One of the saddest times in my legal practice is when a family shows up to fight over a business. Or when a business contacts me and it’s too late; they are already waste-deep in a family business battle. In so many cases the family fight has destroyed what is left.
In fact one study found that only 12% of family businesses make it to the 3rd generation. This might be shocking to you, but it’s not to me. I see good businesses go the wrong direction all too often.
But it’s not fate. That business that you, a loved one, a friend or, dare I say, a family member has built does have a chance to survive. If only the right planning is done.
I’ve had the good luck to assemble a lot of lessons on how to make a lasting business from the carnage I’ve had to watch in my career.
For those that are leading or, perhaps, preparing to take over a family business here are some key lessons. These lessons should help you be more effective in business.
We’ll start with knowing where the problems come from then move to what can be done to make things better.
Not Every Kid Wants The Business
One of the biggest issues today in family business is a generational shift that is happening right before our eyes. It starts with the fact that business owners are remaining healthier for longer period of time. What this means, in effective terms, is that children are older when it potentially comes time to transition the business to the next generation.
When the parent steps down the child may have a career or a family started that conflicts with the demands of the business. Additionally the child may have interests different than the parents’. Some of this is due to the aging process and some of this is generational.
Whatever the case it is smart to have a conversation with the next generation and not assume that they will have an interest in the business or want to take it over. In fact they might have zero interest in the business at all.
The World Is Different
Many business owners with successful businesses are shocked to learn that their children, or grandchildren, have zero interest in their business and just can’t understand why. Quite simply values have shifted. While many that are running successful businesses today are happy about that and the income provided many of the next generation want more.
Income and stability aren’t the only things that many of today’s business owners want. Many want a work-life integration. They want to do work that interests them and helps society.
Current business owners working on succession plans need to question and determine whether their children really want the business.
Equal Division Causes Issues
And even when the kids do want the business issues can arise. If there are an even number of children it is often the case that after the parents are gone from the ownership the children will divide into voting blocks. I’ve seen more than a few cases where one group of kids wants to go one direction and another group wants to go the other direction.
These fights can get quite testy and divisive. I’ve even seen children trying to schedule meetings at unusual or inconvenient times hoping that other siblings won’t show up for a particular meeting.
Even if there are an odd number of children unusual voting issues can occur. Sometimes the children will divide and one of the siblings will become the swing vote in all decisions. Not only does this person carry a lot of power they also carry a lot of responsibility. Their siblings will always be looking to influence and sway them.
In most cases I encourage my clients to give more thought to the structure before letting such a future unfolds.
One Sibling Working For Another
In many families we find a situation where one sibling ends up taking over the business while the others are silent owners. Usually the sibling taking over has been “groomed” or are in a place in life where they can take over the business. In such situations we often find that other siblings are often business with their careers, family or other interests.
While initially these seems to be a great outcome there are often some deeper issues. What ends up happening, under law (without some very careful planning), is that one sibling ends up effectively working for the other(s).
Suddenly the sibling running the business needs to account to the others for their salary, the businesses’ profits and other matters. As you can imagine this can get quite awkward and lead to years of disagreement.
Fighting For Fairness
And often these disagreements can touch off fights over fairness. In most of the cases I see no one person actually wants to steal from the other siblings. But, in most cases, each sibling has their own perspective on things. Each one sees their unique sacrifice, demands upon them and other issues meaning that they need something extra from the business (more salary, dividend or perks).
And many of the fights that ensure are about fairness. Each sibling feels they weren’t treated fairly due to some unique aspects of life that apply to them but not other siblings.
This is why we need to think about fairness early in the process of running a business.
And for many families we find there are unusual circumstances. In fact the unusual seems to be the norm these days. Every family is unique.
I’ve had many clients that have had disabled children that have required special planning. Not only do some of the issues of one sibling working for another come up but issues of long-term care also abound.
When we have a situation where mental, health or other life issues present themselves we must pause and work through the future and possible scenarios.
It Starts With Hard Conversations
As you can see there are a lot of reasons fights can happen in family businesses and the fights are very common. You might be wondering what you can do to avoid such fights. And there is a lot that can be done.
The number one key is to have hard conversations. Everyone must get together and talk – really talk – about the future and their wants and desires. Which children want to be involved in the business? Which don’t?
How will the operation of the business look in the future? Who sets salary, income and other financial metrics? How will fairness be ensured?
The more that can be discussed earlier the better. And it all starts with a conversation, now, about the future.
Hard Conversations Become Plans
And those hard conversations can lead to the “rules” or “game plan” for the business for when the parents aren’t there. The decisions on ownership, management and other issues become part of the company’s plan.
One of the great things about today’s business world is that most companies are formed as LLCs. And the LLC laws of the various US states give a lot of power and flexibility.
If the family can come up with a plan those plans can generally be transferred into company’s legal documents very easily.
Where To Start
So where do you start on all of this?
It starts with acknowledging the future and having a real conversation as a family.
Ultimately the business owner gets to decide what to do with their business but the involvement of family early and throughout the process can make a big difference in how well the business survives, and thrives, in future generations.
What challenges are you having in planning for your family business? Join us in the comments below to discuss.
NOTE: This article is a piece develop a small portion of the content of the book Entrepreneur to CEO being co-authored by The Our Shawn McBride and Ann Gatty. If you want updates on the book including the possibility of joining our release team or getting one of the first copies please join our mailing list here.
By: The Our Shawn McBride, is the man you call when you want a keynote, training or a consultant to get your business ready for The Future of Business. He’s the host of The Future Done Right(TM) Show and a long-time business attorney. If you want regular content on the future of business subscribe to get new blog posts from us here.
**NOTE: Any discussion of legal ideas in any of my public facing materials is not legal advice. You must consult counsel to get legal advice based on your facts and circumstances. Do not rely on the content of this message without consulting a lawyer. No attorney-client relationship is formed by this content (video, blog, etc.) Unless you have retained my firm and I have specifically acknowledged I am your lawyer you should not rely on any of my statements as legal advice.**
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