Most business owners will agree that having a succession plan in place is critical, though often challenging, even in the best of times. But Michael Wagner, co-founder of the family-owned, Florida-based Omnia Family Wealth asks what happens when the heirs of the business have different needs, talents, goals and involvement in the family’s business?
Sibling differences and communication barriers can create major obstacles to a smooth transition in leadership that can lead to the ultimate destruction of the company.
Being a part of a family-owned business with family and non-family in partnership positions can create a unique dynamic. Only one of the four children in our family is involved in our business. Privately-owned family businesses, which account for 64% of US GDP, are in particularly challenging situations as only about 40% of them have a clear succession plan. A total of 70% of family business owners would like to pass their business on to the next generation, but the reality is that only 30% will be successful in that transition.
Why are we facing such daunting statistics? Every family wants to create a legacy for their children, but often are not doing the hard work of addressing it today. It is much easier to put it off for another day. However, that day may not come.
Three scenarios often face a family business once the founders give up control: It will continue to generate healthy profits; your heirs could take over, leading the business to a whole new level of profitability; or the family business will ultimately succumb to the many challenges facing families during a leadership transition.
If some of your children are involved in the business, and others are not, they will view the business very differently. This can range from a self-worth to a cash flow perspective. If you have a non-involved owner, the conversation around what to do with excess cash flow can become divisive. If one child wants to reinvest in the business, and the other wants to take distributions to fund their lifestyle, you could be introducing an avoidable conflict between the two siblings. The complications grow exponentially if you have even more children in the business, or children from multiple marriages involved, in-laws, etc. The goals are protecting what you have built up to this point, and being fair to all heirs.
Control is valuable. It can be expressed through the use of voting and non-voting share classes in your partnership agreements. These voting shares should be treated like gold since they control the company. Non-voting shares can be treated as an incentive, and the planning lever with the most potential.
Most documents that come across our desk have been drawn up from an estate planning perspective and, for the most part, tend to treat all children equally. This can lead to unique challenges for a family business because the business is an illiquid asset. The conversation is difficult, if under this scenario, since the patriarch is no longer in control, and there are likely multiple siblings, each owning equal shares of a business, in which they are all involved differently. We always recommend that estate planning and business planning go hand in hand. This will prevent “blind” equality that may harm a business’s profitability. Operating agreements are always a relevant planning tool. They should be reviewed as the business evolves, as your concerns change over time. The evolution of operation agreements is almost akin to trust work. It’s one of the few times you get to draft the exact contract that you want. These operating agreements should be reviewed often to formulate a plan should something unforeseen happen to the founders of the business. Share classes can be an important consideration here.
Often, siblings have been gifted shares in the company in equal amounts. This can become complicated, and this may lead one sibling to essentially “buy out” the other sibling(s). Proper communication remains at the core of any successful (and peaceful) transition. This will help you decide which succession strategies make the most sense for your specific situation.
Communication should begin when the founders are still in control.This will allow you to clearly communicate your wishes and plans, and will also give your heirs the chance to weigh in, express their views, concerns or excitement. These conversations can lead to very fruitful results.
An impartial, non-family third-party can also help you create a solution for your family. This can address a situation where one sibling genuinely cares about the business, while the others may not.
How do you know when the next generation is ready? The natural progression would be immediate involvement following school. However, we would recommend encouraging the next generation to work for other companies to obtain a greater understanding of the hierarchy of an organisation. This can help prevent a feeling of entitlement. Young adulthood is a critical period for the heirs of a family business. It’s an opportunity to assess passions, capabilities and work ethic.
As owners of the business and wealth creators, one has the absolute right to determine how they want assets to be distributed and what future leadership of the business will look like. The problems arise when this is not clearly communicated. It’s never too late, and now is the perfect time to begin.