During a prospective client meeting with a family business beginning to transition to third generation, it became clear that there were decades of issues to be addressed. Dad’s estate plan had considered the inactivity of his one daughter in the family business and she inherited non-business assets equal to the value of 25 percent of his estate. The three boys inherited one-third each of the business. The daughter’s husband was an attorney and acted as his father-in-law’s Personal Representative and Successor Trustee. Everyone seemed fine with the outcome at the time.
Fast Forward
While everyone seemed fine with plans then, that was over two decades ago. Now the daughter is divorced without children and living in Arizona. “The Boys” are very successful and the business has grown from one shop to five. Two of the wives have positions in the business, and the third is a successful attorney. The Boys each have two children and their ages range from 28 to 10. The eldest of the second son has now joined the business as a shop manager and is performing well. One of the third generation is married; her husband is in med school. None of the others have significant others now.
The three brothers disagree on the future of the business. The eldest wants to see the business continue, and retire soon. The middle wants to slow down now, and retire in about five years. He wants to keep the business in the family, but would support a sale at the “right price.” And the youngest intends to work for about 10 more years and doesn’t care whether the business remains in the family or not, if he is “set for life” (but can’t give that statement a number).
The business is governed by a committee of the three brothers who often disagree. They have no formal Board, or any formal decision-making process. When they disagree, depending on the situation and the strength of the disagreement, they often become stalemated. Decisions tend to be painstakingly slow, and often opportunities pass by. Management style is “old school” – get your hands dirty, work hard and everything will work out in the end. Strategic planning is very informal at best and growth has occurred as opportunities have presented themselves rather than by planned process.
There is an old Buy/Sell agreement that has been amended over the years, but appears inadequate for the current situation. It is funded with life insurance that represents about two-thirds of the current business value, and the agreement has not been updated to represent current value in years. The agreement addresses death and restricted stock sale only.
The brothers are currently updating estate plans at the insistence of their attorney. Consequently, the business was recently valued (even though the value was not used to amend the Buy/Sell). And, there are some pending IRS changes to the planning technique of using transfer value discounts to minimize taxes. So, there is a strong push to get something done quickly to maximize the current discounting techniques.
One more caveat, the sister now regrets not being part of the business and has expressed a desire to reconsider their parent’s estate plan that excluded her. It is unclear what her current financial situation is; or, if this new desire is for financial gains, or to reconnect with the family.
The Look-back
It’s easy to find fault as a Monday morning quarterback – but that never wins last Sunday’s game. However, it might give you a better chance for next Sunday’s success.
Some practices, or lack thereof, in this scenario are correctable for the future. It’s easy to table issues when the business is making money. Now, some of the issues that have been left unattended are surfacing.
Governance structure would be improved by formalizing decision making and developing a methodology to handle disagreements before they occur. Forming a Board to debate issues and hold everyone accountable would help immensely. That Board needs to have some true outsiders that can add experience, objectivity and wisdom.
Developing a strategic plan for the next several years to address the business vision/mission would make sense. Heck, figuring out what that vision/mission is would be a great start. Just answering the question of whether this business is for sale, or not, and if so, then under what circumstances, would be a good start. Next questions: if it is sold, what do we do with the money? Who stays and who goes, and is that part of the negotiation? Do we go our separate ways, or remain some business entity together? And so on. These discussions are more fruitful before the sale than during or after. The team with a better game plan usually wins the game.
The Re-Ratchet
Some of the pieces left unattended are stickier. Good family business practice would have dictated family meetings that should have determined entry and exit strategies. One third generationer (G3) is now employed in the business – is that now the “protocol” for the others? That is, if the business remains in the family. And if the business is sold, how is that G3 employee treated?
What if one of the brothers leaves the business for some reason – either planned or unexpected? Are his children given the same opportunities as the remaining G3ers? And what about G2 spouses – do they remain employed? Are they treated the same as other employees, or are they a different class?
Does the fallout from a G2 exit differ depending on the when and why? Is a premature death different than early retirement? What does a planned exit look like? Does a planned retirement mean turn in your key and ride off to the sunset, or is there a semi-retirement phase? Do any perks continue and for how long?
Does entry for other G3ers follow the first’s protocol? If not, how do entry requirements change and how does the family buy into that change? How do G3ers become owners? Who can become an owner? Do you have to be employed in the business? Do you have to prove yourself as a valuable human asset before gaining ownership, or is being a member of the lucky gene pool enough? How does ownership transfer occur, and who decides? And so on….
Then there is what to do about the sister’s situation. Looking back at “what ifs” probably isn’t worthwhile. Gaining insights into her real needs and desires would probably be more useful. How do you do that? Is it a heart to heart discussion with one or more of the brothers? Is it a legal issue to be determined by counsel? Is it a family issue that might be aided by some counseling? Or, is it as simple as including her in family meetings so that she can reconnect?
Good Practices
Family businesses are a difficult balancing act. Of course, they require good business practices, and they require tools to provide transparency and inclusiveness for the family as well. Here are three best practices that will offer a path to a successful business and family harmony:
- Regular family meetings that include all stakeholders to address family business issues.
- Structured family business education to learn common issues and solutions.
- Designed governance that should include a real Board of Advisers or Directors to add objectivity.
It’s never too late to re-ratchet into good practices. This family would benefit from establishing best practices that have been absent for years.
