owner cannot pull the trigger to finalize the process, this is often a signal that something is not quite right. When that is the case an outside mediator / facilitator with business acumen skills may prove very helpful. This person can address the concerns and help the parties reach a resolution related to the process.

There are some firms and organizations that can assist with this process for example the Exit Planning Institute, BEI Exit Planning Solutions, Purposeful Planning Institute, National Association of Estate Planners and Councils, Pinnacle Equity Solutions and Robert J. Zarlengo, Inc. are examples.

This is not a time to be penny wise and pound foolish as a business owner. Getting expert advice, working through the process with experts and bringing on board a mediator / facilitator when needed can make all the difference in the world to having a smooth transition and a very healthy transition.

About the author

Mike is a mediator / facilitator and professional speaker. You may contact Mike directly at mg@mikegreg.com and at (651) 633-5311. Mike has written 11 books including Business Valuations and the IRS: Five Books in One, The Servant Manager and Peaceful Resolutions that you may find helpful. [Michael Gregory, ASA, CVA, NSA, MBA, Qualified Mediator with the Minnesota Supreme Court]