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?”