Successful Succession Part V of VI: How To Maximize The Impact Of Business Transition

This is the fifth part of a six-part series focused on planning and implementing a successful succession strategy. The series focuses on a business-owning couple—William, 63 and Susan, 60—along with their three children: Nancy, 28; John, 25; and Amanda, 20.

While this family is fictionalized, its members represent the clients and issues I have worked with extensively over the course of the last two decades. So far, the series has covered:

1. William and Susan’s origin story
2. Building a governance plan that ensures the right people are making the right business decisions
3. The financial planning process
4. How to document and implement William and Susan’s legacy. Now this fifth part explores how a succession plan navigates the minefield of family dynamics.

What is family, what is business and where do they intersect? 

In addressing family matters, the first question William and Susan need to answer is whether Jackson is a family business or a business owned by family members.

The distinction is one of prioritization. The topic harkens back to the first two parts of this series wherein we discussed William and Susan’s succession purpose and governance. Consider the following:

• If Jackson is a family business, the priority is the integration of family and business. Being part of the family means being involved in the business. There is no “opting out.” The question then becomes role clarity.
• On the other hand, if Jackson is a business owned by family members, the priority is business success. Family members must earn their respective roles in the business, be it shareholder, director or executive. The priority goes back to governance: which family member, if any, is the right person to make business decisions to maximize the company’s success?

It is important to pause here and point out that neither answer is always superior. I have experienced several examples of the family business concept working phenomenally well. Family members understand, from early on, their opportunities and duties, and undertake them with seriousness and passion. Other times, these structures work poorly—as unprepared, entitled family members are placed in positions of power and influence they are ill suited for.

Likewise, there are businesses owned by families that do a phenomenal job of getting the right people in the right positions to run a world-class business. But there are also situations where talented family members who may want to try other professional endeavors do not have a compelling role available by the time they are ready to join the family business.

So again, there is no right solution for a legacy business. The important part is to make the difficult decision to choose a philosophy and, within the confines of that choice, to make strategically optimal decisions.

Family Harmony 

I cannot count the number of times, in the hundreds of succession clients I have worked with, that Mom and Dad’s number-one succession goal is that the children (and grandchildren) “continue to be able to have Thanksgiving together.” They have heard horror stories of family businesses tearing families apart after the parents pass away and transfer ownership.

While I would say there is no absolute bulletproof solution to ensuring post-transition family harmony, there are definite common themes to the disasters. The first is empowering misaligned children. For example, let’s assume William and Susan see Jackson as a multi-generational source of family wealth and pride. And let’s further assume that only one of their children shares that view; the other two see Jackson as a source of annual cash flow. Finally, let’s assume that William and Susan leave the stock in Jackson equally to the three children. In that situation, the two children who do not have aligned philosophies with William and Susan control Jackson. So, for example, if Jackson could best fulfill that multi-generational purpose by reinvesting its earnings in growth rather than paying shareholder dividends, the two misaligned children will not allow that to happen. The result will not only be a failed purpose, but also disharmony between the children.

The second theme is failure to communicate. It is said that nothing creates discontent like unmet expectations. It is fair to assume that, without communication, William and Susan’s children will have beliefs about Jackson. It is not irrational for each to assume that he or she will inherit one-third of the company stock. Or, employee shareholders could assume they will inherit control of the company due to expertise and experience. Uninvolved shareholders could likewise assume that their parents will leave them nothing given their choices to eschew the family business.

Finally, a third theme is not considering the relationship of the children in the context of ownership succession. Most adult siblings love each other, but many do not like each other. There are several reasons why this might be, but if those practicalities are not thought through and worked through, sibling tensions can destroy the family business and the family.

Solutions to protect family harmony 

When clients like William and Susan let me know that their number one goal is to maintain family harmony, I give them two pieces of advice:

1. If that is truly your highest goal, think strongly about selling the business and leaving each child a proportionate share of the proceeds; or
2. If that is inconsistent with your legacy and purpose, we can try our best, but there are no guarantees of family harmony given co-ownership of the business. But there are definitely things we can do to better the odds:

• Set a family meeting where William and Susan discuss their succession purpose so that the children understand their transition goals.
• As part of that meeting, William and Susan can listen to the children’s thoughts on:
  • What the business means to each of them 
  • Each one’s desired role in the business
  • Their hopes, dreams, wishes, fears and concerns
• William and Susan can take that information and then try to craft a succession plan to meet as many of those goals as possible.
• William and Susan can make sure their children are given the time and opportunity—while their parents are alive and involved—to professionally develop into the business role they would like.
• The family can collectively craft a family purpose/mission statement wherein common values are committed to. One of those values can be family harmony. I have found that each family member’s commitment to this value has a materially positive impact on future family harmony.

Conclusion 

Maintaining family harmony in a family business is the most difficult succession goal to achieve. The keys are communication, transparency and collaboration. If done correctly, a family business can be a source of family unity; if done poorly, it can be the thing that rips a family apart.

In the upcoming sixth part, we will put all of what we have discussed together into a process and plan.

ABOUT THE AUTHOR

Joe Maier

SVP Director Wealth Strategy JD, CPA | Johnson Financial Group

Joe has extensive experience helping high‐net worth individuals, family offices, business owners and corporate executives meet their wealth and legacy goals. His areas of specific interest and skill include business succession planning, financial and estate planning, and wealth transfer strategies.