Why Family Business Transfers Fail

Submitted by John Brown on Tue, 08/16/2016 - 5:00am
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As an advisor active in the business-owner arena, you've likely witnessed many family business transfers that have ultimately failed. While the causes of those failures seem numerous, they boil down to two: assumptions and the parents’ lack of clarity

Here's an example, courtesy of one of our advisors, of what we mean.

My phone rang early on January 2. It was Frank, an owner who had gifted, with my help, some of his business interest to his son. His first words were not, “Happy New Year!” but "Undo that gift!”

Six weeks earlier Frank, Sr. (Senior) had given his youngest son, Frank, Jr. (Junior), part of the business interest. Junior not only ran the business with his dad but had become more important to the company’s success than Senior. For that reason, Senior had decided to gift a significant part of the very successful business to Junior.

Senior arrived 20 minutes early for our hastily arranged appointment later that afternoon. Suspecting that Senior might be just a little agitated, I asked, "What has you so upset about the gifting?"

Senior’s answer poured out, “Jean and I had all four kids and 11 grandchildren over to the house for a holiday dinner. My oldest daughter, Linda, noticed that Junior’s kid had on a pair of red Jordan Super Fly basketball shoes. You know, the $190-a-pair shoes?”

Before I could answer, Frank went on, “Linda cornered Jean in the kitchen and told her that her kids wouldn’t help clear the table because they were too embarrassed to be seen in their $29 sneakers from Target. Linda complained that, since Frank Jr. was now earning more than he could ever have hoped to outside the business, ‘This is beyond unfair!’”

Senior continued, “At this point, I walked into the kitchen—now a hornets’ nest of moral outrage. I was prepared to face the ‘you always liked him best’ routine. I reminded Linda that I’d offered her (and her sisters) the same opportunity to work in the business, but they’d all chosen different paths. I told her that her brother was responsible for increasing the value and cash flow of the company—something he’d done working 60 hours a week for years!”

“That wasn’t good enough for either one of them!” explained Frank. “Somehow I have not only violated some unspoken Family Code, but now Jean and Linda are not speaking to me!

As I listened, I realized that Senior blamed me and expected me to extract him from this mess. He wanted me to right the ship of marital bliss by ensuring that all his children felt that he treated them equally.

And he was right. It was my fault . . . for not requiring that Jean be present at the meeting during which we discussed gifting to Junior.

Frank and his advisor had paved the road to family conflict with good intentions.

This story illustrates the two causes of family transfer failure in action. First, family members make a lot of assumptions about the transition of a family business. There is a tacit acknowledgement that some day dad will leave the business but often nothing more than that.

It's not just the parents who haven’t thought through the issue; it's also children and their spouses. When everyone is unclear about the business ownership transition, confusion and misunderstanding reign.

Second, the transfer of a family business cannot move forward successfully when the owners—the parents—lack clarity in what it is they want. This is where skilled Exit Planning advisors can be of measurable benefit.

You may recall from past articles, that the starting point for all Exit Planning —regardless of an owner’s chosen exit path—is establishing the business owner’s universal goals: financial security, departure date and successor owner. These universal goals must be clear, unambiguous, and communicated frequently to all concerned parties. When they are not, either nothing happens or conflict erupts.

So what's an advisor to do? That depends on whether you get in before or after conflict and misunderstanding begin!

Laying the Groundwork

Ideally, as Exit Planning advisors, we "begin at the beginning" with the parents/owners (both the business active parent and non-business active parent—something Frank and his advisor didn’t do! and engage in the first steps of Exit Planning: setting goals related to their desired departure date, desired and needed income after they transfer ownership, and desired successors. Goal setting is the first step of Exiy Planning. It's where every Exit Plan—even those for family transfers—should begin. If parents set these three goals, communication becomes much easier, assumptions are answered and the planning for the transition can proceed.

Putting Out Fires

When a family is already in conflict, you may need to call in the cavalry or, as one experienced Exit Planning advisor (and parent to three adolescent children) put it, “I can't manage my own children’s conflicts, how can I help someone else?” His solution is to refer parents/owners and their children to trained family business consultants, experienced in dealing with family conflict. Many of our advisors make family business consultants part of their advisor networks and engage them when they work with families in conflict.

Conflict? What Conflict?

The conflict and mistaken assumptions that can arise just around the owner’s three primary goals are significant.

  1. Departure Date. Is the business-active parent—usually “Dad”—willing to exit at all, much less willing to leave when his spouse and children want him to? Some dads decide to keep their businesses in the family precisely because it’s the only exit path that allows them to stay on, and in control, indefinitely.
  2. Financial Security. Can the business be transferred for enough cash to provide the parents with financial security? Or if not, have they saved enough to live a financially secure, post-exit life?
  3. Successor Owner. Is it clear to all involved (spouse, business-active and business-inactive children) which child is to receive what from the business and from the parents' other assets?

As an Exit Planning advisor, if you don’t help parents establish these three goals, you can’t possibly manage all of the conflicting issues that surround them and begin the planning process.

When the problem is one of communication, advisors must focus on parents first. Once parents set, understand and clarify what it is they want, the family business consultant can then establish, or begin to restore, communication of those goals to the entire family. Unless everyone works on both goal-setting and communication, the transfer process grinds to a halt.

The Bottom Line

Without the guidance and support of a skilled Exit Planning advisor, few owners will begin the transfer of their businesses to children with setting clear goals. Fewer still will do so in partnership with their non-business-active spouse and it is the rare bird who then communicates those goals openly, objectively, sensitively, and clearly to all members of the family. That’s why family business owners need you!

While this approach to family transfers may seem obvious to you, it isn’t obvious to owners. In fact, without your involvement, family transfers may simply never get off the ground.



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