The death of an owner or founder of a small business can be devastating for employees, customers, suppliers, and other stakeholders. Business owners should plan ahead so that when they die, their businesses will continue to thrive. This process of planning is called Business Succession Planning.
The first step of business succession planning is getting your family’s commitment to the the business’s future. If your family cannot develop a shared commitment to the business, then maybe it’s time to sell it.
Keeping your family dedicated to the business through generations is difficult. It requires the collaboration of the entire family. It also becomes progressively more challenging as your family members become more removed from you and the business.
To maintain a business after you’re gone requires your family to be able to talk about it in a healthy way. This means using assertive communication. The acronym we use at our firm is CHORD. That stands for clear, honest, open, respectful, and direct communication. It’s the opposite of passive aggressiveness. It means not talking behind someone’s back. Family members need to know they will be heard and that their opinions matter.
Create an Estate Plan that Integrates Business Succession.
An estate plan is a set of legal documents that spell out how assets are distributed (or managed) upon the death of an individual. It also includes instructions for managing the business during the owner’s lifetime (in case you become incapacitated). If you own a business, you need to make sure that your family knows what to do with your business after you die.
Business succession is much more difficult if your business ends up in probate. We’ve also seen situations in which the surviving family members spend years in court fighting over control. A good estate plan – which incorporates your business – is a crucial step.
Set up a Trust.
A trust is a legal arrangement where one party (the trustee) holds property for another party (the beneficiary). In the case of a business, the trustee could be the owner of your business and the beneficiary could be your heirs. There is no one-size-fits-all solution, though. Be sure to talk to your estate planning attorney about how to integrate your business into a trust.
We would love to help you. If you want to put your business in trust for the future, call us at 602-443-4888.
Name a Trustee.
If you own a business, you should name a Trustee who will take control of the business upon your death. This ensures that the business continues to operate smoothly after you die. It also helps protect your family members from being sued by creditors of the business.
Think of the Trustee as the shareholder of a corporation. The shareholder may not have day-to-day involvement. However, he or she has the final decision about who is running the shop.
Think of the possible conflicts that could arise. For example, you could name your surviving spouse as trustee, and your son as the CEO of the business. But they might have different goals. Your surviving spouse may want to liquidate and get the cash. But your son wants the ongoing employment and career path.
That leads to the next point.
Family Business Governance.
Family business governance refers to methods for preventing and dealing with potential conflicts. There needs to be a clear definition of the family’s relationship to the business(es).
A family business governance document needs to be developed by all adult members of the family. It is key that the document be flexible and adaptive. In this way, it can change”as the family’s needs change in an ever-changing environment.
Business Succession Requires Dealing with Conflicts.
If you are aware of disagreements in the family, now is the time to resolve them. If you are the main bread winner for your family, your spouse and children may not want to upset you. They may be putting on a happy face around you. But after you are gone, these disagreements are free to rear their ugly heads.
It is much more difficult to resolve these conflicts when you are not around.
And ironically, it is also difficult for you to help resolve them. You are a participant in the situation. As such, you can’t also be a neutral third party helping to resolve disputes. This is a frustration many of our clients have had.
That’s why enterprising families (families that own businesses) hire family business consultants.
If you want help resolving a family conflict, we have a sister company – How To Create A Legacy – that can help. None of your other advisors can help resolve a family conflict involving a business. Your financial advisor can’t help (because you don’t want to sell your business, you want to keep it). Most lawyers can’t help, because a document won’t fix the situation. Plus you don’t want to go to court over the conflict. A therapist can’t help, because you don’t have time for everyone in the family to go to therapy for the next 10 years.
Family Code of Honor.
I wrote a book about this topic. It’s called Lasting Wealth: A Revolutionary Method of Family Wealth Transfer (available on Amazon). It talks about implementing a Code of Honor for your family.
What is a Family Code of Honor?
A Family Code of Honor is set of guiding principles that the family believes in and strives for. These might include “Always do your best” or “Take responsibility for your actions.”
A Code of Honor helps form the glue that will hold them together. All family members need to buy into the Code of Honor as a way to live their lives. They need to agree to hold other family members accountable. Then they need to teach the Family Code of Honor to their children.
Family Council Can Help Business Succession
Most successful families set-up and maintain a Family Council. A Family Council can inform the family business leaders about family concerns before they erupt into disputes. In such situations, knowledge is power. A well-informed leader is best equipped to avoid problems.”
What are some major functions of a Family Council?
- Decision making about family issues
- Providing leadership
- Maintaining the family history
- Facilitates education
- Planning and organizing family events
- Defining the relationship of the family with the family business
- Conflict resolution
- Conduit for information on the business to family members
- Preparing heirs
Name Beneficiaries in a Way that Supports Business Succession.
You have to figure out who will benefit from the business in the future. And even more importantly, how will they benefit? You probably don’t want to create a bunch of lazy offspring relying on monthly checks from the business for their survival.
This is a topic for discussion among the family. And, coincidentally, it goes back to the beginning of this list. Now your family needs to decide on the purpose of the business. Here are some ways in which I’ve seen family businesses benefit the family:
- Pay for an annual family vacation. The family can have fun together part of the time. And the family can also hold meetings to discuss important issues.
- Pay for the education of grandchildren.
- Create a mentorship program for the children and grandchildren.
- Fund charitable donations. Different generations can form their own committees to decide on what charities to support.
Want Help With Business Succession Planning?
We love working with business owners who are committed to business succession. We will come up with a solution for successfully managing your business after you’re gone.