Managing Soft Issues in Family Business

SuccessionKeys to the Successful Transfer of Family Values and

Wealth

Why do otherwise astute owners ignore business succession?

• They never planned for the business to be what it has grown to today

• They aren’t wired to quit working• There are too many thorny family

issues better left alone

What do founders worry about?

• Will wealth help or hurt heirs?

• Will wealth help or hurt family relationships?

• Will transfer help or hurt the business?

What worries parents about wealth transfer to their children?Too much emphasis on money 60%Naïve about money 55%Spend too much money 52%Initiative will be ruined by money 50%Won’t take financial responsibility 42%Resented because of money 36%Will marry someone who wants $ 34%Feel they will fail in the business 18%

Wealth Transfers Today

• 7.2 million people control 33% of the world’s wealth (1 million investable dollars)

• Fed estimates 56 trillion dollars will change hands in the next 50 years in the U.S. alone (greatest transfer of wealth in history)

How Successful is Wealth Transfer?• M.I.T. and the Economist both report

a 70% failure rate in business transfer worldwide regardless of country or industry

• “Wealth never survives three generations” –Chinese parable

• “Riches seldom remain in the same family for long”

-Adam Smith

Possible Causes of Succession Failure• Taxation• Skill of advisory team• Size/complexity of the estate• Unexpected health issues or death• Regional catastrophes• Economics of the region• Changes in government

What are the Actual Causes of Failure?

• Inadequately Prepared Heirs 25%• Lack of Mission 12%• Advisor Error 3%

– Taxation Issues– Poor legal planning– Other

What are the Actual Causes of Failure?Breakdown of communication and trust

60%• Reliability – do family members do what they

say they will do?• Sincerity – do family members mean what they

say, or do they try to manipulate and control?• Competence – do family members have the

skills necessary to accomplish the job at hand?

• Must have all 3 for trust to exist

What are the Actual Causes of Failure?Transfer Fails Due to Lack of Communication!

• Heirs should be included in all information• Heirs should be able to speak openly,

honestly and freely• Founders should not dominate decisions

and meetings

Keys to Successful TransferFamily Meetings1. The entire involved family group participates

in discussions around major decisions.2. Heirs understand their roles, buy into them

and are preparing to fill them3. Meetings are not founder-dominated4. The family grows in the areas of

communication, openness, trust, accountability, team consensus building, developing vision and unity

Keys to Successful Transfer:Family Policy Manual1. How will fairness issues be handled?

-perq’s (vacation time, expenses etc)

2. What is the method for dispute mediation/resolution?

3. What is the mood/health of the family? Are relationships just as important as the business?

Keys to Successful Transfer:Education1. What is the difference between

ownership and management?2. What unique temperament strengths

and weaknesses do I bring to the business?

3. How do we treat each person with fairness (but not necessarily equality)

Keys to successful transfer: Dig your well before you’re thirsty1. Transfer plans should begin 10 years

before the current owner wants a change in business involvement

2. The family should work on these things before crisis forces them to

3. Maintaining health is much more effective than last-ditch rescue efforts