Family relationships are challenging even in the best of times. During a major transition such as transferring ownership or control of a family business to the next generation, misunderstandings and poor communication can derail the best intentions and plans. A structured plan, crystal-clear communication, and appropriate financial tools may ease some of the strain and prevent unnecessary family conflict.
It’s hard to talk about money, and every harder to talk to family about money. Many of us retain relationships with adult children which are steeped in our relationships with them when they were kids. There are unspoken expectations on both sides that make the fear of disappointing a loved one very real; especially about jobs and careers and money. The worry and stress over money issues, and parents and children, can make talking about money about as welcoming as pulling a tooth with a pair of pliers.
But open, honest communication is essential to avoiding catastrophic mistakes impacting a family’s financial life for years. Transferring, selling, or giving a family business to the next generation will impact the original owner’s retirement and inheritance. It may give the next generation a degree of debt that is crushing. Before financial concerns fracture family relationships, consider these ways of ensuring that everyone is on the same page.
If there is no specific succession plan in place, the original owner should consider their expectations for the successor. Is the expectation that the successor will have put some time in the business? Built up experience and skills? Earned some sweat equity? If there are multiple adults in the second generation, it’s worth communicating with all of them at the same time. Ask if they have an interest in coming on board before a decision is made regarding a succession. It may be a mistake to assume that those who live in distant places, or who appear to be settled into a profession, will not have any interest in returning and participating in a family business.
Lead the Money
Even if the second generation is not interested in running the family business, they may have expectations regarding their inheritance. In addition, retirement funding out of an intact business may be a challenge. Health care, especially, can be more expensive than expected; planning for retirement often takes a backseat to other needs of a business. An original business owner must first ensure adequate retirement funding from the business. Then they can decide about inheritance for all of the next generation. If there are grounds for a legal challenge related to inheritance, a new family business owner could be facing significant conflict and expensive lawsuits from siblings and cousins.
Consider options to protect the assets of a family business during times of transition. Various trusts can insulate a business from inheritance and estate taxes. They can allow new owners and stewards of a business time to adjust to their roles and responsibilities.
The core values and mission of a business may change over time, and with new leadership. Much of the value of a business comes from reputation, tradition, and mission. Many business owners are concerned with ensuring the reputation and values of the business remain intact. A second generation may be looking at the business world and seeing rapid change and disruption that needs urgent attention. An original owner and successor should feel comfortable enough with each other that issues of what stays the same, and what needs to change, can be discussed. Many people find that writing these concerns down, and sharing them, allows time for thoughtful reflection. This type of written correspondence can provide something like a map into the future for both original owner and successor.
An issue that remains complicated is when a retiring owner stays in a consulting role. New leadership may appreciate a helping hand and the voice of experience. However, many may also feel someone looking over their shoulder. A consulting role after passing the family business on should be time-limited, and limited in scope. Retiring owners should not retain veto power over business decisions, for instance. If there are issues both sides feel strongly about, such as personnel issues from the retiring owner, or the ability to outsource from the new owner, those agreements should be in writing from both sides.
Transitions can be accomplished successfully, but communication is essential. A structured plan, clear communication, and good financial tools are needed to ensure a family business can move into the second generation positioned for success.
Consider reviewing plans and documents related to a business transfer or inheritance with skilled and experienced attorneys. We look forward to hearing from you!