Decisions Only You Can Make

Create a Legacy With a Family Business

By Mark Ingebretsen

Dr. Bernard Liebowitz knows better than anyone how long-seething family conflicts can ruin an otherwise healthy company. A former family therapist with a Ph.D. in psychology who is now a management consultant, Liebowitz will tell you that those conflicts can grow to Shakespearean proportions when it's time to pass the business from one generation to the next.

The process of transferring a company to the next generation can stir up emotions and issues that have nothing to do with the business itself, Liebowitz explains. One common example: A company owner fails to designate an heir because he is afraid his other sons and daughters will "disown" him. As a result, control of the family enterprise becomes a tug of war among the siblings after the owner dies. Or the eldest child assumes control while her brothers and sisters are still in college. The trouble begins when they graduate and assume a role in the family company. Are they partners or employees?

In part because of situations like this, only slightly more than 30% of family businesses make it to the second generation and fewer than 15% survive to the third generation, according to Joseph Astrachan, editor of the Family Business Review. And only 3% of family businesses are still operating into the fourth generation and beyond.

Decision Time
Ensuring the business you've built continues to serve as your legacy, presumably by remaining within the family's control, takes quite a bit of effort. To make it a smooth transition, the owner must make a number of decisions well before he or she retires, says Lloyd Shefsky, clinical professor of entrepreneurship at Northwestern University's Kellogg School of Management. "Without planning, the odds of survival through multiple successions approximate those of roulette," he says. In fact, says Shefsky, an owner's decisions fall into three areas:

• First, designating which family member will take over the business. This requires deciding not only who has the proper qualifications and desire, but also who is best prepared to both run the business and make it grow.
• Second, determining — with the assistance of financial professional — how the transfer of ownership can occur without incurring excessive estate taxes.
• Third, defining both the company's and the family's culture. It is essential to convey to your heirs your views on the importance of keeping the business, your legacy, in the family.

	Photography by Daniel Bosler/Getty Images

Laying It All on the Table
Planning for a family business' succession sounds simple, but the devil is definitely in the details. Liebowitz advises deciding not just who will take over the business, but also determining which family member — for whatever reason — will not be part of the business. Moreover, everyone in the family should understand who is in, who is out and why. In other words, the son who plans on spending each winter snowboarding in Vail, Colo., should realize his lifestyle choice precludes him from having a say in day-to-day company affairs.

If you have children who are otherwise deserving of an inheritance but do not want a role in the company, consider buying them out. In this instance, insurance can play an important role in your planning. With the insurance policy in place, you can bestow the business to interested children while the others receive the proceeds of the life insurance policy.

At the same time, you must articulate your own intentions about the business' future, Liebowitz says, and how the present situation could change. You might say to a child, for instance, "Look, I would really like for you to come into the business, but if I'm ever offered a significant buyout price, I have to really think about it," Liebowitz says. So if the child enters the business, he or she does so knowing the succession is a business decision like any other: made in the best interest of the business and its owners.

Conversely, you might be adamant that the business remain under family control and would not even consider a buyout. But first you need assurances from your children that they're eager and able to take the reins.

Talking It Out
Such heartfelt family discussions often require the help of an impartial outsider. Liebowitz begins by interviewing each family member in private, one-on-one sessions. He then convenes the entire family for a series of meetings, typically lasting three days. Ideally the meetings take place in a neutral, off-site location.

During the meetings, Liebowitz may, without naming names, bring up concerns raised by family members in the individual sessions. "Families that are more open to begin with are more able to deal with these issues," he says. Some marathon meetings are love fests, while others may degenerate into shouting matches. But even in the latter case, the result may be better than a prolonged family feud that ends up in court, Liebowitz says. He facilitates as family members develop a plan for the company's future. At the meeting's conclusion, the family should draft a document outlining the decisions everyone has agreed on.

Taking a Step Back
In all family business succession decisions, emotions toward both company and family play a crucial role. And the decision to let go may be the most difficult of all. As Shefsky explains, "Entrepreneurs think of their business as their baby. A new parent may feel that no one can care for the kid as well as they do. If they don't get over that, they never go out on a Saturday night. Same with entrepreneurs."

Stepping back before making this decision and understanding how you — the founder or owner — regard the business, can be useful, Liebowitz says. Ask yourself these questions:

• Should the business stay in the family?
• Was the business simply a vehicle to amass wealth to fund other goals?
• Do you run the business because you love it and you want to continue to run it until you die?

If you feel strongly that the company must stay in the family, another weighty emotional issue arises: Whom do you trust to take over the business?

Handing over the reins is tough enough when you choose a professional manager to run the company, Shefsky says. "It's even worse when the successor would be the kid the founder raised, whose every fault was known to the parent and whose old baggage is emotionally embedded, not merely a blip on a financial history."

Discarding such emotional baggage and making decisions to ensure the business' continued growth can take a long time. And so can setting your plan in motion.

Which begs the question: When should you start? "Under the best circumstances, the orientation to the business, the culture and the family ties to the business, should begin shortly after the first child is conceived," jokes Shefsky. "All kidding aside, the earlier the better. Deathbed planning sometimes works, but so does roulette."

Mark Ingebretsen writes a regular column for The Wall Street Journal Online. His most recent book, "Why Companies Fail," was published by Crown

A Company's Legal Form Can Make All the Difference

Illustration by Jim Frazier/ images.com The legal form under which your family business is operated can affect your ability to fight off disgruntled family members, creditors and others who might want a piece of the firm. If your business is structured as a corporation in which you and other family members own stock, your stock is considered your property and, in the event of a lawsuit for whatever reason, it could be seized. Likewise, a judge in divorce proceedings might order your son or daughter to hand over shares as part of the settlement. Instead, pass-through legal entities such as the family limited partnership (FLP) or the limited liability company (LLC) may be a better option. FLPs and LLCs confer greater control in deciding how interest in the company will be divided up as part of your estate or succession plan. For example, placing restrictions on the transferability of ownership interests may allow you to shield them from outsiders — such as the creditors of a wayward son. The same restrictions can also prevent that son from selling off his shares in order to retire early. The family succession scenarios are as diverse as families themselves so owners and their professional advisors must plan accordingly as they craft the family business' framework.

The Importance of Establishing a Vision

Sixty percent of the time when a family business fails, the problem can be traced back to succession issues, according to the Center for Family Enterprises (CFE) at Northwestern University's Kellogg School of Management. By contrast, factors relating purely to business issues were responsible for just 10% to 20% of family businesses failures. Those statistics should remind anyone involved in a family business the importance of succession planning — a point emphasized by attendees of CFE's 2004 Kellogg Family Business Conference. Participants of the conference, co-sponsored by Northern Trust, were polled on numerous topics, including succession issues. Their answers revealed just how important a focus on the future can be. For example, nearly one in four participants said failure to achieve a shared family understanding was preventing them from facilitating a smooth succession. That answer pointed to a basic issue in succession planning, given that the other possible choices were technical items such as a "a buy-sell agreement," an independent board of directors, and "written crises instructions." Without first achieving that all-too-critical understanding among family members, it is impossible to proceed to the nuts-and-bolts issues. Access the answers to these and other questions along with a full downloadable report on the conference at: http://www.kellogg.northwestern.edu/ research/family/images/ conference2004.pdf