By Ivan Hernandez
One of the most common obstacles that family businesses face is multigenerational succession planning.
Navigating ownership succession, while taking into account heir differences can present a wide range of challenges. What happens when the heirs of the business have different needs, talents, goals and levels of involvement in the family’s business? These differences and communication barriers can create major obstacles toward a smooth transition in leadership, which could lead to the ultimate destruction of the company.
It may seem oversimplified, but communication really is paramount to successful succession planning, and it needs to begin when the founders are still in control. This paves the way for properly communicating the founders’s wishes and plans, and will also give heirs the opportunity to weigh in, express their views, concerns or excitement about the business.
Also, an impartial, non-family third party can assist in finding solutions for your clients’ families. For instance, they can address a situation where one heir genuinely cares about the business, while the other(s) may not.
Therefore, being a part of a family-owned business with both family and non-family in partnership positions can create a strong dynamic.
Privately owned family businesses account for 64 percent of the U.S. GDP, yet only approximately 40 percent of them have a clear succession plan in place. Unfortunately, a large portion of those plans will result in unsuccessful transitions.
Why are we facing such daunting statistics? Answer is every family wants to create a legacy for their children in the future but often are not taking the critical steps of addressing it in the present.
Three common scenarios that may face a family business once the founder gives up control are: the business will continue to generate healthy profits; the heirs take over, leading the business to new levels of growth; or the family business will succumb to the many challenges during the leadership transition and the business will be run into the ground.
When some heirs are involved in the business and others are not, they will naturally view the business very differently. This is directly attributed to their actual experiences with and understandings of the business. Experience cannot be taught. If you have a non-involved owner, the conversation around what to do with excess cash flow can become a point of contention. If one heir wants to reinvest in the business and the other wants to take distributions to fund their lifestyle, it can present an unavoidable conflict between the two siblings. The complications grow exponentially as additional heirs enter the scene. Still, your goal is to protect what your clients have built up to this point, while being fair to all heirs.
Most documents that come across our desk treat all heirs equally. This can lead to unique challenges for a family business because the business is an illiquid asset. We always recommend that estate planning and business planning be intertwined. This will prevent “blind” equality that could harm the profitability of the business.
But when is the next generation is ready? The natural progression would be on education completion. However, we would recommend encouraging the next generation to broaden their horizons by working for other companies. This will give them a greater understanding of hierarchy of an organization and help prevent a feeling of entitlement. This is a critical experience for the heirs of a family business. It’s also an opportunity to assess their passions, capabilities and work ethics.
As owners of the business and the wealth creators, your clients have the absolute right to determine the future leadership of the business and what the assets distribution will look like. Now is the perfect time to begin.
Ivan Hernandez is Co-Founder and Managing Director Wealth Structure and Planning at Omnia Family Wealth.