Five steps to avoid conflict in family business succession

April 7, 2021 BDO CANADA

Family business succession has a way of gathering the most difficult decisions from years of family relationships—and magnifying them. Parents want to treat their children fairly, but is fair the same as equal? Equal can be defined; fairness is subjective. And even if the two ever overlap, they sharply diverge as business owners plan for family business succession.

For succession, the equal method divides the shares and assets equally among siblings. But this equal distribution rarely works, instead highlighting conflicting interests. Part of the issue is that siblings have differing roles in the business, and some have no role at all. Many believe that siblings who manage day-to-day operations should receive a larger share of the business.

Because these decisions raise sensitive issues, many business owners shy away from them. They may take minimal steps: drawing up a will and a shareholder agreement in an effort to prevent or at least minimize disputes. These actions—while well-intentioned—often create resentment among family members of both generations and may lead to poor performance in the business.

Business succession in five steps

While deciding how to pass down the business is rarely easy, business owners can adopt a simple framework to manage the process. By following these five steps, you can help keep your business strong and growing and your family united.

Step 1 – Define your principles

Think about your long‐term goals for your family, the management of the family's financial assets, and the sustainability of the business. What's important to you? What do you want to achieve? You have probably thought about legacy—what does that mean to you?

Many business owners have strong beliefs about these core issues yet have never defined or shared their principles and values. Succession planning is your chance to align your future steps with your goals and beliefs.

Step 2 – Develop a family participation plan

Establish criteria for family member involvement in the business. Involvement means two things: ownership and day‐to‐day management and leadership.

Who should be an owner and at what level? Who should manage the business? Who should lead the business when you are no longer in charge? What are the criteria for selection or entrance to the family business as an employee? Can family members own shares and not be active in the business? Can the children of non‐involved siblings become owners or managers later on?

Every one of these questions fosters further thinking and discussion. Key topics include compensation, training, education, and the experience necessary to join the business. Consider the needs of the business, and the full scope of family dynamics. It may help to create a family council, which provides a regular time and safe space for positive communication, keeping all family members connected to each other and the business.

Step 3 – Draft transition policies

Here you take the insights developed in Steps 1 and 2—your principles and family participation plan—and make the structure more robust.

Transition principles codify your rules for the distribution or transfer of financial capital to the next generation. Policies go into more detail. They may include creating financial independence for each generation; keeping family control of the business; determining how the teenagers and young adults of the rising generation will pay for their shares; laying out the rights and obligations of active and inactive shareholders and family; ensuring mentorship, ongoing development, and performance evaluation for family members; insisting on market value compensation; and creating protocols for ongoing reinvestment in the business.

Step 4 – Meet with your children

Communication is one of the most difficult parts of any succession—and also the most critical.

Meet with your family and ask them if they want to participate in the future ownership or management and leadership of the business and family wealth. Share your transition principles and why they are important to you. Be open to and encourage input and changes from the next generation so you can reach consensus and arrive at agreement to uphold these principles.

Step 5 – Draft the legal agreements

Knowing your own mind—even achieving a meeting of the minds with your family—is not enough to avoid conflict during family business succession. To prevent conflict, record your progress.

First, work with your family to create a document that includes all key stakeholders' input. In language you and your family understand, explain the family's transition principles and policies.

Then share your internal document with your tax and legal advisors. Work with them to formalize your family's plans and beliefs, and optimize any transition tax. This will lead to four types of legal documents: a shareholder agreement, employment contracts, wills, and powers of attorney.

Only by connecting all generations can you prevent the pain and conflict that so many families experience in their business succession. The next generation will eventually lead and control the family business, and it too needs to plan for succession. This five-step framework sets the foundation, providing a values-based, ongoing process to transition family wealth for generations.

How BDO can help

Our team helps you and your family plan and implement a business succession that reflects what is important to you, your family, and your business. We use a process that opens a dialogue around your legacy plan for the family and your goals for the future ownership, management, and leadership of the business.

To reduce family conflict in your business succession, reach out to our Business Transition Services team.

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