If years were given themes, 2022 would be the year of how to mitigate risk.…
Come Thanksgiving, family business owners have an extra item on their plate, namely whether this will be the year to raise the sticky subject of a business succession plan. It’s never easy to gather adult children in the same room, after all, and yet that’s what’s needed to initiate the process of passing the enterprise on to the next generation. Even if this year’s reunion will be digital, Thanksgiving is an opportune moment to broach the conversation—but only if you’ve put some thought into the matter first.
Essential Considerations for Any Family Business Succession Plan
Where succession is concerned, the single most complicating factor for many family business owners is the fact that most of their wealth is tied up “in the business.” This complicates passing one’s estate on to children as the desire to be equal may appear to be at odds with being fair, due to the varying degree each child is involved. The solution—in greatly simplified terms—is to distinguish control from value.
It makes sense to pass control of the family business on to those children who have shown the greatest interest. This can be achieved while still ensuring value is equally distributed among children. It is done, by evenly dividing an interest in the business, but only providing the involved children the right to manage the family business. With this approach, everyone receives the same dollar amount but control is rightfully passed on to those who have worked for it.
If only it were so simple, right? Distinguishing control from value is the right idea but the reality of doing so must contend with an additional factor: sentimental attachment. Because this isn’t just any business, but the family business, control, and insecurities about favoritism are easily entangled. This is doubly true when, by virtue of being more involved, one child has gotten more time with mom or dad than the others. The truth is concerns of this sort often dominate the succession planning process. Accordingly, before the pen touches paper it is essential to sit down as a family and talk about goals, expectations, and intentions. It can be uncomfortable, but it can also be invaluable.
Whether you choose to raise the subject this Thanksgiving or some other time, key considerations to take into account beforehand include:
- Specific roles you imagine each child assuming as a reflection of the family business mission statement vision, core values, and guiding principles.
- Skills required of these roles, a sense of how they might be nurtured, and a timeline upon which the succession process will unfold.
- An estimate of the business value obtained through outside, professional evaluation, and a proposal for how this value might be divided whilst respecting differing levels of involvement.
- A reflection on the goals and intentions of the proposed division and roles presented…and establishing a method for receiving feedback.
Detailing the steps to implement all that might be addressed in your conversation is an involved process requiring more than one meeting. Nonetheless, discussing expectations and receiving feedback from children and loved ones is an essential first step. Only upon clearing concerns about how different levels of investment and involvement will be handled can the detailed work of designing and drafting an actual plan begin. Ninety-percent of succession planning is sentimental gymnastics; ten percent is pushing paper. What’s more, an experienced estate planning attorney can be your trusted guide along your business succession journey. If this is the year to have the conversation, don’t hesitate to reach out before diving in!
Contact the Estate Planning Attorneys at the Law Firm of Christopher W. Dumm