Ah, the good old fashion family business.
Ask any estate planning litigator their thoughts about how best to pass down a family business, and you might see a smile creep over their face… because they know…
Some of the biggest inheritance disputes involve the succession, management and ownership of a family business after the family’s matriarch and/or patriarch who ran the family business dies.
Why?
Because of the highly explosive mix which takes place when you try to combine business partners and family members together in the same concoction.
Think about:
1. In a typical non-family setting, when business partners disagree over rights or issues which are not clearly spelled out in an agreement – litigation often follows;
2. Families are made up of highly emotional and explosive “atoms” who are often on the verge of going “nuclear” over the most trivial of controversies; and
3. Dollars and livelihoods are at stake; and
4. Sometimes, family members choose to work for the family business because it is viewed as s cushy job or safe landing spot, and they can become insecure and anxious very fast if they feel their position threatened by a generational transition in the business.
But alas, we are getting ahead of ourselves. Let’s rewind to the beginning, and take a closer look at the family business and what can happen if a family does not have a well defined succession plan in place.
For the parents who are starting or running a family business – what could be a more ideal situation than having a family business, at least on paper? The parents not only get the opportunity to work with each other, but with their children as well. There are no late nights at the office away from family, because everyone is spending each day working together. Everyone is on the same team, pulling for the same goals. What could be more bonding?
Now, granted – all family businesses are not the same. For purposes of our discussion, however, let’s assume that the family business we will be looking at is started an enterprising parent(s), who built the business up from scratch with blood, sweat, and tears. Many times, there is an immigrant story at work here…
The family grows together with the business. When a child is 16, you will see them turning down extra-school activities to be able to help out at the business after school. Summer vacation is not spent at camps but working for the greater good. As each child matures, he or she is offered a job in the business. This is a win-win for everyone. The enterprising parent gets to work and spend time with the kids, teach them the business, and hopefully provide them with the means to sustain them and their children for generations.
The children benefit because they get a secure job, get to work for the family rather than an unforgiving boss, and know that as long as they “show up” they are basically guaranteed an income stream which may or may not be commensurate with their efforts. No one has to have job or workplace anxiety, be afraid of getting fired if they are late, or any other typical worries that a worker might have.
Plus, if the family business is successful by the time they get hired, then there is always a feeling that the enterprising parent has the business under control, and all the kids really need to do is to hold on to the parent’s coattails and not drastically under-perform.
The bottom line is that the kids get a “cushy job” for which they are likely to be overpaid and have little risk of unemployment. They know it, the parent knows it, and all of the other employees know it.
However, this situation brings a whole package of problems when the kids see or perceive that their gravy train is coming to an end.
For starters, the kids in the family business enjoy a nice lifestyle without having to do a lot of work (or at least the same work expected of their peers). The problem is, however, that each kid knows that his or her nice lifestyle is largely the result of riding their parent’s coattails.
This means that family members working in a family business, which is largely the product and success of an enterprising parent, can get very paranoid with each other when they see the enterprising parent start to “lose it” a little. That’s when the kids start circling each other like sharks.
Because each kid wants to make sure that his or her seat on the gravy train is secure…
To complicate matters further…. by the time the enterprising parent(s) gets old, there might be an extensive investment or real estate portfolio which is generating even more income than the business. Therefore, the family issues are not just about the continuity of the business, but of the investment portfolio as well.
So, the battleground is set.
Each kid is ready to tear the other apart. No one is playing the “long game” and they are even willing to “kill the golden goose” just so they can horde enough golden eggs.
This syndrome does not just happen in large companies. All types of businesses and families can fall victim to this pattern.
Therefore, if you are the enterprising parent(s), make sure that you have a plan in place with respect to the succession of the business. Put that plan in place sooner rather than later. Share that plan with everyone. Be consistent – don’t make promises to your children that you don’t intend to keep just to keep them from getting angry with you. Don’t just assume the kids can figure out all of this stuff later. They might not, and the risk is too great for your family.
If you are a child working with your siblings in a family business, ask yourself, at the end of the day is it worth never talking to my brother or sister ever again because of a business fall out? Try to find solutions that work for everyone. Some family members might want to sell the business, other might want to continue to manage it. Therefore, from the start, make sure to have all the resources at your disposal to make these meetings successful from everyone’s standpoint. If there are tensions between yourselves, bring in a mediator or other third-party professional to help resolve your disputes. Just know that there is a tremendous amount of litigation surrounding the succession of family businesses. Take the steps today to ensure that your family business will continue to operate smoothly and survive the passing of an enterprise parent.