If you own a family business, you already know the possibilities for conflict are endless. Bring estate planning into the mix and the territory becomes a veritable minefield. For this very reason, many folks put off the issue until too late. As unpleasant as wading into a minefield may be, it nonetheless beats setting a time bomb in your backyard. Failing to implement an estate plan that includes a succession plan amounts to doing just this for those that own a family business.
Determining how best to distribute one’s assets is a combustible topic for family business owners because frequently a majority of one’s wealth is tied up in the enterprise. Not all loved ones will appreciate inherited shares equally and, to quote from Hamlet, perhaps the greatest family drama ever written, there’s the rub. Where family businesses are concerned, “fair” and “equal” don’t always mean the same thing.
In all likelihood, not all family members will participate in the family business to the same degree. While some children may take active roles and seek to continue the enterprise once passed on, others will follow their own path. Naturally, the former will be nonplussed if the latter receives equal shares in the operation—shouldn’t a person who has invested heavily in a project gain more say that one who has not, after all?—and yet, children that haven’t wanted to take part can nonetheless still reasonably expect an equal share of the family’s assets.
The solution to this dilemma is to implement a succession plan drafted with input from all concerned individuals. This document, which forms a part of your larger estate plan, airs all concerns about how a family business will be passed on and sets terms that, if not agreed upon by all, are at least clear, in the open, and up for discussion while time to do so remains.
Strategies commonly implemented by a succession plan include passing a small majority (say, 51%) to the child that has taken an active role in the family business or dividing voting and non-voting shares in consideration of each child’s involvement. A succession plan does not only organize inheritances, however. This document also serves to implement a strategy for the business’ continued success and growth. For this reason, it is paramount that you begin drafting a plan as soon as your children are old enough to participate in the process.
Good succession plans are years in the making and give employees and family members alike time to prepare for the transition. Building relational capital by introducing successors early is as essential as letting prospective and current employees in on the firm’s motivations. Holding space for the inevitable tough conversations that arrive is similarly critical. No two succession plans are alike and navigating the legal hurdles baked into the process is complex. For all of these reasons, bringing your trusted advisors into conversation with an experienced estate planning attorney is crucial.
Succession planning, like estate planning, depends upon you knowing where you would like your life’s work to end up and trusting experienced professionals to guide you in attaining this goal. There truly is no time like the present—after all, have things ever been so unstable? —and so don’t delay in giving us a call!