In business, the complexities and emotions of a family owned business can lead to ferocious fights, especially when it comes to estate and succession planning. However, this doesn't have to be the case. Family businesses can prevent such difficulties by preparing for future estate or succession discussions.
Often, business owners resist discussing the future because they don't want to face their retirement and mortality. But to ensure the long-term success of the company, it's wise to plan ahead.
To begin planning, family members should stay informed and in communication with the company's management team. A “family advisory council” can help accomplish this. Meetings should be used to formalize discussions and involve all family members, spouses and children old enough not to cause a disruption.
Having a set agenda at meetings will help structure discussions. Agenda items are concerns, future strategy and a business report. Additional agenda items could include:
A family charter that defines family values, mission and legacy;
A family participation policy;
An exit plan for family members;
Discussions on how the family will use its wealth and assets;
Estate and succession plans;
A financial security plan for parents; and
A family compensation policy that details who will own stock.
Council meetings should be held away from the office and home to avoid interruptions and to make them more fun. For example, many businesses send employees on special retreats.
It's also a good idea to hold meetings at least two to three times per year, or even quarterly.
Occasionally, a specialist can be enlisted to help discuss agenda items, communication strategies or legal concerns.
Once a family council is established, it's imperative that company owners create an estate plan. A solid plan includes a living will; durable power of attorney; buy-sell agreements; proper insurance protection and an emergency plan; wealth protection such as trusts or guardians for heirs' estates; special bequests; and fair distribution of the senior generation's assets.
Other steps to consider when designing an estate plan include:
- Total assets value;
- Estate goals and family wishes;
- Each family member's expectations;
- Basic knowledge of estate law;
- Choosing a competent estate-planning attorney;
- Sharing plans with family; and
- Updating plans every three to five years.
A good estate plan builds the foundation for a succession strategy. However, do not mistake having a will and a couple of trusts as a succession plan. A succession plan can include career planning; formal education; working elsewhere for 4 to 6 years; learning the business culture; and handling power and privilege.
To learn management and leadership skills, potential successors should be trained to: run a department or branch operation; establish a company goal; implement team building; have decision-making capabilities; hire and fire employees; deal with customers and advisors; and continue their formal education.
For instance, a recent college graduate who started in a family business' computer department for standard compensation quickly worked her way up while learning different aspects of the business. First, the department manager became her mentor, and then she soon learned to oversee an entire department. Within a couple of years, the woman was managing. And within the next few years, she became the company's general manager, focusing on learning how to make decisions, give direction, and establish relationships with employees, customers and advisors. As manager, the woman also hired two key managers from outside the family.
Armed with this knowledge and skills, the woman's parent's estate plan gave her 100 percent of the company's stock on her father's 75th birthday, or upon his death. Other children not involved in the family's business would receive non-business assets. The parent's retirement plan included a written agreement that they could work part-time for the company until age 70, then fully retire. This written agreement helped to minimize disputes that could seriously affect the business' success and family harmony.
Among the greatest challenges to a family business is perpetuating the business from generation to generation. It's important to share each other's hopes and dreams, then document and develop a strategy.
For more information on families in business, call Henning Family Business Center at (217) 342-3728 Website: www.mikehenning.com.