Father’s Day seems as apt a time as any to write about family business succession planning. A majority of businesses are owned by men, which means that, statistically speaking, fathers are more likely than mothers to be in a position to transfer the business to the next generation. Passing along a successful business to children is one of the greatest gifts a parent can give. The necessity of succession planning for family businesses is well-documented elsewhere, and there are many articles covering the various details of succession planning. But, succession planning is one of those tough, unglamorous, thankless and sometimes painful parts of family business ownership and management. This note isn’t going to convince you to engage in succession planning if it’s not on your radar screen. However, if you’re on the fence, knowing that succession planning is the right thing to do but you are dreading the time, emotional energy, administrative effort and expense that it entails, the hope is that we can show you the relatively low-pain path so that you can take those important, first steps.
Family business succession planning involves at various times elements of legal structuring, financial planning, strategic planning, human resource management, and psychotherapy. Succession planning typically moves in fits and starts, with numerous course changes along the way. Following these principles in formulating the succession plan should help you minimize the effort, expense and stress involved in the process, and will also maximize the likelihood that the succession plan is actually executed.
- Honor yourself. Decide what your desired outcomes are and prioritize them. It’s OK to take care of yourself. You’ve earned that right. Without the fruits of your efforts and good decisions, succession planning isn’t even a discussion. Your goals may be to ensure a comfortable income for yourself or your spouse for life; generate a nest egg for grandchildren; finance a charitable legacy; provide employment and professional development opportunities for family members; minimize family conflict; reward longtime employees; and/or other goals. Write down a list, in order of priority, of what your goals are. Any plan that doesn’t directly address those goals isn’t ready for prime time.
- Be transparent. Share your desired outcomes with family members (or possibly, other individuals) who will most greatly be impacted by the succession plan. People become the angriest and most irrational when they are negatively surprised by an outcome and feel powerless to change it. That’s when brothers and sisters start calling each other names, and start bringing their attorneys to every meeting. Transparency does have its costs. You’ll have to confront people who may be disappointed in your decisions, but transparency offers the greatest chance of acceptance of the succession plan by all of the most impacted parties, particularly if the plan is formulated well in advance of needing it. (Charlemagne, who ruled much of Western Europe from 768 to 814 implemented his succession plan, coronating Louis the Pious as co-emporer in 813. Charlemagne died only a year later, before most of the succession plan was implemented, and the empire was partitioned into three zones, which later became France and Germany. Had the succession plan been given more time to take hold, Continental Europe might have been unified for longer and perhaps even two World Wars would have been averted.
- Address conflict. Conflict is hard. Family conflict is extra hard. Not everyone will get to become the new CEO of the company, and naming one child CEO over another can lead to feelings of favoritism that can be toxic to the business and the family. The fact is, every child tends to see themselves as King Lear’s Cordelia. One way to diffuse conflict is to try to build consensus. Get buy-in from as many family members as possible. Another path is to retain consultants to drive the decisions, and even possibly, deliver bad news. A great use for consultants is to take the bullets for you – they also can run up trial balloons and if they are badly received, you can always overrule those recommendations – a classic good-cop/bad-cop strategy.
- Be detailed. A succession plan should be developed as if it were a legally binding document, and in some cases a succession plan can be formulated as just that. As such, as many realistically foreseeable contingencies as possible should be considered, covering elements of control, finance, performance, compensation parameters, governance, and accounting and financial reporting. If the document winds up being lengthy, so be it. Have that document reviewed by your non-legal advisors, by the individuals who will be most impacted by the document, and even consider a review by a second attorney from a separate firm. The law doesn’t care what you meant to write – only what you wrote.
- Invest in expertise. If succession planning is important to you, it’s going to cost you some money to implement correctly, but probably will cost a lot less than selling the business outright would. Succession planning is evolving into a specific skill set. Many attorneys are succession planning specialists, as are some CPAs, certain financial planners, and business appraisers. There are succession planning specialty firms and practices within larger firms. Succession planning spans so many areas of knowledge, it is highly unlikely that you are sufficiently expert in all (or even most) of them to manage those elements well. The most frequent regret I have heard from people who engaged in the succession planning process is that they cheaped out on the experts.
We can’t promise that the succession planning process will be easy. But, by following these principles, you will have the clarity of vision to see you through tough times and muddled conversations to achieve the outcomes you want, and keep your business on track.