Family Enterprise Planning: The Forgotten Component in the Family Business Succession Plan

By: Ralph M. Daniel,Ph.D.,  and John Ambrecht, J.D.

California Trusts and Estates Quarterly*Fall 1998, Vol. 4, No. 3

Succession planning for family-held businesses when the owners wish to retain ownership and/or control within the family involves a complicated and time-consuming process that requires a multifaceted approach not fully understood by most professionals.(1) Family businesses are unique because, in addition to the usual technical business and estate planning issues, the business is interrelated to a multitude of family factors. As discussed by Peter Leach in his book The BDO Story Hayward Guide to the Family Business:

     Family businesses differ in a variety of critically
     important ways from non-family businesses.(2) 

     If a family business is to achieve its full potential, it is
     vital that its management understands that business
     families function quite differently from non-business
     families and the challenges they create. As well as
     making the right decisions on the commercial problems
     which beset all enterprises, family businesses have to be
     able to analyze the special dynamics that surround the
     founder, the family, the firm and the future. They need to
     develop special skills that enable them to identify and
     resolve the unique difficulties which these dynamics
     introduce, and to adopt constructive strategies to foster
     growth of the business and the transfer of power and
     control within it.(3) 

 Yet, how much importance do the professional and the family
 business owner place on family factors in family business
 succession planning? Typically, not very much! Most
 professionals and family business owners minimize or even
 dismiss the family factors in the family business succession
 planning process. Often the attorney hears from the family business
 owners, in more or less the following words: "Tell me the tax law;
 our family does not have any problems!"

 However, it is not uncommon for the attorney, while involved in
 the estate planning process for that same "problem-free" family, to
 be "side tracked" because the business owner makes some
 negative comment about a family member that sabotages the
 process, such as:    

  • "My child is going through a divorce (or has a rocky marriage), 
     and I want to be sure his or her ex-spouse does not
         receive any part of this business"
  • "I want all of my children to own the business equally, but I
         do not want to share this idea with my son or daughter who is
         presently running the business because he or she will get
  • "I do not know who will run the business after I go"
  • "I really do not trust anyone to run the business"(4)
  • "None of my children want to get involved in the family business"
  • "My children get along wonderfully, but one of them will not
         come to any family meetings"
  • "My spouse does not like our son or daughter-in-law"
  • "My spouse wants be sure that all of the children are treated

Or, the son or daughter assigned to give certain information to the
 attorney or accountant for processing never produces the
 information! Or, worse, the question whether the next generation
 really wants the business never comes up!

 After becoming aware that there are some family problems, the
 estate planning lawyer often leaves the business owner(s) to solve
 the family issues unaided. Unfortunately, the business owner is all
 too often at a loss how to solve these complex family/business
 concerns and instead immerses himself in the multitude of
 day-to-day demands of managing a closely held firm.

     [A]s Yale University's Dr. Ivan Lansberg calls "the
     succession conspiracy," everyone involved may
     conclude it is in his or her best interest to avoid the
     issue altogether. Many entrepreneurs resist succession
     planning as a troublesome admission of mortality. Doing
     it means admitting that you won't live forever--a step
     they feel diminishes them.(5) 

 Statistics confirm that most family businesses, for whatever
 reason, do not properly plan succession.

 As John Ward has stated in his book Keeping the Family Business

     Keeping a family business alive is perhaps the toughest
     management job on earth. Only 13% of successful family
     businesses last through the third generation. Less than
     one-third survive into the second generation. And, as
     indicated by other studies, fewer than 5% of all
     businesses ever started actually become family
     businesses through appointment of a successor from the 
     next generation. 

     The dying family business so permeates our business
     culture that is has become legendary. Expressions such
     as "shirt-sleeves to shirt-sleeves in three generations"
     and "rags to riches to rags" are common in the country... 
     All these phrases suggest the same story. The first
     generation builds the business, the second generation
     "milks" or "harvests" it, and the third generation must
     either auction what is left to the highest bidder or start
     all over again. 

 Ironically, there is an abundance of professionals with the
 technical skills necessary to plan the succession process.

 It seems apparent, then, that if the estate planning attorney wants to
 effectively counsel businesses with family involvement,
 particularly during the business's transition planning from one
 generation to the next, the attorney should consider adding to his or
 her technical skills an understanding of the essential family factors
 in a family business. If the attorney at least recognizes that family
 factors are a second important component in the family business
 succession process, and if the attorney is able to convey their
 importance to the family business owner, such counsel may be
 more important to the client and his or her family business than a
 strong background in the technical issues, since that advice is so
 readily available.

 The importance of convincing the client that family factors are as
 important as technical planning is underscored by the fact that the
 family business owner does not really recognize (at least overtly)
 or in many cases want to recognize that family factors are a critical
 succession planning component! It is incumbent upon the
 professional either to personally become familiar with the family
 factors in family business succession planning or to counsel the
 client to seek help from a qualified professional to help focus these
 important issues.

 In the classic book written by Mike Cohn, Passing The Torch,(7)
 the author states: 

     Attorneys, accountants, and financial advisors often
     focus exclusively on the tax and legal aspects of transfer
     strategies. They seldom address the underlying
     emotional and psychological issues that are involved. By
     addressing those (emotional) issues first, we strive to
     defuse emotionally intense situations and address
     important family issues. Only after those are resolved
     do we focus on the transfer strategies: the technical,
     legal, or tax aspects. This approach sets the stage for a
     successful transfer.(8) 

 As Mr. Cohn indicates, there are two critical factors or steps 
 involved in proper family business succession planning, namely:

     1. Family enterprise planning; and 
     2. The technical transfer strategies. 

 The traditional technical (analytical) approach to succession
 planning suggests that the professional follow these steps:

  1. Develop, analyze and understand the facts; 
  2. Determine which of the various planning tools are applicable;
  3. Suggest to the clients which of the tools are the most
  4. Engage in a dialogue with the clients to select the estate
     planning approach to be taken; and 
  5. Begin implementation.

     This approach focuses on how to minimize the transfer taxes with
     little planning or discussion of the family issues. The plan as
     finally developed in most instances involves solving the division
     of the assets (fair or following some form of family justice),
     avoiding probate, and minimizing transfer taxes. Unfortunately, as
     one author has stated:

         What often passes for family (business planning)
         involves either implementing the wishes of the dominant
         family members or persuading the family to adopt the
         (planner's) sense of fairness under the circumstances.(9) 

     To enhance the chances that the family business succession plan
     will succeed, the estate planning attorney and the family business
     owner should consider modifying the traditional approach in order
     to begin the process of integrating the family issues with the
     technical side of estate planning. The authors suggest the following
     integrated approach:

     1. Develop, analyze and understand the facts. Consider expanding
     this inquiry as follows:

     2. Determine which of the various planning tools are applicable.

     3. Suggest to the clients which of the tools are the most appropriate
     tools for their unique family enterprise.

     4. Engage in a dialogue with the clients to select the estate
     planning approach to be taken.

     5. Begin implementation. Consider expanding this step as follows:

    •  A. Obtain the necessary family information to prepare a family tree (genogram);

       B. Possibly, during the second meeting, expand the discussion to
       include the complex family issues involved in the interrelationship of a family in a closely held family business;(10)

       C. Given the complex family and technical issues involved in a
       family business, help the business owner face a difficult pivotal
       question that will form the basis upon which all of the planning
       decisions will spring:

          Should the family business be kept in the family or sold?   

      In determining the proper response to this deceivingly simple
      question, the attorney should be aware that the answer involves
      significant emotional issues for the founder, his or her spouse, the 
      remainder of the family, and others involved in the business. In
      many cases, the founder will be realistic about the business's 
      future and give a reasoned response. However, a founder may
      automatically respond to this question by stating rather indignantly
      that the business will be kept in the family notwithstanding that the
      planner may have already observed many family issues that could
      lead to the business's destruction in the future. Additionally, the
      founder may have responded without actually knowing what the
      next generation really wants or needs!

       D. Consider suggesting to the founder that a letter be sent to each
       member of the next generation soliciting his or her views on the
       future for the family business.(11)

       Assuming that the founder agrees to this suggestion, the next steps

       E. Assuming that the majority of the family wants to retain the
       enterprise in the family, there are certain basic precepts in family
       business succession planning that the estate planner needs to keep
       in mind with regard to the family-issues informed technical point
       of view:

      •  (i) Review the responses from letters mailed to the next
         generation. (Be sure the next generation's views coordinate 
         with the estate planning objectives of the founder.)

         (ii) Determine if the family and/or the estate planning 
        attorney could benefit from including a family business 
        psychologist or other professional to address family issues 
        in the business. If  yes,  consult such a professional and 
        discuss the next steps; if no, proceed to organize a family meeting.

          • There is no one correct answer for solving the family issues and technical problems in family businesses;
          • Family business and succession planning is a continuing process, not a one-time event;
          • Many families are burdened with latent unresolved conflicts so intense that they jeopardize successful continuation of the family business in the next generation; and
          • Proper estate planning for the family business begins after
            potentially disabling conflicts have been detected, exposed, and addressed.

         A. Plan a family meeting with all of the next generation in
         attendance(12) (including those working in the family business 
        and those who may not be a part of the business).

         B. Develop the agenda for the family meeting; for example:

        •  (i) Establish family communication rules;

           (ii) Review family assets and family business issues;

           (iii) Review the expected death tax situation;

           (iv) Review the proposed estate planning approach (asset
           distribution and classic estate planning tools);

           (v) Determine if unresolved issues exist. If yes, determine an
           approach to solve or face the issues; and

           (vi) Consider determining if additional family meetings 
          would be appropriate. If yes, appoint a person responsible 
          for organizing the next meeting.(13)


         It takes work by the attorney (with the possible help of a family
         business psychologist), the business owner, and the owner's family
         to effectively plan the succession of the family business to the next
         generation. It does not just happen!!


         (1) See Bork, et al., Working with Family Businesses,
         Jossey-Bass Publishers (1996), p. xi.

         (2) See Peter Leach, The BDO Story Hayward Guide to the
         Family Business
        , Revised Second Edition, Kogan (1996), p. 3.

         (3) Id.

         (4) "One of the axioms of family business is that there is an
         understandable natural reluctance for the family business owner to
         voluntarily surrender control or net worth." Goodman, The
         Expanded Role of the Attorney in Planning for the Continuity of
         the Family Business Enterprise
        , AFHE, Family Business Practice
         Series, Family Business Resources Publishing (1995).

         (5) See Craig E. Aronoff, et al., Family Business Succession: The
         Final Test of Greatness
        , Family Business Leadership Series,
         Marietta, Georgia, No. 1, p. 7.

         (6) See John L. Ward, Keeping the Family Business Healthy,
         Jossey-Bass Publishers (1987). 

         (7) See Mike Cohn, Passing the Torch, McGraw-Hill, Inc. (1990).

         (8) Id., at p. 9.

         (9) See LeVan, "Transforming Business Families," Gerald LeVan
         (1993), p. 243. 

         (10) See, for example, Bork, et al., Working with Family
        , supra.

         (11) When faced with the fact that a founder does not really know
         what the next generation thinks with regard to keeping the business
         in the family, the authors will often suggest to the founder that a
         letter be addressed to each member of the next generation to ask
         his or her view about the family business in the future. The founder
         will usually agree to this request and may indicate some interest in
         the results.

         (12) The authors usually find it helpful to include teenage family
         members as well as adults.

         (13) The authors have found it to be more effective to have a
         family member other than the CEO or founder take on the
         responsibility of organizing the next meeting. 

         The contents of this publication are for information purposes only and are not meant nor should be construed to be legal advice. Note, also, the date of the document. Laws are constantly changing, and are subject to differing interpretations. We, therefore, urge you to do additional research or to contact  your own legal or tax counsel before acting on the information contained herein.

        * Published by the: Estate Planning, Trust and Probate Section, State Bar of California


        Posted on October 8, 2013 .