"You take money out of this business and give it to your sons. Then they turn around and compete directly with us. They use our equipment, steal our help and do everything to damage our business!" yells Charles at Frank. Frank responds heatedly, "That is b******t. Your kids and Hank's kids get to work in the business but you won't let mine work here. My kids need to make a living like anyone else. Besides, there is plenty of work to go around." Hank fires back, "We offered your kids jobs but they wouldn't accept the offer." Frank finalises today's verbal volley with, "Yeah, you made the offer on Wednesday and said they had to show up on Monday or the offer was rescinded. They were running businesses and they couldn't shut down just like that."
Joseph Hamilton and his wife Catherine had started their commercial roofing company out of their garage 55 years ago. The business had grown into a multi-faceted roofing and commercial construction company, with revenues in excess of US$100 million. Catherine used to say that if it weren't for Joseph acting as referee, the boys would have killed each other long ago. Catherine never understood why her oldest son Charles (age 67) and her youngest son Hank (age 59) always seemed to gang up on Frank (age 64).
Now things have really intensified. Since Joseph and Catherine passed away (Joseph in 1990 and Catherine in 1998), the brothers spend so much time arguing with each other that business succession issues have been neglected. Although the business has succeeded beyond their wildest dreams, there are no estate, ownership succession or management succession plans in place. The three brothers bought out a fourth brother ten years ago (although there is still a lawsuit pending by that brother's family) and now each brother owns a third of the business. However, each of the brothers has five children of their own, so the lack of estate planning presents a significant risk for the next generation.
Charles has three boys in the business ages 45, 43 and 41. None of them have worked anywhere else, nor have they been prepared or developed for key management roles. Hank has two boys in the business, of which his oldest son, Jason, is very capable of taking a key leadership role. Jason held management positions with two large corporations and is arguably the only person capable of leading the company in the future. However, Hank tells Jason that Frank is unwilling to support putting him in a key role as long as Frank's own sons don't have the same opportunity. There are four key non-family managers in the business who are each age 60 or above, so the management succession plan is as critical as the leadership and ownership succession plans.
Hank and Charles say they will buy out Frank's interest and Frank is willing to sell. However, the brothers are miles apart on what the business interest should be valued. Frank has indicated he will accept US$15 million for the business although he really believes $30 million is a fair price. Hank and Charles have refused to get a third party to assist in the valuation process but say they will not pay Frank more than $5 million They have also refused to discuss dividing up the business. They take the position that since the two of them combined have majority interest, Frank is out of luck.
Charles and Hank's sons are concerned about their futures. They worry about what will happen to the business if something happens to any one of their fathers. A number of family and non-family managers are beginning to question if the business has a future beyond the current generation. Jason, by far the most competent family member in the next generation, is beginning to consider whether to look at other career opportunities outside of the family business. What should the next generation do?
Too often, transition planning is seen as the domain of the senior generation. However, successful transitions require that the successor generation create and implement the vision for their own future success. The continued conflict among the senior generation owners not only undermines the ability to develop management and ownership succession plans, but can also threaten the business in the market place. In this case, the next generation must become proactive in designing the transition plan, before the business loses its competitive advantage.
The employed next generation cousin consortium must meet to determine if they would choose each other as business partners. How would they organise their business relationships with one another? What type of governance structure would be necessary? Who will be the next leader? What management authority will the leader(s) have in the business? Too often, successors become business partners because of the estate transfer plan imposed on them by the senior generation. Unless the successor generation 'chooses' each other, their partnership is likely to fail.
The five active cousins, ten non-active cousins and three retiring senior generation owners must decide whether or not the next generation will function as stewards to the shareholder group? Should they consider buying out the inactive shareholders? Are the cousins willing to take on this financial risk? The problem of liquidity often creates tension between the active and non-active shareholders. Active members want to reinvest in the business and finance their own salaries, while the non-actives want financial return on their ongoing investment.
The next generation cousin consortium needs to take the initiative to become educated on the best options for estate planning and the management succession of the business. They should develop a plan that addresses the needs of the senior generation, the issues of 'fairness' for the non-actives and, most importantly, how to foster the ongoing viability of the business.
If the next generation is unable to come to terms with their own future in the company, they should look for alternatives to family business employment as the best way to nurture their own dreams and develop their career ambitions.
Dean Fowler is a family business consultant at Dean Fowler Associates, Inc in Milwaukee, Wisconsi, who provides family business development planning services.
Many tragedies are waiting to happen to this family and their business. The third generation (G3) can minimise the pain if they stop bickering and start planning. Jason should convince his cousins that continued neglect could sink the business and they could lose as much as 55% of its value in estate taxes. With good planning, they could prevent this.
The G3s need to start working together. Then they should present their fathers with their requests and a succession plan. They should insist their fathers' confront the unresolved issues of fairness and entitlement since other succession issues depend on resolving these underlying conflicts.
G3 should insist their fathers' hire professionals to review the ownership and capital structure and to make suggestions on reorganising the business to move the estate planning process forward. Jason and his cousins should not let their fathers or any reluctant G3s sabotage or delay the planning. This is a volatile family, capable of litigation, and perhaps violence.
The G3 must also deal with their ownership and governance issues including whether the active G3s will own the business (equally or not); whether to split the business and give ownership pieces to select G3 members; whether to reorganise voting and non-voting interests; and determine the terms of the buy-sell and management agreements. They should ask their fathers to adopt tax sensitive estate plans that incorporate ownership succession.
Though Jason may be the most competent G3, outside advisors should objectively assess the abilities of the key G3s and prepare a succession plan to present to their fathers. It should include the role of the key managers as well as family members.
The G3s should insist that the business is appraised. Not doing so invites a lawsuit, scrutiny by the IRS and imposition of a gift tax upon any transfer of ownership. For example, if Frank sells his interest for $5 million but the IRS determines it was worth $30 million, Charles and Hank just made a gift to Frank of $25 million.
Finally, the G3s should ask their fathers to address these challenges now, or the active G3s will move to other opportunities. This will be hard for all of them. The business is succeeding in spite of the fathers' war. But if the G3s inherit the mess and their fathers' model, the company will probably be sold.
Kay B Wakefield is an attorney in Portland, Oregon with a special focus on succession planning for family-owned businesses.