Family Business Succession: Hidden Costs

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The Cost of Doing Nothing

Putting the Business of Family at Risk

It is not unusual to for the owner of a family owned business to have a hard time with succession planning. In fact, are usually started then tabled due to the many issues that suddenly come to the front. When this happens, the most common response is “denial.” Sadly, substantive succession planning may be put on hold until some sort of crisis – either in the owner’s family or in that of another family – makes itself known.

Counting the Costs … to the Family

Most would agree on the importance of “counting the costs” or doing a cost/benefit analysis before investing in a large piece of equipment or undertaking an expansion project. There is, however, another side to consider. There is a cost in doing nothing. Particularly for the family of a family-owned-business.

Financially, the cost of not having a succession plan can be catastrophic. Funds needed to pay estate taxes may not be available, which in turn can force a sale of the business on distress terms. In fact, when a business sells after a generational transfer, the primary reason it does so (over 40%) to pay for unexpected and unplanned expenses tied to the owner’s death.

In other situations litigation over ownership and/or management issues may arise, dividing the next generation of owners. From our extensive consulting we know that once the heat between family members rises to point where one seeks advice from an attorney, the chances of creating a reasonable dialogue drops dramatically.

Even when the attorney understands and appreciates family dynamics, most view their duty as representing the client who has come to them. Indeed, under their canons of ethics, they must do so even, if it comes to this, at the cost of the best long term interests of the business, not to mention the interests of other members of the family or the family taken as a whole. Given this professional stance, which is certainly appropriate, a lawyer ethically representing an individual client can start a war that may destroy the family and the business.

Counting the Costs … Financially

Additionally, there are financial costs of doing nothing; though this may actually be the least of the family’s worries.

Money is a problem when the family doesn’t have enough. Strong family businesses and strong, capable people can manage the money issues. We already mentioned that a large percentage of the family owned companies that are sold after a generational transfer are done so to address known and unknown costs. With proper planning, much of these can be avoided, or at least minimized.

For example, we once worked for a family owned business in Hawaii to create a generational transfer. In our investigation we discovered a number of additional shareholders; brothers and sisters of the senior generation who had been given shares in the company by the founder. We negotiated a buy-out of all of the outstanding shares, effectively making a way for the new generation to take over. Had we not gone through the planning process, the business transfer would have been more cumbersome and probably more costly to complete.

Counting the Costs … Emotional

The emotional cost of doing nothing is truly the greatest risk. Family relationships built up over a lifetime or even generations can come tumbling down in the absence of an effective plan to transfer power and control; one that brings generations together rather than splitting them apart.

We once had a client who engaged us after he had been sued by a family member over his role in the business. His worst fear was that his sons would suffer what he had endured. In his succession planning, he wanted create a family and corporate structure that would bring his two sons together on a regular basis to discuss their family, professional and mutual interests. In his mind, this would give them an opportunity to share their thoughts and feelings regarding their families and their family business.

Where to Begin … Time and Talk

We advise owners of family businesses that the time they spend together in and out of the business can be rewarding. When family members talk about the issues that matter to them, including business concerns, the rest usually falls in place.

If they have been doing this all along, then when it is time to talk about the family business succession they are usually able to do so. But it is important to note that family members, both those owner/managers and non-management owners, cannot expect to become engaged in such a highly charged conversation on the fly. There has to be a certain level of trust before tackling this emotional subject.

Fortunately, the cost of doing nothing can usually be paid with an investment that will build trust. If you haven’t already done so, take the first step; even if it is over coffee or lunch. Talk about the business and what it brought you. Then talk about the future, and what you hope it looks like. Take each conversation a bit deeper; away from ideas and into what could be action.

It may be hard. But it will be rewarding.

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