Business Succession Planning

wine barrels in a rowOne of the greatest challenges family businesses face is how to hand over the reins to the next generation.

Even faceless corporate entities struggle to ensure their long-term survival; add the potential for interpersonal drama and hurt feelings among parents and children, and it’s no surprise that the odds are stacked against family businesses enduring the transition. Just 30 percent of family-owned businesses make it to a second generation, 10-15 percent make it to the third, and 3-5 percent make it to the fourth generation, according to a Harvard Business Review study.

We need look no further than our own Wine Country backyard for a prime example of what can happen when family succession goes awry. The late Robert Mondavi had visions of leaving a multi-generational legacy with his namesake Oakville winery, like the great family wine brands of Europe. Mondavi had founded the winery in 1966 and built it into a multi-million dollar company; in 1994, the company went public with a two-tier stock structure that maintained family shareholder control.

Robert Mondavi and his wife, Margrit, decided to gift much of their personal fortune to charity, causing hard feelings among their three children. In addition, the children were on different pages than their father: daughter Marcia wanted no part of the business, and sons Michael and Timothy were often at odds with each other and their father over the direction of the company.

Ultimately, in order to appease shareholders, the Mondavi family was forced to accept a buyout offer from Constellation Brands in 2004. Although none of the Mondavis exactly suffered in the transaction – they exited with millions and the sons have gone on to start new ventures – one of the iconic wine brands of California had passed from family control.

To avoid these types of unintended consequences in your own family business, consider undertaking a succession plan — that is, creating a blueprint for how a business, its owners and its employees will move through and beyond a transfer of power.

Succession plans can be used to cement a family business’ legacy even when there are no heirs interested in taking over someday, or no heirs at all. Either way, the process often requires a thorough review of each aspect of the business, including input from people within the company as well as outside it.

Although difficult family conversations sometimes occur, putting off succession planning is a big mistake. Not taking steps to secure the future of your business could ultimately lead to its demise and leave those you care about heartbroken and in financial straits. To get started, consider these steps:

1: Start Talking
Many experts agree that bringing family members together to articulate their ideas, goals and shared purpose as future owners of the business is the first step in successful succession planning.

“Uniting around a shared purpose helps family members define their roles and responsibilities before a succession takes place, helping them make joint decisions about how to manage the company in the future,” consultant Amelia Renkert-Thomas told the Wall Street Journal. “The better defined that joint purpose or vision is, the better chance the company has of a successful outcome.”

To kick off the discussion, consider these topics: What is driving the creation of the succession plan? Are heirs ready to step into leadership roles? What’s important is taking that first step and sitting down with family members to begin the process.

Step 2: Choose Your Tools

As the succession plan takes shape, use the right legal instruments to convey the wishes of parents and children.

Creating a family business constitution or family charter is a way of formalizing the ideas and desires that result from planning discussions. It should begin with a mission statement – a declaration of the organization’s core purpose and intent – and incorporate the family’s values into policies, practices and procedures for how the business operates. The constitution should address issues of potential conflict as well as the rights and responsibilities of all family members, both those working in the business as well as those not actively involved.

Estate planning is a general term describing the process of deciding what should happen to your assets if you should die or become incapacitated, and ensuring your decisions are carried out.

In a last will and testament, a person lays out their wishes for how their property is to be distributed in the event of their death. The will also names one or more persons as executor to manage the estate until its final distribution.

Trusts offer legal protection for the estate by allowing a trustee to hold title to property or assets for the benefit of a third party, the beneficiary. Trusts are designed to make sure the owner or trustor’s assets are distributed according to his or her wishes. Unlike a will, trusts take effect as soon as they’re created, avoid probate, and in some cases avoid or limit inheritance and estate taxes.

The durable financial power of attorney grants a designee legal authority to act on your behalf for financial issues should you become incapacitated and unable to make those decisions yourself.

Step 3: Make Peace with the Plan

If inheritors can’t come to an agreement, it’s better to acknowledge that difference of opinion, Renkert-Thomas said. “Rather than trying to press heirs into a succession structure that doesn’t fit, the business owner should explore other options with beneficiaries that might better suit their needs and circumstances.”

The key once a succession plan is in place is to keep talking. No one knows for sure what the future holds, so it’s critical to periodically revisit the plan and revise it as necessary to ensure that it expresses the expectations of family members and employees, and meets the needs of the business moving forward.

Your family business is your legacy. Protect it and keep it alive for generations to come by proactively planning for its future. For a free consultation about the best succession and estate planning tools for your situation, contact us today.

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