Succession: Planning

The influential founder and chair of a multibillion-dollar family company suddenly fell ill. The founder and chair had worked closely with a non-family CEO on a day-to-day basis. Financial performance was deteriorating. The board was concerned about the future of the business and recommended replacing the CEO.

The company’s COO was suggested as the CEO’s successor, although not all board members supported this choice. Without the full support of the board and family, the company had to find additional CEO options. Further complicating matters, the new chair of the board, who succeeded the ill founder, was an inexperienced family member. A controlling shareholder of the company, who was a family director, expected the new chair to be the next CEO.

If this story sounds like a rarity, it’s not — particularly in family-owned businesses, where multiple factors complicate the selection of a new leader. Issues of founder mortality, the perception that the CEO and brand are inseparable, and assumptions about future roles of family members all intertwine, leading overwhelmed company leaders to delay or ignore succession planning.

Unfortunately, procrastination often leads to devastating consequences for the business. PwC’s 2019 U.S. Family Business Survey found that a mere 18% of respondents had a succession plan that was documented and communicated. Additionally, family-owned companies often have the same leaders for 20 years or longer, compared with the average public company CEO tenure of about five years, making transition planning a low priority until a triggering event occurs.

Why succession planning takes a backseat
One reason family CEOs tend to avoid the topic of succession is that it leads them to consider their own mortality. Additionally, when CEOs are also founders or born into the business, they often remain at the helm past the time when they are able to be strong contributors because they feel such strong ownership of the company. Furthermore, the board and other owners might be reluctant to ask an iconic leader to step down, which leads to delaying the succession conversation until an emergency occurs.

The family business discussed above found itself in an emergency situation as the business quickly deteriorated without the presence of the influential founder and chair. The board and CEO had not prioritized succession planning, instead hoping that good leadership would emerge. Without full support from the board, the plan for the COO to assume the CEO role was more of a suggestion than a strategy. The new chair, realizing he needed help, engaged us to assess the CEO options, and we concluded that the best candidate was, in fact, the unsupported COO. However, the controlling shareholder pushed back after our assessment and benchmarking exercise. We advised the family, “If you have any doubts, don’t put the COO into that role.” 

In family businesses, the CEO expectations can be complex. Competencies and skills matter, but culture fit and trust are equally important. In this situation, the shareholder did not trust the COO (although the individual was the right fit on paper). Given these internal dynamics, it would have been difficult for an external leader to come in and be successful. A deeper talent assessment found a high-potential candidate in another part of the business to assume the CEO role. This candidate was not an obvious choice. He had never led a relevant business, but he was highly capable of succeeding with the right support system in place.

In this situation, the family and leadership were not aligned on succession planning — from who owned the decision to how to conduct the process. Another reason family businesses avoid this topic centers on the difficult conversations that inevitably arise. How does a board or a CEO tell an heir apparent they’re not the right person for the job? In most cases, the senior leadership, the board or the family (or all of these) know the shortcomings of a potential leader, but they keep quiet because of the emotions involved. Sometimes an objective third party can help deliver difficult news and be an objective listener and mediator. The multibillion-dollar company in our example understood that having the right CEO was essential and prudently gathered external data to expand the successor options rather than make a complex and critical business decision based solely on internal perspectives.

The risks of solo planning
A one-sided approach to succession planning can alienate stakeholders and potentially destroy value. Take the following example: A third-generation CEO has anointed his son to be his successor. The current CEO’s cousins, who are also owners and board members, believe the son could be capable of being CEO in the future, but he is not ready now. Compounding matters, the business faces a difficult industry environment and is underperforming financially, making the owners highly concerned about an unprepared leader. The CEO has threatened to leave if the other owners make his son wait 10 years until they think he is ready. The CEO also will not allow the board to have a conversation about the succession plan or allow his son to have a voice in the conversation. The owners are considering selling their shares in the business because they feel as if they have no control over its future.

When pushed, some family CEOs may develop a succession plan based on what they personally believe is important (e.g., continuing a legacy, bringing in an external candidate) and expect the rest of the ownership group to accept it without question. When the plan isn’t shared, there is no opportunity to address parts of the plan that could be negotiated. For example, if a CEO selects a successor who is not prepared to fill the role, the board could push for a development plan, coaching or new team members to provide skills and capabilities the successor lacks.

The expense of emergency planning
Waiting to find a successor until a triggering event occurs is expensive — not just financially but also emotionally. The CEO of a $1 billion company hit retirement age, felt he was not being compensated properly and was ready to leave the company. Another family member was a vice president who both wanted to be CEO and believed he had the right to be. However, the board and the current CEO didn’t believe this VP was right for the position, so an outside COO was brought in to be groomed for the top job.

With the clock ticking on the CEO’s retirement, a few issues came to light. A talent analysis confirmed that the VP was not right for the CEO role and also uncovered some issues with the incoming COO. A new candidate had to be brought in, and both the VP and the COO left the company.

Because this succession was prompted by a problem, there were very few options for CEO candidates. Had the company engaged in planning a few years earlier, there could have been a COO in place who had the potential to grow, or the VP could have embarked on a development plan earlier so as to be ready to assume the CEO role. The situation was also costly in that two high-level leaders left the company and needed to be replaced.

Navigating emotions
Family businesses can benefit from the following guiding principles:

• Start earlier than you think you should. As illustrated in the examples, most companies lack a perfect candidate within the organization. Advance planning provides time to develop people internally as well as to consider external talent that can be brought in and groomed for a higher-level position. It also creates the opportunity for external leaders to develop trust among the family ownership group. If an internal successor is groomed, the fact that they have gone through all the right steps will engender family trust. 

• Articulate what’s important to the family and the business. Given the complex dynamics of a family business, it’s essential to create an environment where everyone feels heard and to facilitate an open dialogue about the future of the company. What is important to the family? Is it perpetuity, long-term employment, the environment, social impact? How important is it to have a leader of the business from the family itself? Does the family leader need to be the CEO, or can this person be chair? Is it important to support next-generation involvement in the business? By understanding the parameters, the family can clarify the tradeoffs and their implications in a robust discussion. Having multiple opportunities to discuss these questions will aid family cohesion in the long run, even if it’s uncomfortable now.

• Define the roles and rights of all stakeholders in the succession process. Defining the role of the ownership group, the current CEO and the board will provide the family a voice while also ensuring clarity in the decision-making process. It also ensures that the right (and most qualified) individuals are weighing in on a very critical decision — to whom will the future of the family business be entrusted?

• Proactively communicate with the ownership group about succession planning. Letting the family know the timeline for succession, and informing them of the role of the board and the steps in the process, builds trust that the issue is being handled professionally, with the goal of identifying the best leader for the business. While it’s not appropriate to share candidate evaluations with the family, assuring family stakeholders that a fair and objective process is being followed can increase their acceptance of the outcome.

Succession planning in family companies is a difficult process. It combines emotional and organizational change and all of the associated feelings. Proactive planning alleviates some of the stress, offers more talent options for the CEO role, provides the family a voice in the process and gives the company a much better chance at surviving for multiple generations.                                                  

German Herrera leads the Family Business Advisory and the Industrial Practice for North America at Egon Zehnder. Julie Kalt is a research principal and North American practice specialist for assessment and development at the firm. Jennifer Pendergast, a senior adviser to the firm, is John L. Ward Clinical Professor of Family Enterprises and faculty director of the Center for Family Enterprises at Kellogg School of Management at Northwestern University.

Copyright 2019 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.

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Although many people have encountered MacLean-Fogg Co.’s products, they probably haven’t noticed them, unless they’ve looked at the hardware that sits atop telephone poles or the parts inside car exhaust systems and transmissions, such as gear blanks and wheel nuts.

The company, built by the MacLean family over the past 94 years, now generates $1 billion in annual revenues. Its success attests to its ability to live up to its founder’s goal, as stated by Duncan MacLean, the president and CEO: “We solve customers’ problems for a fair price, on time.”

Today, the company, based in Mundelein, Ill., operates 23 factories all over the world that make engineered components for the electrical, telecom and automotive industries. MacLean-Fogg has two primary businesses: MacLean-Fogg Power Systems, which serves the electric utility, telecommunications and civil markets; and MacLean-Fogg Component Solutions, which serves the automotive, heavy truck and other industries.

As MacLean-Fogg’s leadership moves from the third generation to the fourth, the company is managing change on several fronts: in its leadership, its board, the shareholders, the family foundation and the family office.

“This company and this family are going through predictable but profound transitions in both leadership and governance,” says Rodney L. Goldstein, co-managing partner of Wealth Strategist Partners, a firm that manages wealth and advises large, complex families with substantial assets. He started informally advising the family almost a decade ago and joined the board several years ago.

Barry MacLean, 80, the sole third-generation member in the business (with the exception of his brother David, who serves on the board), remains as chairman but has turned over the president and CEO role to his son, Duncan, 47. Barry’s five children are becoming active shareholders: Liz Larned, 57; Margaret MacLean, 54, who recently left her position with the operating business; Duncan; Gillian Growdon, 45, who runs the family office as executive vice president of shareholder relations; and Adrian Jay, 43.

The transitions, some of which are still ongoing, have been taking place — with careful planning — over the past several years.

“A company doesn’t get to be 94 years old if you do things impulsively,” says Duncan.

Nuts-and-bolts roots
The company was founded in 1925 by John A. MacLean, the great-grandfather of the current CEO and his siblings. He was followed as president by his son, John A. MacLean Jr., and, in 1972, his grandson Barry.

The company started out manufacturing nuts and bolts, primarily for railroad cars. (The “Fogg” in the company’s name recognizes Jack Fogg, an early employee who was key to the success of the business because of his connections in the railroad industry.) Over the years, ­MacLean-Fogg has expanded to make parts for automobile manufacturers and power companies.

Barry grew up with two older brothers, spending many Saturdays at the office with his father. He loved building things and tinkering; he recalls heating up lead to make lead soldiers and building a chicken coop with his oldest brother. “I had several businesses in high school and college and enjoyed working with my hands to solve problems and offer services in my community,” Barry says.

He graduated from Dartmouth College with a master’s degree, then came to work at the family business with his oldest brother, John A. MacLean III. They worked together for a year before his brother was killed in a plane crash. (David, the middle of the three sons, pursued a different career path and never worked for the company except as a director.)

Would his older brother have taken over the company if he had lived? “We very much enjoyed working together. We both liked building things, and we dreamt about growing the company,” Barry says. “We’ll never know who would have been in charge if he had lived.”

Barry gradually bought out the shares of his older brother’s family, as well as those of the middle brother, consolidating the ownership.

During the 1978-80 recession, the company saw its sales plunge, with business from the railroad industry shrinking by almost 90%. “Everybody took a hit financially, and we weathered the storm,” Barry says.

With the railroad business taking a while to recover, Barry focused on building the automotive business. He eventually sold the railroad part of the company and made an acquisition to start supplying the power industry. For a time in the mid-’90s, MacLean-Fogg also made products for the healthcare industry.

MacLean-Fogg’s 1986 acquisition of Reliable Power Products marked the company’s entry into the power business. That was a pivotal decision, Gillian says. “It diversified the business significantly and allowed us to ride through the cycles of the automotive business.”

Barry’s children remember the easy mixing of business and family as they were growing up.

“We really were a family business — customers and colleagues of my dad were always coming and going through our house,” says Adrian. “My mom had the ability at the drop of a hat to entertain people.” Barry’s wife, Mary Ann, died in 2016.

Adrian and her husband are co-founders of Random Acts of Flowers, a non-profit organization that delivers bouquets of recycled flowers to people in hospitals, assisted living facilities and hospitals. She has never worked full-time for the company but is very engaged as a shareholder, working with the MacLean Family Foundation and bringing her children from Tennessee on plant visits, for family assembly meetings and to the annual company Christmas party.

“We had this wonderful enterprise, but there wasn’t ever any pressure that this was your path,” Adrian says. “If you had another path, there was full enthusiasm and support.”

Leadership transition
Duncan’s ascent to the role of president and CEO was the culmination of years of training at the company and with one of its partners.

“I started in quality control and learned what happens when something goes wrong with the manufacturing of complex parts,” Duncan says of his early jobs with MacLean-Fogg, during high school and college. He also worked in the maintenance department doing cleanup.

“These are the kinds of jobs that were hard at the time but have paid real dividends — all the guys know that I haven’t always had a desk job,” Duncan says.

Later he worked in the machine shop, which convinced him that he wanted to be an engineer.

Duncan joined the company full-time as a manufacturing engineer for MacLean Power Systems right after graduate school, in 1996. He was elected to the board in 1998. He points to two pivotal events in his career: his move to Germany from 1999 to 2003 and his management of the automotive side of the business through the 2008 ­recession.

MacLean-Fogg and a German company were partners in a U.S.-based joint venture, Metform. The German partner asked Duncan to work at a separate facility, Erich Neumayer GmbH. Duncan says that during those years he learned not only about another culture but also about other ways to do business. He also started a business there for MacLean-Fogg.

He became president of the auto side of MacLean-Fogg in 2008 and was immediately challenged by the recession. He managed the business very tightly and closed or sold five plants. Most of the production assets of the German business he had started were sold at this time.

“The recession made me the executive I am,” Duncan says. “It proved to our banks, the board and my father that I wasn’t just the son, I was a competent executive.”

Duncan notes that the recession also changed the culture of the company. “In 2009, we started to make really tough business decisions,” he says. “We installed modern thinking. That was critical for our success. The auto side doubled in size in the succeeding eight years.”

Duncan took over as president of all of MacLean-Fogg in 2015 and as CEO in 2017.

“This has been a natural evolution,” Goldstein says. “It’s been carefully guided, but it has worked in large measure because Barry determined that perpetuation of the business was a high calling, and because Duncan has great capability and terrific experience, as well.”

The transition means more than just a new family member as CEO.

“My dad is a real visionary — he grew this business from a small family business to what it is today,” says Adrian. “My brother has his own style and has proven to be an incredibly capable and innovative operator. It’s exciting to see not only the transition in leadership but also to see a different style.”

Board transition
The transition to a new CEO is also leading, gradually, to a revamping of the board of directors.

Independent directors have served on MacLean-Fogg’s board for decades. Today, the board consists of four family members and seven independent directors.

“We have a lot of very intelligent people on the board that have had the best interests of our family at heart for many years,” Duncan says. “As we transition the board, we’re going to start thinking about the specific skillsets we need. We are no longer a mom-and-pop business — the problems we’re facing now weren’t conceivable many years ago.”

A governance committee, a subset of the board under Goldstein’s leadership formed in 2018, is looking at how the board’s composition may evolve. Committee members are considering the ideal size and mix of experience to support the new CEO and the company’s next chapters. The committee is building a bridge between the board and the shareholders, meeting twice a year with the next-generation shareholders, Barry’s children.

“That bridge hadn’t existed before for the non-operating shareholders,” Duncan says. “Now we are making sure the shareholders stay plugged into how the values of the family are playing out in the business, understand the risks of investments, and know the other duties of shareholders.”

Family governance transitions
The MacLean family office is also in transition, moving from primarily supporting Barry to now supporting all six shareholders, as well as other family members.

“Everything has grown in complexity from the way it has historically been managed,” Goldstein says.

The family office has existed for more than a decade. Until recently, it primarily supported Barry. In May 2016, Gillian took over the family office as part of the effort to expand it to serve the households of all six shareholders.

As executive vice president of shareholder relations and head of the family office, Gillian oversees family estate planning, tax planning, financial planning, shareholder education for the current generation of shareholders and the next, and family gatherings and retreats. She also oversees, in consultation with Barry, the family’s investments outside of MacLean-Fogg, in private equity and other small operating businesses.

The initial priorities for her office, as set by the family shareholders, were to kick off education of the next generation with a family assembly, increase communication and transparency, manage family-owned assets and offer help with tax compliance.

“The first thing was to get everyone together and tell them about our legacy, stewardship, and what the company does. We’d never actually done that,” says Gillian.

“Since then, we have learned more about what we call the ‘black boxes.’ How do the ownership trusts work? What other companies has Dad invested in? The family office started unpacking these, with an appropriate review with my dad, so we could make a decision and move along.”

A key part of this transition is separating the operating company and the family office.

“Duncan leads the operating company, and Gillian leads the family office,” Goldstein says. “We are going out of our way to separate the two so the board can be focused on operating matters, while also ensuring that there is consistent communication and transparency across the two.”

Along with the leadership changes have come changes in ownership. The company’s six shareholders are Barry and his five children. Although the fourth-generation siblings have long been shareholders, the majority of the voting shares have remained with Barry.

Barry is now transitioning the leadership and responsibility of being a shareholder to the fourth generation. No members of the fifth generation are shareholders yet, which is a future area of focus for the company.

The shareholders have made a formal decision that the perpetuation of the business under family ownership is a key objective — giving the board clear direction about the shareholders’ desires.

The MacLean Family Foundation is also going through changes, becoming a full grantmaking foundation. Adrian is president; Duncan’s wife, Brooke MacLean, is vice president; and Gillian is secretary. The foundation, the vehicle for the family’s giving, has long supported the Brookfield Zoo and other causes.

The family has faced challenges in making all these transitions work.

“Transitions have a way of testing relationships, and it takes hard work to actively care for them,” says Gillian. “We’re in the middle of that. We love each other, and we have a commitment to this business. It can be hard, though.”

One example: balancing the multiple roles the family members play at work and at home.

“At work, I’m a sister, I’m a daughter, I’m the head of the family office, I’m a shareholder,” Gillian says. “Each of us has many different roles. We all have to practice knowing the context of our conversations to play the right role at the right time.”

Looking to the future
While the transition to the fourth generation is under way, the family is looking ahead to future generational changes. There are 12 members of the fifth generation, ages 7 to 23. Two of them have participated in internships at the company. At family assemblies, the family has started teaching younger family members about legacy, stewardship and the values of the family in business and in life.

In addition to working with Goldstein, the family has engaged Renee Montoya Lado of Strategic Designs for Learning, who serves as a coach for the five fourth-generation siblings and their spouses. Elizabeth Kieff and Tom Levinson of LK Advisors designed the curriculum for the family’s annual assembly and provide coaching for the fifth generation.

It’s too early to identify a successor to Duncan, and family members are open to many options.
“We’ve made the decision that we want this business to exist for generations to come, so we will need to make difficult decisions,” says Duncan. “For example, will we always have a family member CEO?”

The company is investing in technology and “modern ways of thinking,” says Duncan. “It doesn’t mean what we’ve done in the past is wrong. My dad was a terrifically successful CEO by any measure. But if you stagnate, you kill the company. What worked in the past might not work in the future.”                                               

Margaret Steen is a freelance writer based in Los Altos, Calif.

Copyright 2019 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.

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The WM Fares Group of Halifax, N.S., began planning for generational transition when the three second-generation siblings began asking questions about how decisions would be made in the future.

Wadih Fares, the 62-year-old patriarch and founder of the property development company, has the last word on business decisions. But in 2012, his children began to wonder how the process would work when he was no longer at the helm.

With that question in mind, the family took a page from their playbook as successful builders and laid a foundation for the future. Family-centric procedures and a new, detailed succession plan are now in place.

“It was very difficult for me, but it is the only responsible way to make plans for the future,” says Wadih. Two of Wadih’s three children work for the family company. The third, an entrepreneur who runs her own healthcare company, is also part of the succession plan.

“My father realized during this process that it’s not going to be as simple as ‘his way or the highway’ forever,” says Wadih’s son, Maurice Fares, 31. “With three young professional owners coming up, more questions are going to be asked.”

Preserving family harmony is paramount in this family business. “We’re all very close, and those relationships will always be the most important,” Maurice says.

From the ground up

Wadih founded the WM Fares Group in 1983, less than 10 years after he fled civil-war-torn Lebanon, his native land, and went to work doing odd jobs like cleaning up construction sites for an uncle in Halifax. He was supported by those jobs and family connections while he studied engineering at Dalhousie University, a juggling of responsibilities that was especially challenging because he did not speak much English at the time. His first project was a small, single-family home he designed for a friend. His second was a 12-unit apartment building that the same friend — now a satisfied customer — wanted to build. Word of mouth, fueled by an unrelenting work ethic, led to greater successes.

Today, buildings designed, built and managed by the WM Fares Group shape the Halifax skyline and streetscape. The company’s projects also can be found in communities throughout the Maritime Provinces, Ontario and Alberta. Wadih himself, still very active in the business, also serves as Honorary Consul of Lebanon for the Maritimes. He holds a seat on the Dalhousie University Board of Governors and on the Nova Scotia Minister’s Immigration Advisory Council. He has received awards and honors from organizations spanning three continents.

Perhaps the company’s signature project to date is the Trillium, a $40 million mixed-use development in the heart of Halifax that was the first skyscraper built downtown in 25 years. “My father still calls it his baby,” says daughter Zana Fares-Choueiri. “He broke ground during the crash of 2008, and it really put us on the map.”

Zana, 34, an engineer who joined the business in 2006 and now runs the company’s construction operations, remembers the date well, since her first child was born on the day of the groundbreaking. “When we were building the Trillium, it was the only project downtown,” she says. “Now you see four or five cranes going all the time.”

Building on their reputation

The WM Fares Group is built on a business model that brings together all the various components of real estate development projects. It finds opportunities, sites and financing. Its architects design buildings that its construction arm builds. Its management division finds tenants and operates properties. The company has about 15 employees in the office and another 15 who work outside the office in property management and construction supervision.

In addition to building for other developers, WM Fares competes with them for sites and projects that it builds for itself. As one might imagine, working that way with competitors isn’t possible without their trust. “Ninety percent of the developers in the city are my clients,” Wadih says. “That goes back to the reputation you build for yourself through the service you give day in and day out.”

Family ownership adds to that reputation, according to Zana. “When it is your family’s business, you take more pride in the projects and what the company is doing,” she says. “You have more responsibility to make the product great. A customer who sees my father, my brother and myself working together [has] a good feeling. They get some security from it.”

Zana oversees construction projects. Her brother Maurice supervises property management and serves as VP of operations. He is Wadih’s right-hand man and designated successor. Both he and Zana grew up in the business and value their father’s guidance. “When you feel like things are a little bit overwhelming, it’s good to have someone there who’s been through it before,” Maurice says. “He’s always quick to remind us that we’re not the first people to build and manage buildings. We’re going to have good times and bad times, and we just have to enjoy doing it.”

Running the business can sometimes be complicated by family ties, however. “It’s very difficult to separate family issues and business issues,” Zana points out. “There are a lot of family issues discussed in the office and a lot of business issues discussed outside the office. We try very hard to separate the two, but many times issues will come up in a casual setting.”

As the patriarch, Wadih outranks his children and can overrule them. “At the end of the day, it’s his final word,” Zana says. “Having said that, we are part of the discussion,
and we can change the way he looks at something. We bring information to the table, and many times he will change his mind.”

For example, Zana describes a discussion with her father about the timing of asphalt paving installation around a building. “I explained my reasons, and he went with my decision,” she says.

Answering key questions

Maurice says the family realized the need to move forward on a succession plan soon after he joined the company
full-time. Zana, his older sister, was already working in the business. His twin sister, Monique Fares, was finishing her graduate education and preparing to pursue an entrepreneurial path in healthcare.

“Three young adults, who were all educated, were starting to ask questions,” Maurice says. “They hadn’t asked before, but now they were interested in knowing.”

Maurice says Wadih was proud that the questions his children were asking were the right ones. “He wanted to
make sure everything is laid out for us,” Maurice says.

A succession-planning firm had been in touch with the family, and Wadih agreed to start the process with those advisers. Through a lengthy series of conversations about the future, Maurice says, “we put a blueprint together.” The family developed a variety of strategies: a shareholder agreement for the second generation, ownership and management structures, share structures and tax planning. The process took about a year.

“What’s nice about it is that we’ve all agreed on a certain way this company is going to be run in the future when Mom and Dad aren’t around anymore,” Zana says. “But it’s more than who’s going to be running the show. Our own wills are attached to the succession plan. It’s who is going to end up with the wealth in the end, how they’re going to get it and how our children fit into it. Trust funds and insurance plans are all part of the document.
It was very complicated, but the process involved all of us and we all had a say in how we wanted our money to be handled.”

That included spouses as well as Monique. “From my standpoint, it went very smoothly,” Monique says. “Our entire family has a great working relationship, and I trusted the decisions they were making about the company.
They kept me very informed about the decisions they were making.”

Their mother, Cathy, participated in the discussions also, not surprising given how involved she has been with the company since its early days operating from her kitchen table. “I am the sounding board in the family,” Cathy says. “I am the one the kids can come to, and I’ll talk to their father.” During the succession-planning process, Cathy says, “I made sure Monique’s voice was heard, for example, as well as my son- and daughter-in-law’s.”

The process was completed in 2016 and, as far as Wadih is concerned, everything is settled. “We made some hard decisions as a family about how [they] are going to run the company after I am gone,” he says. “Maurice will be in charge. All major financial decisions will be made between him and his sisters. A two-out-of-three vote will make major decisions.”

Looking ahead

Maurice and Zana are happy with the plan for the future operation of the business, but note there will always be room for change. “I call it ‘Phase One,’” Maurice says. “If we sat around and talked about the future of the company now, it might be different because some people might think differently than they did a few years ago. It’s an evolving, multi-phase process, but it helped everyone be more comfortable.”

“In the short term, we will continue to run the business as it is,” Zana says. Farther out in the future, things might change, she notes. “Some of us may say we’re going to keep working until we’re 80 years old, while some of us may say, ‘Why do we need to do that? Let’s try to retire and not work our whole lives if we don’t have to.’ We’re very fortunate to be in that position.”

Wadih takes a long view, too. “What I’m doing now, I want my children to do for their children,” he says. The third-generation members are currently all under age 10.

“It’s important to organize your affairs and make sure the family is still together,” Wadih says. “Family unity is the most important thing.” 

Dave Donelson is a business writer in West Harrison, N.Y.

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The path from starting up a business to planning your exit is a winding one, with plenty of speed bumps and potholes. One of the biggest potholes results from the failure to include liquidity planning as part of the business succession planning process.

As part of the preparations to sell the company or pass it on to a family member, a business owner should develop a wealth management strategy that minimizes taxes.

Regardless of the size of their companies, all business owners should create a succession plan that meets their personal needs as well as the needs of the business. The effect of the asset transfer on the business owner’s estate plan should also be addressed. If the business is sold, the entire family will be affected by the transaction. A well-thought-out and well-executed personal plan provides greater opportunities for generational wealth creation and helps reduce anxiety. 

Here are some questions family business owners should consider as a first step in the planning process, along with examples from a real-world family situation.

Is selling the business the best option for your family? Many business owners need an exit plan that provides retirement income for themselves and their spouses. Those who want to name a family member as their successor may be torn between realizing the dream of continuing family ownership and meeting their personal liquidity needs. Another complicating factor arises when the prospective successor is not yet ready to lead the business. With proper planning and time to address these issues, a strategy can be developed that provides an income stream for the retiring leader.

As Mr. Smith approached his 69th birthday, he realized that no member of his family was ready to succeed him at the helm of his company. Neither of his children had joined the business. His nephew, who worked in the company, was only 27 and needed at least a decade’s worth of experience before he’d be ready to take the reins. At that point, Mr. Smith would be nearly 80. He began to rethink his plans and decided to sell the company. Eventually, we helped him structure a succession plan through a private equity buyout that allowed him to exit the company just before his 71st birthday.

Are you and your spouse interested in charitable giving? It makes sense to time a philanthropic gift so as to counteract capital gains taxes. Techniques to maximize charitable giving and minimize income taxes can be executed prior to your exit from the business. You and your financial adviser should determine which strategy — such as a donor-advised fund, a family foundation or a charitable trust — would work best for your financial situation. Additionally, creating a charitable vehicle can provide the family with an opportunity to continue to work together after the family business is sold.

The Smith family wanted to give back to the community that supported their business. Mr. and Mrs. Smith also wanted the family’s next generation to participate in their philanthropic endeavors. During the business succession planning process, the whole family discussed their charitable goals. The Smiths created a donor-advised fund and transferred some of the company shares to the fund. The fund held the shares until the company was sold. When the transaction occurred, there were no tax implications on the shares of the company held within the donor-advised fund. After the sale, the family used the liquidity within the fund to make gifts to local charities.

Special Section: The quest for liquidity

The ABCs of PE

Private equity pros and cons

Family offices: 'Quiet capital'

Creating shareholder liquidity: A checklist before going public

Should you establish trust funds for your children/grandchildren? If you want your children and grandchildren to benefit from the sale of your business, it may be more beneficial — for both you and them — to establish a trust and fund it with business interests before the ownership transition. Simple planning techniques implemented before an event can significantly increase the transaction value for the family as a whole. In addition to being tax-efficient, a trust allows you to establish provisions governing how and when money will be distributed to your heirs.

The Smiths wanted to set aside money not only for their children and grandchildren, but also for their nephew, who had worked in the company since his teenage years. They wanted to encourage their nephew’s entrepreneurial spirit now that the operating company was to be sold.

The Smiths established a trust — funded with stock before the sale — to benefit their children and grandchildren. The trust was structured so that the children and grandchildren could access money immediately for education and health needs. More generous access was delayed until later in life, because the parents felt it was important that each member of the family have a strong work ethic.

The business’s real estate holdings were not part of the sale; the Smiths gifted these interests to a trust for the nephew’s benefit. The nephew became actively involved in managing the real estate.

How will each family member handle the wealth? This may be the hardest question to answer. If your family didn’t always have significant wealth, will everyone be able to responsibly manage money after your liquidity event? This is something you’ll need to discuss candidly with your spouse. It is important to develop a life plan for you and your family members after the transaction. Most importantly, take time before the liquidity event to educate the family and discuss your goals and expectations.

Many business owners begin the education process well in advance of a transition. Turning over a small amount of money to family members gives them experience in working with an adviser and offers insight into how each individual might invest (or spend) in the future. This information can be helpful in determining whether to turn over future assets outright or in trust.

In the months leading up to the sale of the Smiths’ business, they held facilitated educational sessions and family meetings for their adult children. The conversations were dynamic and included not only financial matters, but also the family values and mission. This helped promote stewardship of the assets.

Planning for the future
Pondering these questions and working with your advisers to come up with answers will help you to develop a business succession plan in parallel with a family financial plan. You may not be ready to retire or exit from your business right now, but having a plan in your back pocket will smooth the way for you, your company and your family when it’s time to think about a transition.                      

Amy M. Kane is a senior wealth planner and Brooks Rarden is a senior portfolio manager for U.S. Bank’s Private Wealth Management. Both are based in Denver.

Copyright 2018 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.

          

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CNBC analyst Jim Cramer raised some eyebrows recently when he stated on his show, Mad Money, that Walmart was going toe-to-toe with Amazon; Walmart isn’t generally seen as a rising powerhouse in e-commerce. But this comment by Cramer about Walmart CEO Doug McMillon drew even more of my attention: “As long as he’s got the backing of the family, he can afford to take some short-term hits in order to grow the company’s e-commerce presence. That’s a real rarity in this game.”

Cramer was, of course, referring to the Walton family, which owns just over half of the massive company. Whether his analysis of Walmart’s competitive position in the online space is on point is not yet known. Regardless, it’s clear that Walmart, founded by Sam Walton in 1962, has maintained its rise while remaining a family-controlled enterprise—and an extraordinarily successful one at that.

Not all family businesses experience smooth generational transitions; even the Gucci empire fell victim to family infighting and scandal. Thousands of mom-and-pop enterprises, formed as sole proprietorships with the hopes of passing the business down to future generations, have instead ground to a screeching halt.

In my decades of advising family businesses, from startups to billion-dollar corporations, one theme repeatedly emerges: “transition shock.” Transition shock happens when family business owners fail to understand the critical need for succession planning, mistakenly putting all faith in the power of the family unit to sustain through change. Owners of both large and small family companies can increase the odds of a successful generational transition by incorporating continuity planning into their succession strategies.

Transitions require a new, consistent management approach
Founders start their companies as a means of creating a comfortable life. They might envision selling their businesses before retiring. But when their children grow to adulthood, many business-owning parents decide not to sell and instead think about leaving a legacy for children and grandchildren. When a generational handoff occurs, the decision-making process must be redefined to foster continuity.

Leadership at a sole proprietorship is limited to one or two owner/managers, so decision making is simple. Engaging another individual or two—or three or more—requires a more formal management approach. Those who inherit the business are technically shareholders in a joint venture. There must be clear processes in place to ensure consistency in planning and execution, and that all parties are operating on a level playing field. And that’s in the simplest case, when ownership transfers to direct descendants, such as a sibling group. When others become involved—such as cousins or in-laws—the limits of “shareholder rights” and shared responsibility are tested even more.

Frank Foster, the managing general partner of the Gideon Hixon Fund, shared how this can put be into action. Foster is the great-great-great-grandson of Gideon Cooley Hixon, a Wisconsin businessman who started the Hixon empire through investments made after the Civil War. Many of Hixon’s descendants still manage the family’s interests. In fact, the Gideon Hixon Fund proudly proclaims on its website that the firm “utilizes and expands on the experience of six generations of family business.” Foster noted that the family holds annual meetings and educational programs, and provides internships for younger family members. In other words, relatives in the family business are treated as shareholders. According to Foster, family businesses allocate as much time and as many resources to shareholder relations as public companies do.

What happens when continuity planning is overlooked?
When families put all their faith in “family ties,” they overlook how the complexity of ownership change—and, sometimes, basic human nature—might affect family dynamics. A 2014 PwC report noted, “Conflicts in family businesses are rarely caused by poor business performance; most conflicts arise because the family owners perceive that their needs are not met.” Does that sound familiar?

In its best iteration, a family enterprise benefits from the presence of trust, cohesiveness of familial bonds, shared goals and collaborative decision making. But in times of succession, those attributes can fall by the wayside. Researchers cite “reluctance to embrace necessary change, family conflict, refusal to admit ideas from the outside, and nepotism” as detrimental to continuity of a family business and the preservation of family bonds (Mary Barrett, “Theories to define and understand family firms,” in H. Hassan [ed.], Being Practical with Theory: A Window into Business Research, Wollongong, Australia, THEORI, 2014).

While it may seem intuitive that “communication” is the answer, that often only scratches the surface of deeply ingrained resentment and bitterness. In and of itself, communication is not a business strategy but rather a tactic to implement a strategy. Thoughtful continuity planning doesn’t attempt to “talk through” barriers; it recognizes the reality of their existence and factors them into plans. Continuity plans must address not only how business leadership will change, but also how ownership and decision making will change.

If, for example, owners are concerned about a family beneficiary’s business acumen, they might include a requirement for that individual to enroll in a graduate business program or a non-credit seminar, learn through an internal training program or accept on-the-job training for a specific period. There also should be clear upfront expectations about changes as a result of death, divorce or poor performance.

Most important, there should be buy-in to the terms of any ownership change or executive transition: Is ownership transferred proportionately among second-generation owners, or does it take into account the number of children in each family? How will the voices of owners not in leadership roles be included in decision making about the enterprise? Who will hold the next generation of executives accountable for considering the interests of all owners when making decisions about company spending? What governance structures will be established to ensure stewardship of the family assets for generations to come?

In an enterprise that is publicly traded or owned by private equity, this might make for a lively boardroom debate. But in a family, where one person’s hurt feelings affect every other member of the family business system, planning can mean the difference between a generational handoff and the end of the company.

The most important family business asset: ‘patient capital’
Family business owners must consider how committed they are to maintaining “patient capital”—taking a long-term view in decision making, rather than adopting the short-term perspective of an “impatient” trader. Patient capital is essential to maintaining the health and stability of family businesses, especially when there are many shareholders who must lean on this capital when necessary.

Patient capital is the single most important factor that can make or break a family succession plan. When Alan Mulally took over as CEO of Ford Motor Company, he presented his controversial plan to mortgage all of the company’s U.S. assets to hedge against the recession. Bill Ford, then the chairman of the company, called a meeting to discuss the plan, which would essentially mortgage the Ford family name. After hearing from Mulally and investment bankers, Ford dismissed everyone who wasn’t a family shareholder, and a “spirited” discussion ensued. After gaining the unified support of the Ford family to stay the course, Mulally turned down government bailout funds. Ford was the only one of the Big Three auto manufacturers to do so, and Mulally faced added criticism. But not one member of the Ford family ever publicly criticized the decision. Mulally was eventually viewed as a visionary leader. That’s using patient capital.

Patient capital also appears to be a key asset of the Walmart operation. When CEO Doug McMillon determined that the company could gain trajectory in online retail, he successfully sought approval from the Walton family. According to Jim Cramer, it was the family’s approval—not the company’s remarkably solid quarterly financials—that put the online strategy in play. 

Of course, not every family company is as sprawling as Walmart. But all family business owners can increase the odds that their companies will transcend transition shock and flourish by committing to continuity planning, communicating openly, emphasizing stakeholder accountability and contributing patient capital. 

Otis Baskin, Ph.D., served as dean of Pepperdine Graziadio School of Business and Management from 1995-2001 and is currently an emeritus professor of management. As a consultant of The Family Business Consulting Group, he has worked with family-owned businesses in the United States, Middle East, Europe, Asia and Latin America over the past 20 years.

Copyright 2017 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.
 

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Effective succession planning is a multidisciplinary process that combines an understanding of the psychological dimensions of the business-owning family with the legal structures necessary to realize the business leader's desires and objectives. What does the exiting leader wish to accomplish, and how can he or she achieve those goals while keeping the estate, the family and—if desired—the business intact?

The failure of many family businesses to transition successfully to the next generation is legendary. What is often unappreciated, however, is that barriers to exit and effective exit planning frequently have emotional underpinnings. An owner's powerful emotions often play a significant role in the decision to sell, not to sell, or to transition a business. While family members may humorously refer to the business as the owner's "child" or "favorite child," the emotional force behind these comments may come to dominate succession planning in counterproductive, if not destructive, ways. Failure to discern and address these factors may result in significant reduction in value.

Emotional factors may override sensible decision making in many areas, including overvaluation of the business, the decision to sell at a time of low value, and the wrong successor being chosen for the wrong reason.

Conflict commonly arises between a group of second- or third-generation owners who are employed in the business and a group of their siblings or cousins who are not. Without planning, the employee and non-employee owners will be on course for a disagreement after the senior generation passes away.

Many times, expensive and devastating litigation results. Trial judges, often ill equipped to handle business ownership and family disputes, tend to issue court orders for the dissolution of the business or unaffordable buyouts of the non-employee owners. It is much better for the senior business leaders to handle transition planning during their lifetime, as opposed to leaving the matter to the courts to resolve.

Business owners would be wise to think about their succession plans early and often, which means realistically considering the value of their business and the possibility of a sale. If selling the family business is not an option, the senior generation must properly address estate planning—e.g., what would happen if the founder died owning 100% of the company, or a controlling interest—because to do nothing can ruin the company.

Yet it is no simple feat to plan for transition of an estate that consists primarily of a family-owned business. Consider the allocation of assets. The most common question raised at an estate planning meeting is how to divide an estate among children who have different levels of wealth. For example: Do you give your son the schoolteacher more of your estate than you give to your daughter, who is a successful and wealthy doctor, or do you give each a 50% share?

If your estate is passing to your grandchildren, do you give each grandchild an equal share of your estate? What if one of your children has just one child, while another has four children? Will the grandchild without siblings receive the parent's 50% share, while the four grandchildren in the other branch receive 12.5% each?

As a parent and grandparent you have many decisions to make. Treating everyone equitably does not mean treating them all equally.

In addition, it is difficult to accurately value your business. Value depends at least somewhat on the quality of management after the company is in the next generation's hands. The following scenario is just one illustration of how complex these issues can be.

Different heirs, different perspectives

Consider a family with two children: Steve, who manages the family business, and Dave, a teacher. After their parents pass away, Dave and Steve will each receive 50% ownership in the business.

Steve, the CEO, wonders if this ownership structure is fair. He works long hours, while Dave contributes nothing to the business. Wouldn't it make more sense, he thinks, for him to own the entire business? He also notes that the more he builds the business, the more it will cost him to eventually buy out his brother's 50% interest.

Dave is proud of the family business but sees that his brother lives a lavish lifestyle with many perks from the business their parents built. The family business does not pay any dividends to Dave; all extra cash flow is invested back into the business. Dave, understandably, feels that under the circumstances his equity in the business has little current value to him.

Restructuring the business for the inactive owner

Because the parents do not have material wealth outside of their business, they find it difficult to be equitable. If they give Steve 100% ownership of the business, the assets available for Dave, such as their relatively small brokerage account investments, will be of lesser value.

One option is for the parents to divide the business into two parts: the operating company (to be inherited by Steve) and the real estate (to be inherited by Dave). The real estate will provide Dave with rental income as well as an appreciating asset.

Another option to provide some liquidity to Dave is to recapitalize the business when ownership passes from the parents to the children. For example, the parents can give Dave either a preferred stock interest in the business or a promissory note issued by the business. Tax rules limit their options. In a limited liability company, they can use "preferred" interests for Dave, but they cannot do so in an S corporation. If the business is an S corporation, a promissory note or other non-voting stock redemption arrangement is the best option for Dave.

If the business is worth $10 million, Steve would receive 100% of the common stock interest in the business, while Dave would receive either preferred stock interests worth $5 million or a $5 million promissory note. In both situations, Steve would end up with stock worth $5 million and Dave would receive an asset worth $5 million. However, as a common stock owner, Steve would be entitled to all of the business appreciation for his hard work. Similarly, he would lose his equity value if the company does not do well under his leadership. Dave's risk is minimized, since he would always be entitled to $5 million before Steve could get his equity.

Parents set the valuation and pay out to inactive heir

If the parents set Dave's value at $5 million, there is no dispute between Dave and Steve over the value of the company or the value of Dave's interest. This kind of valuation is a complex matter, since generally accepted methodologies include discounts for Dave's lack of control and the stock's lack of marketability, not to mention the inexact science of business valuations. In their estate plan, the parents should handle the potential for further conflict between Steve and Dave.

For financial reporting purposes, Dave's $5 million promissory note would be considered debt on the balance sheet, while a $5 million preferred interest would be considered equity. Either would result in Steve's equity interest in the $10 million business being $5 million.

Further, Dave's $5 million preferred interests would typically receive dividend income on the face amount of the $5 million of equity. In the second case, Dave's $5 million promissory note would receive interest income on its principal debt. The dividend or interest payments provide Dave with some income he would not have had otherwise. The parents set the dividend or interest rate, which can be a fixed or variable rate based upon an index such as the WSJ Prime plus or minus certain basis points. Keep in mind that interest payments are tax-deductible to the company, and the dividends and interest are subject to different income tax rates for Dave.

The parents could also establish a reasonable payment schedule to pay down the $5 million principal on the debt or to redeem the preferred stock interests over several years. (Payment periods of five to 10 years are common.) The extended payment schedule will minimize the financial drain on the company (and thus the burden on Steve) but will allow Dave to otherwise enjoy his inheritance. Steve may also be able to borrow money to pay off Dave sooner, as a prepayment option without penalty. This would be beneficial to Steve if the borrowing rate is lower than the interest or dividend rates established by his parents.

Other issues

There are many more collateral issues to address, such as voting rights. Dave's consent on certain material business matters may be required while his interest in the company or promissory note balance remains significant. These rights are typically outlined in shareholder agreements and commercial loan agreements (for example, limitations on the company's right to make certain large capital expenditures or restrictions on Steve's compensation while the company still owes Dave money).

Proper estate planning is more than having a lawyer prepare a last will and testament. Careful estate planning that ensures business owners will leave a valuable legacy to all their children is a complex process.

Parents who leave all their assets in equal shares to their children may not realize they could be setting the heirs up for litigation or the breakdown of sibling relationships. As we saw with Dave and Steve, failure to plan results in an inequitable solution.

Herbert R. Fineburg, Esq., is managing shareholding principal at Offit Kurman P.A. in Philadelphia (www.offitkurman.com). Steven S. Rolfe, M.D., is managing principal at Merion Advisory Group LLC in Bryn Mawr, Pa. (www.merionadvisory.com).

Copyright 2017 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.

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Sustaining a family business over multiple generations has never been easy, and several megatrends are making it even harder.

First, there is the well-documented decline in corporate life expectancy generally. A recent study by Fidelity Investments found that in the last 20 years, the expected life of public companies has declined from 25 years on average to less than 12 years. Private companies have a much higher mortality rate. Corporate "death" occurs through business failure, M&A and other causes. The rising cost and the increased complexity of doing business as a result of globalization, technology and communication advances are among the reasons for the increasing mortality rate.

Second, there are the demographic trends documented recently by the National Institutes of Health's National Institute on Aging—a 60-year-old man is now expected to live 23 more years. In 1960, a 60-year-old man could expect to live nine more years. Today healthy men and women in their 60s have a good chance of living to 100 or more. For a multigenerational family business, this dramatic change in expected mortality has far-reaching implications. Not long ago, two generations at most worked together in a family firm. It is now common to have three generations actively involved in the business. The fourth generation often has already been born or is right around the corner.

These trends—declining corporate life expectancy and increasing human longevity—exacerbate the core dilemma of every family business: how to match family growth with the growth of the business. If the family grows faster than the business, either the business gets sold or what constitutes "the family" must be redefined (i.e., must shrink). This has always been a major source of family business dysfunction, since the typical family grows geometrically and businesses, unless exceptional, grow in line with GDP growth. This mismatch in growth rates has the potential to generate a lot of friction between the family and the business.

The need for growth

The need for faster business growth is particularly acute for businesses in the process of transitioning from sibling to cousin leadership and beyond. Given the boom in family business formation after World War II, this is a large subset of the current family business population. Many of these firms now find themselves at the juncture at which family business survival is most challenging.

Faster growth is the best answer to the challenges created by these two mega-trends. Family businesses seeking growth should actively consider product line extensions, acquisitions of new businesses, innovation and more investment in research and development. All these growth strategies require more capital and greater focus on capital allocation. Pursuit of more growth increases the risk profile of the business and may cause some discomfort, but the alternative is not a viable option. The stakeholders must buy into this.

More family businesses today are taking on private equity partners in their pursuit of greater growth. The private equity market now has many participants who are actively looking for family business growth equity opportunities. This can involve a direct infusion of growth capital to the core business or the formation of a partnership with a private equity fund to acquire additional assets. The family can also enter the private equity business itself and build its own portfolio of independent businesses. This requires the human capital to manage such a process and a funding mechanism for the additional required investment.

The survivors of tomorrow not only are focusing on growth but also have developed complementary best practices to address the threats posed by these mega-trends. Three deserve special mention—they relate to the human resources function, succession transitions (of management and control) and governance.

Human resources

Investment in human capital is a key attribute of the survivors. This means greater and more specialized education for family members before they join the business. It also means better mentoring and evaluation of key employees once they are in the business. The human resources function—in name or practice—must now be a significant component of the leadership team. More family means more complexity and the need for more process and consistency in the hiring, training and performance evaluation of everyone in the business.

More intentional management of senior-generation members' retirement and faster incorporation of the younger generations into decision-making roles are also necessary. Given the changing skill sets and technical expertise required today for business success, it is imperative to involve the younger generations sooner. If the family doesn't have the necessary talent, more outside professionals must be brought on board.

Those responsible for the human resources function must also place increased emphasis on what is now referred to as "cultural fit"—the determination of how a particular job candidate will mesh with the family members and their values. This is a critical consideration when going outside the family to fill key positions. Interviewing and testing processes should be deliberate and comprehensive so the risks of hiring missteps are minimized. Most firms require that new family member hires be vetted in a similar fashion.

Succession planning

Transitions in leadership and voting control of the business are always important but now must be more actively managed as well. Not long ago, only one generational leadership and ownership transfer had to be effected within one's lifetime. Now, family members may need to take part in two such transfers. Succession choices in family businesses must be made and are never easy. Getting the process right the first time will ease the burden on those who will be involved in such choices in the future.

Major wealth transfer decisions and the actions required to implement them are always easy to defer to another time. But the traditional "I die, you inherit" approach definitely doesn't work in this new environment. You can't wait until you're in your 80s to pass on the control of the business to the next generation; at that point the "kids" are already in their 50s and 60s and should be thinking about turning over the business to the next generation coming along! The new demographic realities mandate a new approach to the timing and method of transferring control of the business.

Governance

As the complexity of running the family business increases, it is easy to understand why the maintenance of family harmony becomes more important. It is essential for everyone in the family—not just the direct equity owners—to be on the same page in terms of shared values, objectives and long-term perspective. In this context, the family now includes the cousins who are coming along in the third generation and beyond. Family harmony among all the stakeholders in the family business must be a priority.

This is why today there is so much more emphasis on governance mechanisms such as mission statements, family constitutions and formal decision-making and communication forums, such as the family meeting, family assembly and family council. Decisions about what is best for the family and what is best for the business should be addressed independently and resolved in an organized and deliberate way. Conflicts need to be identified and resolved. Conversations about sustainability and stewardship are imperative.

Competitive advantage

Family businesses' resilience and adaptability in the face of challenge is a competitive advantage. Two key life cycle mega-trends—the acceleration of corporate mortality and the demographics of aging—must be addressed by every family business today. Whether by instinct or design, family businesses will benefit by incorporating some of the approaches described above to meet these challenges.

Spencer Burke is executive vice president of the St. Louis Trust Company (www.stlouistrust.com). He is also an adjunct lecturer in family business at the Olin School of Business, Washington University in St. Louis.

Copyright 2017 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.

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About six or seven years before Dave Juday retired as chairman of IDEAL Industries in 2014, he decided it was time to make a major change—so he grew a beard.

Juday is the grandson of J. Walter Becker, founder of IDEAL, a Sycamore, Ill.-based maker of products and tools for the electrical and telecommunications industries. Seeing the beard in the mirror reminded him that " 'This is a different era; I've got to be a different person,' " explains Juday, now 72. He also began coming to work an hour later than usual.

What's more, he says, "I worked very deliberately to not only say—out loud with some frequency—that I needed to move on, but [also] to make myself believe those words."

Family business succession planning involves many steps and many complexities. A new leader must be identified and developed, ownership transition and estate planning sorted out and stakeholder buy-in achieved. Along with all that essential (and difficult) work, the future retiree must let go of key roles and pick up new ones.

Ignoring the introspective aspect of retirement planning can have dire consequences. A 2013 study by the U.K.'s Institute of Economic Affairs found that retirement increases the probability of suffering from clinical depression by about 40%, and decreases the likelihood of being in "very good" or "excellent" self-assessed health by about 40%.

If you're a family business leader, much of your identity is linked to that role, especially "if you've been at the head of the business for many years, and it's a central part of the community, and a central part of your family's narrative arc," says Stephanie Brun de Pontet, Ph.D., a senior consultant at the Family Business Consulting Group. "It's not surprising that it's very core to who you are and how you see yourself, and how others see you."

"Being the chairman of a company our size, no matter how humble you think you are, that's heady stuff," says Juday. (IDEAL has 1,200 employees and operates facilities worldwide.) "I knew it was going to be difficult to give up all of that," Juday recalls, "but I believed in my heart that [succession] was far more important than any discomfort I might feel."

Now what?

Phil Clemens, 66, a third-generation member who relinquished the CEO's role at the Clemens Family Corporation in 2014 and retired as chairman in 2015, advises those nearing retirement to identify "something else of meaning that's going to occupy their time and their focus" after they exit the family business.

"I'm somewhat startled by how much value it appears I can bring to startups, not-for-profits and even some medical people with my experience and background," IDEAL's Juday says. "The maturity and the years of hard knocks provide me with a background to be helpful in many arenas."

One of Clemens' current activities is family business consulting, an activity he began well before he retired. Clemens, who spent 20 years of his career in human resources, helped senior executives in his company transition to retirement and then began counseling those in other organizations. "By helping others, I was in a learning process," he says.

Juday says he learned a lot about transition issues from sitting on other family business boards and attending programs at Loyola University Chicago's Family Business Center; he also served on the Loyola center's board. Involvement with the center "was very beneficial for me, on a lot of levels," Juday says.

To prepare for his transition, Juday says, "I worked very diligently to identify things that would be fun for me to do, and at the same time take advantage of what I have learned over the years." Since his retirement, he has been actively involved with a business incubator in Wisconsin, an economic development group in northern Wisconsin and a workforce development program in Illinois, along with several philanthropic projects. He also is funding or advising several start-up companies.

Setting a timeline

Jim Ethier, 73, stepped down as third-generation CEO of Chestnut Hill, Tenn.-based Bush Brothers & Co., maker of Bush's Best canned baked beans and other products, in late 2009 and retired as the company's chairman in 2015. Ethier now does some family business consulting and holds several board directorships. "My exposure to family businesses in general indicated to me that one of the problems was when the senior generation didn't have a deadline" for retirement, says Ethier. "You tend to focus on succession if you know that you have a timeline."

Leaders should be transparent about their plans, says Brun de Pontet, who is writing a book on retirement in the family business. "Very often you'll have CEOs who have a retirement plan in their head, but they've not really verbalized it to anybody," she says. That causes confusion and uncertainty in the family and business systems, she says.

Brun de Pontet says a solid transition process involves "a minimum of five years of intentional planning." The board should monitor progress, she says. "The senior leadership team needs to be held accountable by the board for having a plan for continuity," she says, "and that should be a topic that comes up as part of the governance process on a very regular basis."

Sometimes leaders hang on too long because of "an unhealthy belief that they are more valuable to the company than they really are," Juday says. "We all like to think we work hard and create great value. Sometimes we work at trying to convince ourselves and others of that rather than doing the work that needs to be done."

Juday says senior leaders might worry whether their achievements meet standards set by previous generations. "If a person is approaching retirement with a sense that he needs to make a big splash to make up for lost time, it's highly likely to be a misguided effort," he warns. A strong, independent board can help prevent mistakes, he notes.

Juday says he lobbied for an acquisition that would have moved IDEAL, known for low-cost production of electrical connectors, into production of data connectors. "I was trying to push my preconceived notion farther than good business judgment would have it go," Juday acknowledges. IDEAL ended up not making the acquisition.

The importance of ritual

A retirement party is more than an occasion to raise a glass; it's a meaningful event for stakeholders, according to Brun de Pontet. A party gives attendees "permission to recognize and celebrate the change, as well as acknowledge the discomfort and the sorrow that also is part of that transition," she says.

Ethier says he was initially "not at all in favor of" the party Bush Brothers threw in his honor in late April 2016. "Finally, one of my senior executives simply sat me down and said, 'Jim, every once in a while a company needs a party, and you're the excuse.' And it became the 'Bush Prom,' and it was quite a party."

The year before the party—in late June 2015—Ethier created a symbolic ritual as he ceded the chairman's post to his cousin Drew Everett at a shareholder meeting, held at the MeadowView Conference Resort and Convention Center in Kingsport, Tenn. "I picked up a paper crown at Burger King on my way to the MeadowView conference center," Either says. He marked the passage by placing the crown on Everett's head.

"The family greeted him with wonderful applause, and recognized that he was ready," says Ethier.

He also had another successor: Tom Ferriter, previously Bush Brothers' president and chief operating officer, succeeded Ethier as CEO in November 2009. Ferriter is the company's first non-family chief executive.

Like Ethier, Clemens participated in a transition ritual. His second cousin and successor, Doug Clemens, assumed the CEO position in September 2014 and became chairman in September 2015.

To mark the handoff, Phil Clemens passed a commemorative baton to his cousin at the 2014 shareholder meeting and at a special year-end management event. All shareholders and management team members received batons, engraved with the saying, "Clemens Family Corporation, 2015—Passing the Baton to the Fourth Generation; The Legacy Continues."

Phil Clemens says members of his large family—about 680 family members and nearly 300 shareholders—no longer approach him with opinions or questions about the business, "because they know that I'm no longer carrying the baton," he reports.

The analogy can help senior leaders understand their roles at various stages in the succession process, Clemens says. "Once you pass the baton, you'd really look stupid [if you tried] to run after the guy you passed it to and grab it away from him," he says.

Some senior leaders try to "retire on the job," Clemens says; they cede key tasks to the next generation but don't vacate the top post. "People don't know: Are you in charge, or aren't you in charge?" Clemens says.

"To me, that baton becomes so important. Know when you're holding it; know when two of you are holding it together; know when you're letting it go," Clemens says. He notes that if a relay runner relinquishes the baton before the next runner is ready to take it, the baton falls to the ground. "Make sure that you are totally in sync with that person who's going to be picking up the baton," Clemens says.

'Going dark'

To prepare the company for the transition, advisers recommend a "weaning" period, with leaders taking extended vacations or shortening their workweeks as their retirement date approaches.

Clemens started this process in his last year of employment. "The first three months I took a week off; the second three months, two weeks off; the third three months, two consecutive weeks off; and the last quarter, three weeks off," he reports.

During that year, Clemens' company announced plans to build a new plant in Coldwater Township, Mich., representing a major expansion of the business. "I told my senior leadership team, 'I'm going to be staying totally out of the process,' " Clemens says.

He agreed to attend the groundbreaking for the new plant, under one condition: "that I have absolutely nothing to do." He insisted that his presence not be publicly acknowledged; he would attend solely to support the new leadership team, who would be the public face of the company.

"It was really nice to be there," Clemens says. "It was also nice to see the team picking up [the responsibility] and running."

After he officially stepped down, "I 'went dark' for a year," Clemens says. He stopped all business activity and relinquished board and committee memberships. He remained "on call"—that is, he would be available if the new leaders called him; he would not call them.

Clemens maintains an office at company headquarters, though he's rarely there. "It's interesting; when I do show up at the office to clean out my mailbox, oftentimes I hear people saying, 'Well, we had a Phil sighting; we actually saw him around here,' " he says with a laugh.

At Bush Brothers, "When I announced that Tom Ferriter would be my successor as CEO, it was virtually in conjunction with the initiation of a new strategic planning exercise," Ethier says. "That was very deliberate. And I didn't darken the door for three months. So that in creating the next strategy, the organization would not see me in the room and be looking to see what my expression was. They would have to look to Tom for leadership."

When Drew Everett was named his successor as chairman, "Again, I disappeared for three months," Ethier says. To reinforce the symbolism, the weekend after the announcement Ethier cleaned out his office and turned it over to Everett.

As Juday's retirement date approached, he stopped attending some key company meetings, including budget meetings and the annual planning meeting. He restricted his involvement to "high-level policy, and culture and family governance," he says.

Juday also changed the tone of his small talk with employees after it became evident that IDEAL's CEO, Jim James, was set to succeed him as chairman. Juday realized that questions he asked out of curiosity and admiration, such as "What are you working on?" and "What did you invent this week?," might be misinterpreted. "I had to back off of that, to be sure I wasn't seen as keeping track of what was going on—trying to get the skinny off the grapevine to check up on Jim," Juday explains.

Roles on the periphery

Fulfilling peripheral roles can be found that add value to the family business and don't step on successors' toes, retirees say.

Ethier has become Bush Brothers' historian and mentor to the younger generation. While the company published a history book to commemorate its centennial in 2008, Ethier says, "I'm trying to outline some history in terms of stories that are more personal because they are my recollections, or the recollections that have been handed to me regarding my grandfather and my uncles."

Ethier meets with interns, new employees and next-generation shareholders to discuss company history. "I've used a lot of these stories to illustrate why we have the culture that we have," he says. "And in the process of doing that, it finally occurred to me that I need to write some of those things down."

For the past 10 years or so, Ethier has hosted luncheons for small groups of Bush Brothers employees from different departments. The luncheons are held in the home, built by Ethier's grandfather, where his mother was raised and, a generation later, where he grew up. "They receive from me—usually as a result of [asking] questions—some insight as to why we do things the way we do them," Ethier says.

"I still am comfortable wandering around the organization; I just don't give any instructions," Ethier says. "And my two successors don't seem to be in any way threatened by it. If anything, they encourage more of it."

Clemens started working with next-generation members—representing two generations of his family—about 15 years before he retired. "We didn't call it succession planning; I called it 'Lessons in Leadership: What Do Leaders Need to Know?' " he says. As part of a lengthy training process, he shares his insights with promising young family members. The Clemens family prefers for a qualified family member to serve in the highest leadership position. "In order to make that a reality, I had to make sure that I had family members who were going to be qualified," Clemens says. "Our family is very resolute that if we don't have a qualified family member, we will go to non-family."

Dave Juday was asked by his successor, IDEAL chairman and CEO Jim James, to oversee construction of the company's new 222,000-square-foot manufacturing facility in Sycamore, Ill. Since the completion of the project, Juday has offered to take politicians and other visitors on tours of the new plant.

Juday says he's delighted to "show off all that we've done, and who we are, and the role we play in the community. I love that stuff. It does not get in the way of anybody else."

Reframing

In counseling retiring CEOs, Clemens asks them to recall their first year in the job. "What were you prevented from doing because of somebody else being around?," he asks. "They'll all remember stuff that they want to do that they couldn't, because their predecessor was there." He then asks them to consider their successors. "Do you want them to view you like you saw your predecessor," he asks, "or would you like them to see you as a real asset, and not a liability?"

Juday says that after he stepped back, "I expected to feel a greater sense of loss. I expected to feel a need to check on people more than I did. And I was surprised to find out how busy I really could be with significant and major projects."

Moreover, Juday says, "It felt like a really good transition. I really did convince myself, deep in my heart and deep in my soul, that this was the right thing to do for the company and the family."

Consultant Stephanie Brun de Pontet says business leaders who shift smoothly into retirement tend to be "people who have consistently found ways to be engaged in their community—whether that be because they're very involved in their church or because they're very involved in some aspect of civic life."

"Be serious about the spiritual side of yourself," Juday recommends. "Playing golf or having lunch with the guys, while fun, does not provide that heartfelt satisfaction which is so important to us in our working years." He recommends contributing to worthy causes in a way "where your presence can make a difference"—not just by donating money.

Brun de Pontet suggests that competitive individuals seek out projects with measurable results, like non-profit capital campaigns. "Saying, 'I'm going to spearhead this project, and there's a metric that I'm going to go and hit' is similar to setting business objectives," she says.

However, Brun de Pontet cautions, "It's important not to rush into things. As we age, we want to continue to feel relevant and feel like our voice matters. So I think sometimes folks are too quick to say yes to opportunities that may come their way because they may have some fear that nothing else will come along. I think it's helpful to take a breath and be a little bit discriminating in terms of how you really want to spend your time, and be intentional."

Building a new routine

Brun de Pontet advises business leaders nearing retirement to talk with their spouses about their vision for this new phase of their lives together. Questions to explore, she suggests, include "What do we each, individually, want to spend our time and energy doing, and what might we want to do together?"

"You have to work on the relationship with your family in a very different way," Clemens says. "It's funny; when I retired, my wife told me I'd better go out and get a job. But now that I've gotten really busy, she [has asked], 'Aren't you going to be taking some time for us?' When you set your own schedule, you can make it as busy as you want."

Juday cautions retirees to pay attention to their health. Eighteen months into his retirement, he suffered a heart attack, which he attributes in part to stress from a complex estate-planning project and from another project he was pursuing outside the family business.

"I put myself in a stressful situation that I didn't realize was as demanding as it was," Juday says. "During our working years, we learned to manage the stress that came with our job. It is not uncommon for a retiree to assume roles that [involve] stress, but of a different level, which we have not learned to manage."

Often "a big piece of what is getting in the way" of succession is the senior leader's lack of a future plan, Brun de Pontet says. Nagging questions, she says, can range from the existential—"Who am I?"—to the mundane—"Who's going to manage my correspondence?"

Above all, Clemens says, "Don't be afraid to talk about this."

RESTRUCTURING BEFORE RETIRING

In some family companies, governance must be revamped in order to prepare the family and business systems for the senior leader's retirement. Such restructuring projects can take years.

Jim Ethier's retirement as chairman of Bush Brothers & Co. in 2015 marked the culmination of extensive governance work. Efforts to strengthen the family and the business were well under way when Ethier ceded the CEO title to Tom Ferriter in 2009.

Family education was a high priority. There are about 100 Bush family members, 60 of whom are shareholders. "The family was resolute that they didn't want to sell the company, so it seemed to me that that meant we needed to educate them as to their role in governance," Ethier says.

In 2005, Ethier began sending family members to an executive education program on family business governance offered by Northwestern University's Kellogg School. Over a ten-year period, 43 family members attended the program, as well as about a half-dozen senior executives and three independent board members, Ethier says.

A Bush family council had been created in the 1990s, but the effort failed after a few years. Starting in 2007, the family revived the idea, establishing a new body they called the "family senate." That project "needed some nurturing," Ethier says. "And then we worked to develop a shareholders' agreement, and that took considerable time and education."

Separating the roles of chairman and CEO, Ethier says, involved "articulating what each of those roles were responsible for" and ensuring that family members understood the distinction. With Ferriter running the company, Ethier turned to mentoring future chairman Drew Everett and to his agenda for the family: "creating a new structure—not just of a family company, but a family enterprise."

In 2010, shortly after he stepped down as CEO, Ethier focused on creating a private trust company. That involved two years of work; Shoebox Private Trust Company was chartered in Tennessee in October 2012.

The initiative was undertaken to simplify many aspects of communication with trustees, Ethier says. "A substantial amount of the ownership of the company was held in some type of trust, and those trusts were distributed among a great many institutions," he explains.

Creating the private trust company—the state's second—involved establishing relationships with the Tennessee Banking Commission and pursuing some state legislative changes, Ethier says. "You might say that gave me something to do when I wasn't taking a nap," he adds with a laugh.

The roles of the operating company board, the family senate and the private trust company had to be clarified and communicated to the family, Ethier says.

At IDEAL, the appointment of non-family member Jim James as chairman and CEO represented a departure from the tradition of having a family chairman and a non-family chief executive. Prior to the hiring of James, IDEAL underwent a management change that required former chairman Dave Juday to delay retirement. The tumultuous period helped him clarify the qualifications needed in a new CEO and in the person who would succeed him as chairman, Juday says.

Juday's daughter Meghan had taken the lead in revamping the family council to meet the needs of the fourth generation; she also joined IDEAL's board.

Dave Juday says a major turning point came when he realized that, because of a changing economy and an expanding family, each generation would have a more difficult job than the previous one. He had to pick a successor with "significantly greater ability than mine," he says.

"I was the last of the benevolent dictators," Juday says. "I realized that the governance model I inherited wouldn't work." The family council model that he and his sister had created was too formal to function well in the fourth generation, he says. "[It] was very structured, very rigid; it was very policy- and procedure-driven. We had terms and term limits, and succession plans for our family council chairs, and [formal] membership... It was very, very prescriptive."

Meghan Juday spearheaded the family council's shift to a focus on process, centered on task forces of family volunteers who research ways to resolve disputed issues. "It was clear to me that the direction she was going was exactly where we needed to go," her father says.

A little over a year into his retirement, Juday began working to resolve a complex estate-planning problem. The family needed to create a trust to replace the trusts that had owned the majority of the company's stock. Those trusts, formed in the 1950s, were due to dissolve because of "rules against perpetuities."

The previous generations' estate planning essentially had assured an income for them while passing on the growth of the business to succeeding generations; however, the entities they created would work for only a single generation.

In June 2015, Juday began drafting plans for a set of new trusts to replace the previous trusts and resolve the issue for the long term. The new plan results in assured income for the older generation with the growth accruing to younger generations, while avoiding the "rules against perpetuities."

"The entire project was premised on paying capital gains up front," Juday says, "That is counter to everything that lawyers, accountants and bankers preach day in and day out. We have invested a lot in our family governance and believed that we could take the risk of paying the tax now, which implies that we aren't going to be facing any pressure to sell the company in the foreseeable future. That part was easy for us. We came together nicely as a family. However, the professionals needed convincing."

A lot of work went into explaining the elaborate plan to the family. "Of course, with this many people, we had some different interests," Juday says. "We had a total of 25 webinars on five topics, each building on the previous, and getting buy-in with each one" before proceeding to the next. "After all the webinars were completed and bought into, we created an individual model so each shareholder could see a very specific 'before and after' of their holdings and cash flows."

Shareholders, company officials, trustees and attorneys have signed off on the documents, Juday says. "There are many hurdles to be overcome in this kind of transaction. We have conquered most," he says. Transactions must be monitored to make sure the transfers are being properly executed, he says. "But, for now, we are confident that we have what we need in place." — B.S.

HOW TO PLAN FOR YOUR NEW LIFE

1. Recognize that it's wise and healthy to step down from leadership well before you're on your deathbed. If you're not convinced of this, seek out stories of succession crises by networking with other businesses, attending conferences and programs or reading the family business literature.

2. Be serious about preparing for life after retirement. Start early; don't relegate your life plan to the bottom of the succession planning priority list.

3. Assess your interests and tap your network to find meaningful projects that are a good fit with your passions and your talents. Don't jump at the first opportunity; take time to think about the most rewarding ways to invest your energy, and how much time those projects will require.

4. Be transparent with stakeholders about your plans and your timeline. Ask your board to hold you accountable for meeting that timeline and alert you to red flags. Allot at least five years for the transition process.

5. Discuss with your spouse or partner how you plan to spend your time. What will you each do separately? What will you do together? How much traveling would you like to do together? Will your spouse join you when you travel for board meetings, speaking engagements or consulting assignments? Is there a major project you might tackle as a couple?

6. Consider peripheral roles you could play in the business or the family. Discuss these with your successor to ensure you won't be stepping on his or her toes.

7. As your retirement date approaches, begin taking longer vacations or working fewer days per week. Don't call in or check email on your days off. Allow the future leadership team to function without your interference.

8. Don't meddle; allow your successors to make mistakes. They will learn from them. If you have an effective board, the directors will steer your successors away from grievous errors.

9. After you leave, don't offer an opinion unless you're asked.

Copyright 2016 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.
 

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After building a thriving business, entrepreneurs often hope their companies will stay in the family for generations to come. Yet many business founders, despite planning diligently and gathering recommendations from well-known advisers, find their companies faltering after they relinquish the reins. Why?

Fragmented vs. integrated

Most family business owners work concurrently with multiple advisers. These professionals may be very qualified and have great ideas, but they are often in limited contact with one another. Each expert offers advice and observations from his or her own perspective but may be unable to connect all the dots because they are all working in separate silos and, in some cases, with incomplete information. Each one communicates with the family and the business hierarchy, and each may see documents that the others produce. But they may never have the opportunity to meet as a group to discuss the family's business, wealth and life goals. In these cases, the family gathers up piecemeal bits of expert advice and observations and tries to stitch them together into a patchwork plan. In the process, the opportunity is lost for synergistic "third-eye" insights that come from a "sum-is-greater-than-the-parts" team approach. It's less about how smart your advisers are and more about how well they're talking to each other. Equally important is having somebody at the nexus to discern these insights, distill them and turn them into a plan.

The upshot: The family thinks it is on track, doing the right things to help ensure the longevity of its business, wealth and family legacy. But too often, it's dealing with incomplete information and possibly incongruent approaches. Family members fail to recognize overarching issues until a crisis throws a wrench into their carefully crafted—but compartmentalized—plan. That's when gaps in the segmented plan become obvious, and the family experiences uneven or unexpected results.

Secrecy causes problems

Consider Joe, the president and one-third owner of a successful family business in its fourth generation. The firm engaged a law firm, an accounting firm, a tax preparer and an estate planning attorney for professional advice. It had a board of directors and an executive management succession plan. A family council facilitated communication between the family and the board. The company typically paid modest dividends, but most cash flow paid salaries and employee incentives.

Joe was a very private person who kept his personal finances close to the vest. After he died, his family discovered his wealth was tied up in the business and other illiquid ventures. Joe's widow, facing a liquidity crisis without his salary, felt forced to modify her lifestyle and sell personal assets, including some cherished family heirlooms.

But those changes likely will not generate enough cash flow for her over time. Her future cash needs may require selling shares back to the company under its shareholder agreement, depriving Joe's descendants of future pro rata ownership.

Lessons learned

Although he worked diligently to address business succession and estate planning, Joe's failure to share complete personal information with his family and advisers undercut those efforts. With better adviser communication and coordination early on, the group might have spotted this information vacuum and gotten Joe to recognize the importance of sharing such critical details with his advisers and/or his family. They might have persuaded Joe to reallocate his assets to anticipate the family's future cash-flow needs, revisit his asset allocation and address the liquidity issues via life insurance or strategies such as an Employee Stock Ownership Plan.

Joe's situation is far from unique. Indeed, data from a well-known study of 3,250 families and 100 family foundations (Roy Williams and Vic Preisser, Philanthropy, Heirs & Values, Robert Reed Publishers, 2005) bear out the difficulty families face in creating businesses that withstand the passage of time and leaders.

The study found that only a small percentage of wealth transfers that failed within two generations were the result of technical flaws in wealth management or estate planning. Most failures stemmed from a lack of effective family communication and a lack of trust among family members (family governance). Others resulted from inadequate preparation of heirs (family education).

This study and others confirm that communication, education and trust are the key characteristics of families whose businesses (and wealth) span generations.

Benefits of collaborative plans

What's the remedy? While there's no single panacea, constructing an integrated plan executed by a collaborative team can go a long way toward helping the family achieve its long-term goals. We suggest a three-pronged approach to family business succession planning (see sidebar). It starts with gaining a thorough understanding of the business owner's goals and objectives. It then addresses how the business, wealth and family plans are integrated through a focused approach of (1) strategizing and aligning; (2) communicating, educating and developing; and (3) managing transitions to achieve those goals.

The benefits of having coordinated advisers are similar to those of using an integrated approach to health care. Many patients searching for the best treatment for a rare medical condition travel from specialist to specialist, each of whom devises a plan based on limited information and expertise. If they don't all work together and communicate, they can overlook important aspects of the patient's situation that greatly affect the approach and the results.

Increasingly, however, patients are seeking care from multidisciplinary specialty clinics. They benefit from being surrounded by a collaborative team of specialists offering coordinated, cost-effective care. That trust, expert collaboration and communication can mean the difference between life and death or, in the case of a family business, between growth and failure.

Keeping the family business alive across generations requires long-range and continual planning to identify goals, understand challenges and adjust to expected and unexpected transitions. It entails applying the best approaches to meld three work streams—business, wealth and family. But it also means that business owners, family members and professional advisers must talk candidly among themselves. They must obtain a panoramic view of the family's situation—not just an isolated frame—in order to create a holistic plan based on that broad vista.

Charlie Mueller is Trust and Advisory Services Practice executive, Kevin Harris is managing director of the Family Business Group and Claudia Sangster is director of Family Education and Governance at Northern Trust (www.northerntrust.com).

A Holistic Approach to Succession Plans Reduces Blind Spots

Family business owners should take three steps to help ensure that the legacy they worked so hard to build and nurture thrives across generations. This holistic, multidisciplinary approach aims to break down silos among various advisers and gets them talking among themselves as well as with the family. It can help eliminate and illuminate the peripheral blind spots that too often undermine the family's best efforts.

1. Strategize and align

Business plans: Develop strategic business plans; set up contingency management plans; address policy gaps.

Wealth plans: Clarify wealth goals and amounts needed to fund each; review/develop estate/tax plans and "stress test" them based on various scenarios; conduct asset sufficiency analysis and personal risk reviews; develop financial plans.

Family plans: Create shared vision/mission statements; make compacts for family members to follow for managing shared ownership of business (e.g., family employment policy, distribution policy); develop communications practices informally or formally (e.g., family councils, family meetings)

2. Communicate, educate and develop

Business plans: Communicate with key stakeholders; develop board structure and identify leadership team; conduct leadership succession planning.

Wealth plans: Determine wealth transfer plans; evaluate senior generation's income flow; assess opportunities to achieve tax efficiency and optimize wealth transfer to family members and/or charity; engage next generation in wealth management tasks.

Family plans: Develop decision-making/conflict-resolution processes; educate family about ownership/finance/business; develop family acumen; augment the adviser team if needed.

3. Manage transitions

Business plans: Select/induct successor; implement family's "stepping-back" approaches for retiring generation; manage retention of key employees.

Wealth plans: Monitor estate tax liquidity needs; update estate plans per life changes; implement charitable strategies.

Family plans: Orient new family members to family system; educate new family members and continue educating younger generation; recognize key transitions; engage all family members in the future direction of the business.

Copyright 2016 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.
 

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Have you put business transition on your family meeting agenda? All too often, succession plans are not slated for intergenerational discussion.

The reasons for this vary. Sometimes, the business leader is reluctant to accept that there will come a time when he or she is not at the helm. In other cases, the CEO fears the prospect of conflict erupting if one child is named over the others as the successor. Alternatively, the patriarch or matriarch might not want to break it to the children that none of them has what it takes to guide the business into the future. And then there are those who, despite good intentions, never pull their heads out of day-to-day operations long enough to think about planning.

Whatever the reason, failing to discuss succession openly as a family is a mistake. If you attend a family business conference or peer-networking event, you are likely to hear a successor describe how his or her progress was hampered by the older generation's reluctance to share their thinking about transition.

Such cautionary tales abound. In this edition of Family Business, however, we focus on the positive, by featuring stories of families who benefited from candid succession discussions.

The Smith family, owners of Cedar Rapids, Iowa-based CRST International Inc., put a range of options—even selling the company—on the table. While John and Dyan Smith at first expected that all three of their children would work in the business, they eventually realized that the next-generation members needed to develop their own visions for their careers and their lives. The result was an inclusive conversation that resulted in an ownership plan endorsed by the whole family. The Smiths, pictured on the cover of this issue, are continuing their discussions through family meetings, and understand the likelihood that their plans will evolve.

For the Friedman family, owners of Friedman Realty Group in Gibbsboro, N.J., the succession conversation started earlier than it otherwise might have because of a health event. The result has been a deliberate process during which the business leader and his son have discovered much about their firm and about each other—and have experienced self-discovery, as well.

Tacy Byham, one of the CEOs profiled in this issue by Amy Katz, had an extra advantage. The firm her father co-founded focuses on leadership development, and she participated in its rigorous training system, which tested her decision-making abilities and allowed her to obtain feedback and learn from her mistakes. Her father announced that she'd be taking over two years before she took the helm.

The importance of succession, and family members' strong feelings about the topic, virtually guarantee that some transition conversations will be emotional. But it is better for family members to air their opinions before anything is set in stone than to develop and finalize a plan that is not viable in the long run because it doesn't mesh with the next generation's vision or capabilities.

The secret to a smooth succession, in other words, is to not keep your succession plan a secret.

Copyright 2016 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.

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