History is replete with family owned businesses that have endured intense family conflicts, which have resulted in the sale of companies at undervalued prices or liquidations and the creation of permanent rifts in families. Such conflicts take a toll on everyone involved and result in economic gain only for mediators, arbitrators, lawyers and the legal system that serves them. If there is any gain for family members, it is at the expense of other family members. It is not a win-win situation but rather a lose-lose situation. The question is: “Can all this be avoided?”
In many, if not most cases, the conflict that arises is the result of poor planning on the part of the family in the area of succession. Often, there is no succession plan, which leads to this conflict. If there is a succession plan, in many cases the cause of the conflict is structural; i.e., it was unintentionally designed into the succession plan from the very start. Structural conflict is created between family members who own interests in a family business when the succession plan and supporting documents work at cross purposes during implementation. The conflict arises out of the plan and documents themselves as opposed to individual personality conflicts. While it may be unintentional, structural conflict is often predictable almost from the time the ink is dry on the signatures of the succession planning documents.
At Family Business Centers, Cardinal Rule #1 is:
“To the extent possible, always pass the business interest and the necessary control of an operating entity to those who are charged with operating the business.”
This means: do not leave shares or portions of the business interest to family members who are not involved with the business. We realize that this is not always possible given the composition of family assets, but it is important to follow this rule to the extent that you can. This rule does not apply to assets such as real estate that the business may occupy and utilize. Usually these assets are owned by a separate entity and leased to the company and require only passive management. Because of the passive nature of these types of assets, conflict does not usually occur here.
At Family Business Centers, we have successfully used this rule for over 40 years to help family owned businesses pro-actively develop succession plans that avoid structural conflicts. Let us help you develop a plan now that can help avoid excessive legal costs and/or the emotional costs of family bitterness and estrangement that such structural conflicts often result in later on down the road.
While the legal costs are important, it is the human aspects that are often the most heart breaking. We have seen conflict resulting in the estrangement of grandparents from their grandchildren and being denied contact with them for the rest of their natural lives. This is only one of the family stories we have experienced with clients over the last 40 years that we believe could have been avoided with proper succession planning.
Let us help your family avoid this kind of pain.