Family businesses steer through succession squabbles

Who’s going to grab the company reins when dad and mom retire?

Some children grow up and want to be CEO of their parents’ company, but just don’t have the ability. If several siblings vie for business control or scrap for ownership of family assets, a thriving family business can become a sore spot that spawns years of rancor or litigation.

Family succession planning, usually the most emotionally complex route to ensuring that a business go on beyond the retirement of its founders, requires capable business leaders.

“Often in families you are dealing with people who might not be qualified to take the business to the next level,” said James Andersen, partner in Hemming Morse accounting firm, who operates out of offices in Santa Rosa and San Francisco. “The talent is not there.”

Andersen works as a business consultant in what he calls “non-traditional accounting.” If there’s no obvious chief executive among family members, he might suggest hiring a chief operating officer “who can coach somebody who is a family member.” If the parents allow enough time for training, one of their daughters or sons might be cultivated as the future CEO.

If there are multiple children, “don’t gum it all up by having everybody get to be an owner in the business,” Andersen said. “You will find out that certain members of the family may be talented and motivated to do it right. The other ones may be not as talented, and looking more for a free lunch,” a form of lifetime annuity.

“It’s a multifaceted thing,” he said, especially complicated when parents seek to treat all their offspring equally.

He recommends not having all the children be owners in the business. The ideal scenario is when the parents and business founders have other assets - comparable in value - that can be distributed to children who don’t end up running or working in the business. “You have it set up in wills and trusts to give members of the family who are not as talented or motivated other assets,” Andersen said.

A hardworking daughter or son in the business “may have earned some sweat equity,” he said, “and they should be rewarded for that. They’re being mistreated if they’re not given credit for their hard work.” Other siblings might not have worked much to help keep the business on track and growing.

Family business owners frequently make mistakes in handling the delicate communications around succession planning. Typically one parent seeks to achieve equal treatment of the children more than the other. “They have to come to agreement,” Andersen said. “I have to use tough love. You’ve got these three children. One’s very talented and hardworking, and the other two, they may be fine people, but they don’t have the same degree of talent.”

He works to get the mother and father to agree on who will run and own the business, and who will remain as non-owners in the family.

Assets can be transferred through a gifting process or sales to the children actively involved in the business.

“I recommend a family meeting,” Andersen said. “Bring all the kids into the room, and the parents.” He facilitates such meetings, explaining to the children what the parents have decided, then fielding questions. “It comes from me,” he said. “It takes the pressure off mother and father.”

Sometimes the parents make comments during such meetings that interfere with the clean communication of the structure and intent of the succession plan. He may stop the parents from participating actively.

Siblings may not see or value the work done by a brother or sister in working at the business, the sweat equity. “We’re going to try to be as fair as we can to everybody,” he said. “Things are not necessarily going to be perfectly equal. They can’t be.”

Equality in family wealth allocation typically is seen differently by different people. Some family members may place value on the business that is unrealistic, unsupported by appraisals from accountants, attorneys or real estate professionals.

“There is nothing more unequal than the equal treatment of unequal people,” Andersen said, attributing the thought to Thomas Jefferson, credited as principal author of the Declaration of Independence. “You can’t always get the perfect answer.”

Getting the parents to adopt a plan is often the most challenging task. “In this area, there are more false starts,” he said. “They stop because they don’t want to deal with it.”

The business owners may have intentions to arrange an appropriate succession plan. “But when you get into the painful part of the situation, they balk and they don’t want to deal with it,” he said. “That is the challenge. How do you get them through the balking stage?”

Enacting a succession plan in a family can take years. “We keep chipping away at it,” Andersen said.

Sometimes parents “fail to recognize the shortcomings of their children,” he said, and put offspring into positions not suited for them, where they are overwhelmed by expectations of the job. “They failed. It did permanent damage to the child” in the form of mental scarring, damage to self-esteem, as well as harming the company. “It can potentially tank a business,” he said.

“That’s a tricky area. You have to let them know,” he said.

He may work beyond the first generation to carry succession planning to the grandchild generation. “That gets even more complicated,” he said. “You have brothers and uncles,” and sisters and aunts. “They have children. You have cousins. You can pick your friends, but you can’t pick your siblings,” Andersen said.

“If you are running a really truthful succession planning program,” he said, a business owner needs parallel tracking. The business ought to be groomed for sale, what he calls “polishing the apple.”

A sale makes distribution to siblings much easier. “You take the cash and divide,” he said.

“Sometimes the simplest thing is to sell this thing,” Andersen said.

The second track involves prospective transfer of the business to key insiders, especially where there is not a good market for an external sale. “You look to see if you have qualified people internally who can carry the mission forward,” he said. The business needs to have the cash flow to pay out the sale price to the owner, usually over several years through a partner or stock redemption process. “That can be risky,” he said.

The third parallel track is the prospective transfer of the business to some of the family members. “Those are the touchiest, the toughest,” he said. The North Bay, especially the wine business in Sonoma and Napa counties, has lots of family enterprises where parents typically want family business ownership to continue.

“You see a lot of family members who work in these businesses,” Andersen said. “The real challenges come up” when family members don’t “have the brain trust to work a business. You better hope there is liquidity in the family because you don’t want the non-working kids and the working kids in co-ownership of the operation.”

If such co-ownership exists, it requires “very, very, very strong document agreements as to how things are going to be done, how salaries will be determined, when distributions are going to be made,” he said. More partnership and corporate disputes and dissolutions arise from family-owned businesses than from entities where family ties are not involved.

Succession planning requires custom fitting, Andersen said, based on each situation. “It’s all about people,” he said. “You have to get buy-in from mother and father. If you can’t, then you’re blowing in the wind.”

Many family businesses find that eventually they need an infusion of outside capital in order to grow. Venture capitalists and private equity firms will provide capital in exchange for a significant portion of the business ownership. Such transactions can provide “more perpetuity in the business,” Andersen said.

Outside investors may not have voting control, but nearly all want one or two seats on the board of directors. Such professional intervention can help to straighten out family squabbles. “You have to separate egos from reality,” Andersen said.

With his own former accounting company, Andersen & Company, which he ran from 1981 to 2008, “we didn’t feel we had the bandwidth to compete effectively,” he said. He and his partners sold the firm to Burr Pilger Mayer. Then he stayed with that company for nearly four years before moving to Hemming Morse in 2012.