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Why Are Family Business Transitions Often So Difficult?

Submitted by John Brown on Fri, 05/08/2020 - 8:00am

The failure of families to successfully and happily transfer business ownership from one generation to the next is the stuff of movies. Family discord has been celebrated since the dawn of recorded history. In Greek mythology, Uranus imprisoned his son, Cronos (a creator of the world), to prevent his overthrow. In turn, Cronos consumed his offspring as soon as they were born until his wife tricked him into swallowing a rock instead of their son Zeus. As Uranus and Cronos learned, neither imprisonment nor filicide are effective transfer strategies.

Despite its sometimes bloody history, transferring control (whether a kingdom or a business) from parent to child does not need to cause discord. Instead, the transfer becomes the arena to which all interested parties bring their definitions of fair, their met and unmet expectations, and their feelings of entitlement. 

Discord often lurks, invisible to advisors and perhaps business-active parents, in even the most contented families. Smart advisors know that just because they can’t see discord doesn’t mean it is not ready to pounce. To prevent family meltdown should discord appear, these advisors encourage three actions.    

Action 1. Communicate Early & Clearly with the Right People.

Advisors should initiate conversations about ownership succession with both parents before they include children (and perhaps their spouses). The purpose of early meetings is to establish the parents’ goals, needs and aspirations for themselves, their children and the business as clearly as possible. BEI Members use checklists or outlines to ensure that their conversations cover a wide range of potential topics and issues.

Topics include both parent and child-related issues such as: 

  • Do the parents have financial security now? What do they need?
  • How would you define the parents’ role in business going forward? How long will business-active parents remain active? What does “remaining active” mean?
  • What are the roles of the children in the business currently, and what will they be during and after the transfer? 
  • Will the children be gifted ownership? Will the children buy ownership? Will only the business-active child(ren) gain ownership?
  • What will the ultimate transfer of the parents’ estate via gifting and estate planning look like?

Specific, clear goals, and a plan of action to accomplish them, act as a buttress against the conflicting wishes of children and their spouses. We make certain that the parents are in accord before proceeding—a requirement that every parent understands. When dealing with children of any age presenting a united front is critical.

Only after both parents agree on their planning goals is it time to meet with the children. We strongly suggest that all meetings involving children be facilitated and conducted by the planning advisor, not a parent. One of the advisor’s duties at this meeting is to explain the parent’s wishes as well as the plan that achieves those wishes. An important advisor role may be to deflect discord from the parents.

Action 2. Advise Owners That Transferring Ownership is Complicated Without a Process.

To succeed, ownership transfers require a proven process that both anticipates problems and resolves them (See our blog post last week for a more detailed discussion). Before parents wade into the murky waters of family business transfers, advisors should explain that a proven strategy/roadmap reduces the likelihood of unexpected conflict and consequent powerful emotions that can halt all progress and destroy a family.

Action 3. Acknowledge That Family Business Transfers Require Experienced Guides From Outside the Family.

To maximize the chances of a successful family business transition, it’s best to work with advisors well experienced and trained in family business transition planning. If that’s does not describe you, we can provide a list of trained advisors in your city or area. There’s no shame in admitting that one is not a trained guide. Even experienced advisors turn to other experts (e.g., family therapists, psychologists, and family business consultants) when family-based issues threaten progress. Not all these experts are needed in every ownership transition of course, but it is important to have them on your bench should the need for their services arise. 

Takeaways 

  • Transferring a business within a family does not need to cause discord. 
  • Advisors can act to prevent or resolve discord by: 
  • Helping parents set goals before facilitating communication among all family members.
  • Using a process to keep planning, decisions and implementation on track and minimize conflict.
  • Quarterbacking a bench of expert advisors who guide owners through a successful transition.


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