Succession Planning in Family Business



Kathryn Munn for The Lawyers Weekly

September 18, 2009

Families must manage conflict in transferring ownership to the next generation

Succession planning is a challenge in any business - especially when the successors are in the same family as the current owners. A large component of successful transition is the management of conflict.

Media attention tends to focus on the difficulties experienced by family businesses in making the transition to the second and third generations. One frequently cited statistic is that 70 percent of family businesses do not make a successful transition to the second generation. The good news is that 30 percent of family businesses do successfully manage the transition.

Conflict is normal. Successful management of conflict creates an opportunity for growth and change and improves relationships. Consider the cost of avoiding conflict, with its accompanying buildup of resentment and discontent.

Part of what makes family businesses successful is the energy and built-in passion for the business. That same passion can become a barrier when the generations are working side by side.

An example of a business operated by a 50-something owner and founder, with his daughter assisting.

Two possible succession paths for a family business:

Succession Path 1

The owner is making the management decisions alone as he has always done. The owner's 20-something daughter is working in the business in a junior role. The owner's first choice for succession of the business is to have it taken over by his daughter. He would like his daughter to show more initiative in her work and has told her this.

Now let's imagine that the situation continues for a couple of years in which father and daughter talk occasionally about how they work together. She tells him that he treats her like a kid and that she does not want this. He disagrees that he does this. He tells her that she should show more initiative. She tells him she is doing her best to go along with his decisions.

By the time they seek legal advice, the father and daughter have recruited other family members to take sides. The signs are not good for this business to make a successful transition from father to daughter.

Succession Path 2

The daughter is thinking about operating the business some day but is not sure if it that is what she really wants to do. She thinks her father treats her like a kid and just seems to expect her to do what he says. She feels that she is not getting work experience that will allow her to develop her management skills or even to decide if or in what role she might be involved long-term in the business. She plans to quit soon if things don't change with her father.

Let's imagine a different direction for this father and daughter. With the assistance of an experienced mediator, they decide how they will work together. They develop a plan for building the skills of the daughter and helping her decide her role in the business. If and when the daughter opts to stay in the business, they move on to develop a transition plan for her, over a period of years, to become gradually more involved in the business role she has chosen and possibly also for the father to be less involved. Other family members are informed and invited to be involved in the planning discussions during family meetings.

Succession path 2 moves this business in a direction much more likely to make a successful transition to the next generation.

How can a lawyer help family business to increase the likelihood of success when planning the transition of the business to the next generation?

Separate owners from managers

In a small company, the lines can be blurred because there may be overlap between the people doing the day- to-day work, the managers and the owners.

As the business grows and evolves, the shareholders may be a different group than the managers of the business. A shareholders' agreement may be a vehicle for the family to deal with critical questions about how to treat family members fairly, even if not equally. Whether or not they are involved directly in the company's operations, a shareholders' agreement is important to address the concerns of shareholders.

Hold regular family meetings

The family is encouraged to hold regular family meetings for which all participants may suggest agenda items. The family may need their lawyer to provide advice at some meetings and may arrange for financial advisers, accountants or other experts to attend on occasion. Invite a professional mediator to get the first few meetings running smoothly and to attend when the topics are likely to cause tension.

Recognize when the family or the business needs a professional mediator

Business families can benefit greatly from the help of an impartial and experienced professional mediator to develop a succession plan that will keep the business and the family thriving.

Kathryn Munn of Munn Conflict Resolution Services is a mediator and arbitrator based in London, Ont. and is a member of a business family.

 


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