Businesses intended to remain family-held after the death of the founder need planning that goes far beyond the orderly and tax-efficient transfer of ownership interests. For ownership transfers to succeed, owners and leaders of family firms also must work out how the business will continue to thrive under new leadership and new ownership, as well as how family relationships will endure.

In fact, the family business succession plan “to do” list is seemingly endless and almost certainly will raise emotional temperatures both in and out of the business. Yet, unless a client is willing to face the many questions raised by entire succession planning, he may not go forward with the estate plan at all, saying only that the proposed plan doesn't make sense — without being more specific.

Some of those questions are: how will the senior generation obtain the liquidity needed to retire and attain independence from business loan guarantees? Just how much is enough to retire on? How will the junior generation be able to secure financing to provide some or all of that retirement security? Are lifetime gifts of ownership interests appropriate? Who may be an owner: only family members who work in the business? Which owner will have what governance rights, such as voting rights, or to elect directors? Who may work in the business? If someone wants to exit business ownership or employment, how will that work? What will be the shareholder expectations of the board of directors after ownership has changed, and how will those expectations be communicated? Who can become an executive or even chief executive officer? Will there be a change in business strategy? How will that affect dividends? What processes may be put in place to make future change go more smoothly?

The estate plan must conform to decisions that come out of the answers to these questions. For example, in one case we know of, family business consultants discovered that one of four company owners had an existing estate plan that directed that upon his death, any stock would become owned by a trust. The trustee of that trust was the owner's spouse. The family business consultants pointed out that, because the spouse was not the parent of the owner's children, this was a recipe for tension — even disaster. The family and the owner therefore entered into a buy-sell agreement to keep the stock in the children's hands, while supplying liquidity to the trust that could be invested to produce income for the surviving spouse. There was already life insurance in place that could be used to fund the buy-sell agreement.

A goal of that same owner was to transfer half of his stock to his children by gift during his life, and to assure that the other half would pass to them upon his death. It took more than one year just to arrive at that particular goal, along with many others. At that time, the company was on the brink of a highly successful turnaround, an accomplishment attributable to a new strategy developed under the leadership of a new chief executive officer, who was also a family member. Before the turnaround had the effect of significantly increasing the stock value, nonvoting shares were transferred to a grantor retained annuity trust (GRAT) that, at the end of its term, transferred slightly more than the owner's gift target with minimal gift tax cost. Because the planning process already had produced the owner's commitment to make the gift, he didn't hesitate to create and fund the GRAT. And that was a good thing. He unexpectedly died within months of the GRAT's termination.

Planning and implementation occurred not in months, but years. Without the encouragement and facilitation of family business consultants, neither the buy-sell agreement nor the stock gift would have occurred. In this instance, the professional advisors included family business consultants, corporate executive staff, corporate counsel, estate-planning advisors, tax accountants and valuation experts. In other words, it took a multidisciplinary team.

To reach estate-planning solutions that actually work for family businesses, advisors need some knowledge about what tasks clients face, where clients will get stuck and what can be done about it. Advisors also need to check their egos at the door; recognize that they must work as part of a team; face the fact that their firms alone might not be able to do the job right; and admit when they are not suited to quarterback that team.

FEAR FACTOR

The most common sticking point for the family business owner and his successors has much to do with fear. Even though succession planning promises great financial returns and is the embodiment of family legacy, it's nevertheless terrifying to many people. Succession planning is first and foremost about change,1 and those changes inevitably affect families in profound ways. Many deeply fear that merely discussing change will trigger both personal and family conflicts, and raise the highly unpleasant topic of mortality. But there are other fears, too. Founders fear that their own identity will shatter the minute they let go of control, and that the many employees and their families who have come to depend on their company for their livelihoods will be let down if change damages the company with a consequent loss of jobs. The fear factor is evident in a 1999 study of Canadian and U.S. family businesses2 showing that:

  • 56 percent of current leaders of family-owned firms intended to retire within the next 10 years;

  • 75 percent confirmed that the business is dependent on them;

  • 73 percent never discussed the transfer of ownership with the next generation;

  • 37 percent lacked emergency plans in case of death; and

  • 35 percent wanted to keep the business in the family.

This helps to explain questions about inaction that vex estate-planning advisors, such as: Why do clients cancel appointments without much notice and then seem unable to find another time to meet? What is behind that cool reception of brilliantly crafted documents or insightful spreadsheet analysis? What drives clients away from executing documents they said they've accepted? Why, after doing a terrific job for a client in a difficult situation, utter silence follows, except perhaps for a complaint about fees? In the vast majority of these situations, the answer to all of these questions is that the need for making a significant change in life, indeed the very inevitability of change, often stops the client cold. This has happened to all of us, and in succession planning, it will rear its ugly head in virtually every case.3

So, critical to family business estate planning is: engage the right people in processes that facilitate change. Such a process encompasses both business and family dynamics. It ideally includes shareholders, management, their spouses and all family members. Participants must agree to be accountable to that process, and select a professional who will keep things moving forward — a “keeper of the process” who serves as the hub of all professional services. Estate-planning advisors will most frequently need to team with others who have the skill to facilitate family business succession planning.

TASKS IMPLICATE TEAMS

We think of succession planning in terms of a series of steps or tasks that the client family and the client business must complete to successfully transition their business across the generations. (See “Mission Accomplished,” p. 53, for a partial, representative list of those steps or tasks.) But bear in mind that working through the list is never linear. While some items, such as identifying shared values, are completed relatively quickly, others, such as next generation career development, may take months, even years to complete, and still others will be ongoing through multiple generations.

Two tasks bear special mention: structuring family councils and boards of directors.

There will be many owners after succession occurs. Institution of a family council provides a means for becoming and staying educated; learning how to hold each other accountable; building on their unique legacy; exercising shareholder rights consistent with that legacy; and formulating shareholder expectations to communicate to the board.

The board of directors takes on a role in addition to the traditional roles of CEO succession and corporate oversight. The board of directors must establish trust with the shareholders through dialogue with the family council about shareholder expectations and then must manage to those expectations.

TEAMS BY DESIGN

Another key is to associate professionals from all relevant disciplines; in other words, develop multidisciplinary teams. Team members might — or might not — work in the same firm.

No one person can reasonably (or even unreasonably) claim competency in such a long list of services. But we do not venture to identify who provides which services in this age when professionals practicing under such traditional titles as accountant, attorney, life agent or financial planner might assume multiple roles. (See “No One Does It All,” p. 54, for a sampler of professional services that might be needed.)

While all of us know a little or even a lot about all these areas, none of us is fully competent in all of them. Said another way, perhaps more pointedly: it is malpractice in all the wealth management disciplines to attempt to provide a service for which we do not have the skill, the training and in some of the disciplines, the license, to do so. It is also a tradition, if not a mandate, in all these disciplines to “do no harm.” Particularly when working in an emotionally charged environment, we are all well-served to know the limits of our expertise and live by the maxim that we will open no wound we do not have the skill to close.

MORE RESISTANCE

Given the far-reaching importance and scope of family business succession planning, it's imperative to seek and hire “best in class” professionals. Encourage the client to evaluate existing team members. Yet even if the client is willing, the professionals themselves may resist multidisciplinary teams. There is a very real danger that a long-standing and well-meaning trusted advisor personally faced with change might sabotage the process. Reasons for resistance include competition, fear of being replaced (even if temporarily), fear of giving up the quarterback role, fear of tainting a valued client relationship if the client becomes disenchanted or if some other professional renders substandard services, fear of criticism for driving up costs, lack of understanding the need for forming the team, lack of skills needed to participate on such a team, and just plain outsized ego.

The perception that the client will resist engaging a team of outside professionals in often unfounded. Teamwork is firmly established in corporate vocabularies universally, so the concept of “team” is widely accepted in corporate America. Furthermore, corporate clients are aware that they already are served by diverse professionals. The possibly surprising fact to us outside professionals is that clients just wish we would get our collective act together. Clients value seamless service and are willing to pay for that, if we only take the time to get on board with each other.

To make this point, we'll tell a true and embarrassing story about Glenn. Several years ago, he was chairing a panel of “experts” on succession planning. Although he didn't make a presentation himself, he did introduce to the audience a lawyer, accountant, financial planner and trust officer as succession planning experts. Each in their turn did what we would have expected them to do: talked about the absolutely critical nature of their own field of technical expertise. To be honest, their presentations were a little too technical, and they may have referenced the Internal Revenue Code and Dow Jones average a little too often, but these folks knew their stuff. Despite some yawns and heavy eyelids, the panel did its thing for the better part of three hours with only one short comfort break. At the end of the session, got up on the podium and asked the 200-or so family businesses members who were in attendance if there were any questions.

Before anyone else could raise a hand, an older entrepreneur sprang to his feet, and in a voice that needed no microphone, gave it to poor Glenn — right in the professional solar plexus. He said: “You know the trouble with you lawyers is that you are too da__ busy competing with each other over who can write the best g__ da__ wills or buy-sell agreements to pay any attention to us. Well, I'm here to tell all of you,” (somehow he had gotten the impression that the entire panel was attorneys), “that we don't give a da__! In fact, if you don't get the will or buy-sell agreement right, we'll just sue your as____. When will you understand that what we want from you is for you to get to know us and to get to know our business? Come visit my plant, meet some of the great people who work for me, and visit with my family and see how tough it is to try to pick someone to follow in my footsteps. We want you to listen to us and tell us what you think; all that paper can come later.

“We know you can't do it all. But don't leave it up to us to find the people. Putting that team together is your job, not mine. I won't know who to ask and if I did, I wouldn't know who was supposed to do what. I have a business to run and a family I care a lot about; I want help with this succession business and make no mistake: I'll make the final decisions, but I don't even know what questions I need answers for. You're supposed to be our advisors. Well, get organized and start advising. We'll gladly do the work, but someone has to show us what to do!” — at which point he simply sat down, leaving no room for comment or rebuttal.

In no uncertain terms, this businessman told us what most wealth owners in his position want: advisors not so much as technical experts but as people who care about him, his family, and his “first child,” his business. He had a sense of how powerful the coming change would be. He was scared. He trusted us. And at the moment he needed us most, we had disappeared behind the Internal Revenue Code, spreadsheet analysis, insurance contracts or the latest management improvement idea. He would buy all we had to offer, but first he needed our time, patience and wisdom. That very trust, which so many of us have worked hard to build and maintain with such clients, is exactly what he was trying to tap into and when the moment of truth arrived, he was deathly afraid we would fall back behind that invisible plastic shield of technical expertise and interprofession competition.

If we step back for just a moment from our own profession's primary focus and sit in the client's chair(s), the potential for client-professional miscommunication becomes clear. First, most of us are “fixers.” The client brings us a problem; we analyze it; research it; determine the appropriate course of action; inform the client; then implement (that is to say, draft a document, negotiate a deal, invest the funds, conduct a training, etc.). Our lens is our professional training and background; our instinct is to help the client as effectively and as efficiently as we can by fixing the problem. This orientation is not wrong per se; it just doesn't work very well in extremely complex situations. Now, examine this orientation in the context of our businessman who took Glenn to task.

There is no doubt that he would dearly love a quick fix. He intuitively knows what he's up against even if he can't articulate all the issues or even all of his own concerns. The very complexity of what he is facing scares him to death. So, if you offer to cure all of his ills with an estate plan; a financial analysis; or even a ton of new life insurance, he'll probably buy whatever you have to offer and secretly be happy you did not ask him to examine all those tough issues he really did not want to face in the first place (such as how will his wife manage the business if he dies; whether his successor can do the job; will his children understand his stock distribution decision; will his customers stay loyal to his company, etc.).

But, of course, we all know what happens next. He visits another of his professional advisors, who says: “Congratulations, on getting that work done, but have you considered this, this and this?” (Again, each new suggestion coming from that professional's perspective). “Well, no,” says the businessman, “what would you recommend?” And, off he goes, buying more quick fixes.

While this way of approaching complex tasks like succession planning may ultimately get the job done, it will be expensive, it'll take a long time to complete, and we can almost guarantee that the buy-in by the extended family will be less than universal. The results are also predictable: family conflict, poor (or at least very slow improvement in) company performance and no stomach to do all this hard, expensive work all over again. An example might help. This, by the way, is also a true story.

FAMILY BUY-IN NEEDED

The father was very a successful owner of a large manufacturing firm located in the western states, but he was very reserved and didn't trust people easily as a result of some negative experiences early in his life. He also had lost his first wife and the mother of his four children when his last two children were still very young. His second wife is a wonderful lady who served as the family communicator and glue that held the family together. While she essentially raised this family, he was never able to express openly either his love for her or his gratitude for the work she did raising his youngest children. I am convinced he loved all of his children very much, but he was viewed by them as cold, aloof and hard-nosed. He also was a financial genius, but consequently saw the world almost exclusively through the lens of a profit-and-loss statement. He lived a modest lifestyle that accommodated his introverted nature, and was very strict with his children when it came to lifestyle choices and public displays of wealth. He was generous to a fault when it came to the university that he believed gave him the tools to succeed, but few in the community (including his second wife and most of his children) had any idea how wealthy he really was. Whenever questioned by his children or spouse on what they were supposed to do if anything happened to him, he'd simply say, “Just work hard, be modest in the way you lead your life, and I'll ensure that everything will work out for you.”

His principal advisors were from two of his city's largest and most prestigious law and accounting firms. He was very loyal to the partners in those firms and paid them significant fees over the years. Like many entrepreneurs, he did not trust many people. Once he picked his oldest son as his successor, however, he did a good job of bringing him in on his planning and extracting from that son and his advisors strict obligations of secrecy. At the same time, he promised that when he was gone, no one would be upset with what he had put in place.

He was driven by a fear that the estate tax would threaten the empire he'd built; and that his children and surviving spouse might interfere with the efforts of his oldest son to continue his legacy of business success built on hard work and absolute control from the top. During the balance of his life, he set out to encase most of his estate in tightly controlled lifetime generation-skipping trusts (GSTs) and an equally tightly drawn modest family limited partnership (FLP) with a significant nonfamily limited partnership to control most of his commercial real estate investments. The nature of this planning was, of course, known only to his advisors and his oldest son/successor, even though a large number of gifts were made of interests in these entities throughout his life with the aid of spousal gift-splitting.

By the time he died, his oldest son was firmly in place as the CEO and board chair of all of his business entities; his second son (who was very talented, but a little too outgoing and ostentatious for his father's tastes) had a management position in the company, but no real authority; and his two daughters were married, living modest lives and struggling to find ways to put their own children through college. His taxable estate was comparatively modest; his wife had a tightly controlled qualified terminable interest trust (QTIP) plus the family home; and his children were limited partners of the modest FLP. His managing partnership interest in both of the limited partnerships went to his oldest son, as did the trusteeship on both the lifetime and testamentary GSTs, and he was of course, the executor of the estate. Oh, he also made a substantial testamentary gift to his university.

Some might say that all of his goals have been met. Uncle Sam got very little, his business model was perpetuated for another generation, and he was viewed by the community as a man of vision and charitable largess. But, as Paul Harvey might say: “Here's the rest of the story:” To all but the oldest son, this estate plan was characterized by the family as “The Big Lie.” It took the better part of a year for a multidisciplinary team made up of a family business consultant, a consulting psychologist, Dad's old lawyer, a number of investment advisors and the company's accountants to accomplish the following:

  • Create a senior generation (the grandchildren are to join shortly) family council where the relationships between the siblings could be healed. As is typical in grief, emotions were raw and perceived hurts magnified.4 Dad was seen for a long time as “mean spirited, old miser,” and the oldest son as a self-serving accomplice to the destruction of the family;

  • Provide the oldest son some assistance in broadening the depth of the company management team while providing him with some liability protection by inserting a functioning board of directors between himself as trustee and his service to the company as CEO; and

  • Create a functioning business relationship between the company's real estate investment opportunities and the FLP and negotiate the re-casting of ownership responsibilities as between the limited partners and the managing partner relative to the operation and governance of the FLP.

While the work is ongoing, the crisis has passed. This work was intense and very expensive. The pride in what Dad had built was almost shattered, and it will still take some time before the current generation comes to grips with how to involve their children. As might be expected, it's very difficult for them figure out how to teach the next generation about opportunities the company might offer and the stewardship responsibilities of the wealth that has essentially bypassed them. Sibling relationships were strained to the breaking point and trust in the motives of leadership almost destroyed.

In retrospect, Dad would have been a tough person to stand up to, but all of the professionals on the team that had served his original agenda so very well, now wish they had tried. A multidisciplinary team may not have been possible in working with the founder, but it certainly would have lent a measure of support to individual professionals in warning him about the consequences of his decisions. Also, for those professionals, it was absolutely essential to preserve their business relationships with the father's company and his family after his death.

NOTHING NEW

We have presented a big picture that we hope encourages estate-planning advisors to reflect on how family firms are best served. There is no need to flounder. Others have gone before, and some serve as mentors. Study groups exist. Professional organizations focusing on family firms are also available. Education is widely available. Business schools offer programs on family business. Many written resources are available to guide advisors to family business. And you don't have to look far to find them. (See “Resources,” p. 56.)

Endnotes

  1. Marta Vago “Integrated Change Management: Challenges for Family Business Clients and Consultants,” Family Business Review, Vol 17, Issue 1, pp. 71-80.
  2. Deloitte & Touche and University of Waterloo, “Are Canadian Family Businesses an Endangered Species?” Deloitte & Touche Centre for Tax Education and Research (1999).
  3. Ivan Lansberg, “The Succession Conspiracy,” Family Business Review, Vol. 1, Issue 2, pp. 119-143.
  4. Glenn R. Ayres, “Lawyer's Role In Dealing With Loss,” Minnesota Institute of Legal Education, Minneapolis (2003).

MISSION ACCOMPLISHED

What a truly complete succession plan looks like

If everybody has done their jobs well, the final result for a successful family business transition will have:

A FUNCTIONING FAMILY COUNCIL IN PLACE

  • Everyone is well-informed on critical business and family issues.
  • Stock ownership rights have been determined and policies established.
  • Employment policies have been formulated for entry of family members into the family business.
  • The family's business commitment has been defined and written, meaning:
  • The family's values have been cataloged and prioritized.
  • A current statement of the family's vision for the business has been drafted.
  • The family's business philosophy has been agreed upon and is current (that is to say, what the family members agree about return on investment goals, risk tolerance, family involvement, measures of success).

OWNERS' (SENIOR GENERATION) NEEDS ASSESSED AND ARTICULATED; A TIMELINE DEFINED FOR SUCCESSION

  • What will the leader's life look like after relinquishing control of the company?
  • When will the current leader be prepared to release power and control?
  • What will be the owner's economic needs in retirement?

GOVERNANCE IN PLACE

  • A board of directors (or board of advisors) is installed.
  • The board's composition, training and leadership have been established.
  • The duties and boundaries for board responsibilities have been set.

MANAGEMENT SUCCESSION PLAN COMPLETED

  • The successor leader's skill set has been defined.
  • The successor candidate(s) have been identified.
  • Training and/or mentoring plan for the successor is in place and functioning well.
  • Process for evaluating the successor has been determined and agreed upon.

CORPORATE ABILITY TO PAY DETERMINED

  • Corporate vision and strategic plan (including an analysis of strengths, weaknesses, opportunities and threats) are complete and being implemented.
  • Tactical plans are complete and being implemented (including market analysis, budgets and project priorities).
  • Available, harvestable dollars have been determined and payout timeline projected.

CROSS-GENERATIONAL DIALOGUE SUCCESSFULLY CONCLUDED

  • Senior generation's economic need is within the company's ability to pay and a timeline has been agreed upon.
  • Senior generation's need is beyond the company's ability to pay.
  • Available options have been explored and negotiations have been completed; or
  • A new exit strategy has been identified.

IMPLEMENTED

  • Back-up wills and trusts have been drafted and signed.

  • Gifting plan has been defined and a timeline has been set.

  • Buy-out portion has been defined (if any) and documented.

  • Creditor/banker/supplier negotiations are complete (for example, new guarantor and/or new principal on company obligations).

  • Necessary implementing agreements have been drafted and signed; a partial list includes:

    • employment agreements;
    • consulting agreements;
    • insurance policies with owners and beneficiaries defined;
    • buy/sell or cross purchase agreement; and
    • retirement plans.

A TIMETABLE

  • A timeline has been set and agreed upon.
  • Monitoring responsibility has been assigned and accepted.
  • Course correction mechanisms are in place.

Source: Glenn R. Ayers

NO ONE DOES IT ALL

It takes a village to help transition a family business well

Experts are needed to render all these typical services, in the order dictated by need, to help a family business in transition:

  • interview stakeholders, their families and assess interview data;
  • facilitate family meetings;
  • consult on communication and process;
  • assess needs (of owners, family and business);
  • conduct conflict resolution as needed;
  • help family members articulate their shared values, vision and business mission;
  • help clients formulate a family constitution;
  • build a family council and coach family members on its use;
  • develop next generation leadership;
  • professionalize the board of directors;
  • develop philanthropic vision, mission, strategy and structures;
  • provide senior life/career coaching;
  • quantify the economic needs of the retiring owner/founder;
  • quantify the ability to pay the retiring owner/founder;
  • create an estate plan;
  • formulate a tax strategy, including calculations;
  • articulate shareholders' rights;
  • set up corporate governance;
  • draft buy-sell agreements;
  • draft employment agreements;
  • formulate retirement plans;
  • plan and execute a new entity creation;
  • conduct business valuation;
  • formulate and implement investment strategy;
  • create an economic forecast for business;
  • evaluate company performance;
  • evaluate management performance;
  • formulate and implement strategic business plan;
  • formulate and implement tactical planning;
  • articulate and enforce management best practices;
  • evaluate and coach next generation(s) on their careers; and
  • educate and train all stakeholders in all areas, relating to these services.

Source: Michael J. Jones

RESOURCES

Help is out there

Here are a few publications and associations that should prove useful:

PUBLICATIONS

Glenn R. Ayres, “Rough Family Justice: Equity in Family Business Success Planning,” The Family Business Journal, Vol III (1), Spring, 1990, pp. 3-22 (help in dealing with multiple heirs, not all of whom have an interest in the family business.)

G. R. Ayres, “Rough Corporate Justice” Family Business Review, Vol XI (2), June, 1998, pp. 3-18 (defining the senior generation economic and emotional needs in retirement and the corporation's ability to fund that need.)

Randel S. Carlock, and John L. Ward, Strategic Planning For the Family Business: Parallel Planning To Unify The Family and Business, Palgrave, New York (2001) (textbook on the functioning relationships among family, the board and the management team in a family-owned enterprise.)

Leon Danco, and Donald J. Jonovic, Someday It'll All Be…Who's: The Lighter Side of the Family Business, The University Press, Cleveland, Ohio (1990) (a cartoon book on family business and its trials and tribulations. Sometimes a little humor makes the point better than a 75-page memorandum.)

Ernest A. Doud, Jr. and Lee Hausner, Hats Off to You 2: Balancing Roles and Creating Success in Family Business, Doud Hausner & Associates, Inc. Glendale, Calif. (2004) (a handbook for dealing with family enterprises in transition with a good explanation of the stages such businesses progress through.)

Wendy C. Handler, “Succession in Family Business: A Review of the Research,” Family Business Review, Vol VII (2), Summer 1994, pp. 113-157 (an excellent review of the literature through 1995 on how families handle succession of their business enterprises.)

James E. Hughes, Jr., Family Wealth: Keeping It in the Family, Bloomberg, New York, (2004) (offers thoughts on the challenges families of wealth must deal with in preserving and building economic capital as well as human capital.)

Kenneth Kaye and Sara Hamilton, “Roles of Trust in Consulting to Financial Families,” Family Business Review, Vol XVII (2), June 2004, pp. 151-164 (authors discuss why “trust” is not only an essential ingredient in a successful succession process, but also why it's a critical element in successful teamwork for the professions who work with such families.)

Ivan Lansberg, “The Succession Conspiracy,” Family Business Review, Vol I (2), Summer 1988, pp. 119-143 (a wonderful classic in the family business field by one of the consulting pioneers on why the succession process is so very difficult for so many families.)

Ernesto J. Poza, Smart Growth: Critical Choices for Family Business Continuity, University Publishers, Cleveland, Ohio (1997) (an excellent text on the business realities of a successful succession process across the generations.)

Edgar H. Schein, Process Consultation Revisited: Building the Helping Relationship, Addison-Wesley, Reading, Mass. (1999) (an excellent guide for working with a business enterprise (like a family business) where it is critical that the people involved identify the critical issues, prioritize them, and then decide upon the best approach for dealing with those issues. In family business succession, it is all about the “buy-in.”)

ASSOCIATIONS

Family Firm Institute
www.ffi.org
200 Lincoln Street, #201
Boston, Mass. 02111

Attorney for Family Held Enterprises (AFHE)
www.afhe.org
11357 Nuckols Road, #115
Glen Allen, Va. 23059

Source: Glenn R. Ayers