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Sep 26, 201712:43 PMExit Stage Right

with Martha Sullivan

What happens when a family business’ succession plan isn’t set up for success?

(page 1 of 2)

I work with many different types of family businesses and family dynamics in this line of work. One specific client has been on my mind this week, wondering whether they’ve gotten traction on a key recommendation we provided.

This family business is not so unusual. There are multiple generations involved in the business. The patriarch is in his 80s. His three children are all in their 50s. The grandchildren range in age from high school to late 20s. The patriarch and his spouse hold majority control with the remainder spilt equally among the three adult children.

The patriarch is influential but not active in the daily business. Two of his three children are active in the business and one is not. Of the two who are active, one is deeply involved in management whereas the other is barely participating at all. That shareholder is spending more time on hobbies than work. However, the two “active” owners are compensated identically based upon the father’s directive. The grandchildren with the greatest interest in coming into the business are the offspring of the active-but-not-so-involved child. The offspring of the other two siblings have no interest in working in the business.

As you might imagine, there are varying perspectives on succession plans for the company. Questions swirl regarding how hard and much longer the adult children want to continue to work in the business themselves, whether the grands will ever really work in the business as active owner-managers, and if the adult children want to remain shareholders at all. We’ve had some great conversations around these issues and are working together to arrive at potential strategies. Some shareholders do indeed want to diversify their portfolios and sell their shares, whereas others do not.

There is one major fly in the ointment. There is no buy-sell agreement to guide a transition of ownership. The only direction is the stock certificate itself. It says that shares can’t be sold outside of the family.

The family and the business have no direction whatsoever as to:

Valuation: What is the agreed-upon approach to value the business and the share price? Is it reviewed, agreed upon, and certified on a regular basis? What if parties disagree? What if the original agreed-upon value hasn’t been updated in years despite tremendous growth? How will the valuation address issue of marketability and/or control discounts?

Employment: To be an owner, do you have to be active in the business? Are there stipulations on how active owners’ compensation would be established and set?

Death/disability: What if a shareholder dies or is disabled? Does the estate hold the shares or is there an obligation to buy those shares back? By whom? Would the company or the other shareholders have to come up with the cash? What terms drive the redemption and pay out for timing, financing, etc.? Is it affordable? Is it fair? Is life insurance an integrated tool?

(Continued)

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About This Blog

Spending half her career as an advisor to privately-held and family businesses and the other half in CFO/COO roles, Martha Sullivan is a partner and the succession planning practice leader in the business transition strategies group at Honkamp, Krueger & Co., P.C. She and her team have extensive experience assisting business owners achieve their personal, business, and transition goals. “Don’t think of the 'exit' from your business like it’s a four-letter word. Make it your next adventure!”

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