Succession Planning




	Table of Contents Introduction Why Develop a Succession Plan? Succession Planning as a Continuous Process What Is the Ultimate Objective? How Will the Objective Be Accomplished? Relevant Matrices How Does Value Enter into the Plan? Grooming Possible Successors Checklist of Planning Techniques for Closely Held Companies Case Studies Introduction Family businesses and closely held companies constitute more than 80 percent of all businesses. They have a presence in a variety of industries ranging from manufacturers to retail and service establishments and may be small retail shops or large multinational corporations. These companies face the same challenges as any business, from strategic issues to employee relations. The employee relations may frequently involve family relationships and at times can frustrate, confound, and even enrage the family members operating the business. Yet family members can also be supportive, provide strength, share common goals, and even become a source for inspiration in the family business. It may help to gain an understanding of just what constitutes a family business. Some believe that a given business must have at least two generations of family employees to qualify as a family business. Others, like Professor Alan Carsrud, an expert on family and small businesses at The Anderson School, suggest a broader definition. Professor Carsrud believes there is not one single definition for a family business, which may be either a private or public company. Rather, Professor Carsrud prefers the term "closely held" as an alternative to "family business" because this suggests business partners who work closely together can create emotional attachments typically demonstrated by family members. Therefore, a closely held company may have either family members or non-related employees who interact like family members. Many dot-coms that sprouted in the 1990's, for example, were closely held companies because often the principals were best friends who wrote the business plan in an MBA classroom and spent countless hours together to make the company a success. Irrespective of the boundaries that may differentiate a family business from a closely held company, a fundamental and crucial factor essential in both for success is proper succession planning. Succession Planning Why Develop a Succession Plan? There are compelling reasons to develop a feasible succession plan, and the need becomes essential over the next few years as an increasing number of business founders from the baby-boom segment approach retirement age. Among the most important reasons are the following. A Founder Does Not Live Forever It is the responsibility of the founder to initiate discussion on succession planning because family members will be reluctant to bring up the topic. If the founder does not address the issues, he or she may pass away before announcing any decision, leaving the family business in chaos with no one in charge A Founder May Not Want To Work Forever Many individuals look forward to living a graceful and prosperous retirement in their later years. When the founder has set up a workable succession plan, the plan takes the retirement plans of the founder into account. Without succession planning, the founder too often finds that retirement takes a back seat to the necessity of running the organization. Postponement of Planning May Amplify Problems When succession planning is delayed, family members may develop their own sense of expectations. A valued family member, perceiving no future role in the business, may leave to seek opportunity elsewhere. Likewise, a family member may hold false expectations that he or she will eventually lead the business. Any postponement of succession planning diminishes the value of the plan and jeopardizes its successful implementation. Failure to Develop a Formal Plan May Imperil the Family's Financial Well Being A Large Portion of the Family Wealth May Be Depleted by Death Taxes Succession Planning as a Continuous Process Creating a Succession Culture Succession planning is not a phenomenon that occurs at only the top level of an organization. Companies that are truly effective at succession concentrate on building leadership at every level of the organization. Effective succession planning also requires good communication and conflict-management-and-resolution skills, which are critical for maintaining family harmony and control of the organization. A well-managed company is constantly identifying and grooming possible successors. This allows for a level of preparedness and stability because the business will most probably have a pool of viable candidates for each position within the organization. An enormous commitment of time and resources is required to identify talent at an early stage and to nurture it over the years. Factors That Need To Be Considered A formalized succession plan will not only establish possible successors, but also contribute to the health of a company by legitimizing the selection process and averting bitter rivalry among members of the organization. The careful construction of a business strategy should be contemplated as a road map to a successful succession plan. The business strategy should be closely linked to the succession plan so that as the business strategy transforms over time, so does the listing and ranking of possible successors. A good business strategy will involve analyzing the external world, pinpointing the place of the business within it, and creating a cognizant long-term plan. The business strategy is a crucial element, and may be as important as a formalized succession plan. Key to a Successful Succession Joseph Astrachan, a professor of family business at the Michael J. Coles College of Business at Kennesaw State University, believes that of the 22 million family-owned businesses in the United States, only 30 percent make the transition from one generation to the next due to management's failure to recognize and resolve family conflicts. In a study of more than 13,000 family businesses in the last decade, Joe Astrachan identified three preconditions for a successful succession: A board that holds the chief executive accountable and meets three to six times a year. Formal family meetings in which the business and the family are discussed at least three times a year. Strategic planning which encompasses the company and family continually realigning the goals and what everyone will do to achieve those goals. When considering a transfer of ownership to parties outside the family, a team of qualified individuals will be necessary. A lawyer experienced in the mergers and acquisition process and a good accounting firm with financial planning experience is essential. It is also pertinent to obtain an intermediary, such as an investment bank, to assist the entire process of preparing the business for sale, marketing it, negotiating with prospective buyers, and closing the deal. This is crucial because family business owners and their management teams too often take important time and energy away from running the business to focus on the sale of the company; they fail to realize that one who may be good at running a business does not necessarily know what is involved in selling a business. This can distract the management team at a pivotal juncture and reduce the value of the business considerably. What Is the Ultimate Objective? Corporate Objectives Provide certainty through formal agreements Provide for continuity of business through transition of ownership and management Provide buy and sell arrangements to effect transition of ownership Provide for restrictions upon transfers of stock Stockholder Objectives Provide a market for stock and an exit vehicle in the form of buyouts under a Stockholders' Agreement Provide a structure for income, estate, and gift tax planning to lock in the created wealth Provide protection in event of death or disability, including liquidity for payment of estate tax liability and administration costs Provide methods of funding stockholder buyouts, including use of life insurance How Will the Objective Be Accomplished? Cash Flow Planning for Business Owner Cash flow planning is of primary importance and must address major issues: Can the business owner afford to retire when he or she wishes to do so? Will the owner be assured of receiving adequate cash flow for the rest of his or her lifetime? Will the owner's spouse be able to enjoy his or her lifestyle independent of the business? Management Succession Entrepreneurs are by nature reluctant to give up control Developing, motivating, training, and nurturing successors is vital The business owner must separate personal from business goals Consider utilizing outside directors or advisors to bring objectivity to the process Equitable compensation planning is essential in dealing with management issues. This includes addressing equitable compensation for family and non-family employees and for active and inactive shareholders. Carefully consider compensation planning to retain non-family key employees rather than transferring ownership interests to them. Ultimately, a plan must be developed for creation of responsibility in and delegation of authority to successors. Ownership Transfer The decision as to who will own the business is totally separate from the decision as to who will manage the business. The two decisions, however, must be coordinated. Ownership Successor The business can be transferred to one of three potential groups: Family Most family business owners will desire to continue the business in family hands. However, the owner should very carefully consider whether this is in the best interests of the family. Insiders Many family business owners are extremely devoted to non-family insiders. They should also consider what is in the best interests of those insiders. Outsiders If it is anticipated that family members will not be able to continue the business successfully, the owner may ensure the long-term security of the family by planning for transfer of ownership to parties outside the family. Lifetime Transfer The owner should carefully consider and plan for a lifetime transfer of the business, especially if the owner decides to transfer the business to outsiders. Ownership of a business should be transferred when it is at its maximum value. A business is usually more valuable before its owner dies. A sale during the owner's lifetime achieves advantages for both seller and buyer: Permits a smooth transition from one owner to the next Precludes the necessity of a "fire" sale Enables the parties to take advantage of the owner's knowledge of the market Allows owner consultation with the successor. Structure of Ownership Transfer Ownership can be held in various forms. The following are a few considerations: Voting/nonvoting interests Different classes of interests (for example, one class of stock could be limited to the extent to which it shares in future appreciation) Debt versus equity interests (for example, some children may be given debt interests, such as note payments, rather than equity ownership interests) Separate assets or businesses (for example, real estate used in the business may be left to a family partnership having predominantly non-active children as limited partners, and lease payments could supply desired cash flow to those non-active family members) Timing and Mechanics of Ownership Transfer Will the transfer be made during lifetime or at death? If during lifetime, will the transfer be made by gift or by sale? Will the transferee be a family member outright or an entity for the benefit of the family member (trust, "defective" trust, limited partnership, etc.)? If the transfer is at death, will the interests be bequeathed to the ultimate successors, or will the interests be left equally to family members with provisions for transfer to active family members in a buy and sell agreement? The buy and sell agreement requires very careful planning. At a minimum, the buy and sell agreement should grant right-of-first-refusal restrictions on transfers. Sales of business interests under the buy and sell agreement must be carefully coordinated to avoid a myriad of tax traps. Treating Children Equitably The initial burning issue is determination of the real value of the business. Have the children participate in the business valuation process. Compensate non-active children with other assets (life insurance might be a possibility for creating sufficient "other assets") Distribute some business assets equally (for example, land leased to the business could be distributed in undivided interests to all children) Distribute preferred stock to allow non-active children to receive cash flow through dividends, but realize that the company may be reluctant to pay dividends Develop a buy and sell agreement to leave stock to non-active children and allow stock to be purchased by the company or by the active children Create a class of subordinated debt, which can carry high interest rates, to be left to non-active children. Design a combination of puts and calls to give active children the option to acquire the other shares and to give inactive children the freedom to sell their business interests at their election. Valuation provisions would be critical. Split into two businesses, which would be left entirely to separate beneficiaries, in an attempt to avoid future conflicts. Set up any newly formed businesses such that they are not part of the single family corporation. This arrangement also facilitates gift transfers when the new businesses have low value. Liquidity Planning Can the business survive taxes and expenses associated with the death of the owner? What business could survive a 55 percent mortgage every 25 years without getting any proceeds for the mortgage? Proper liquidation planning is essential. Taking Action Motivating business owners to start the business succession planning process can be very difficult. The most important element of all of the steps in the business succession planning process is to act. Relevant Matrices How Does Value Enter Into the Plan? The Normal Standard The normal standard for valuing property under the wealth transfer tax system is based on fair market value. Fair market value is defined as the price at which the property would change hands between a willing buyer and a willing seller with neither being under any compulsion to buy or sell, and both having reasonable knowledge of relevant facts. Application to Business Interests The application of this standard to a closely held business interest such as the stock in a company is highly difficult. The reason for the high difficulty is that there is no public market by which to value the business interests. Therefore, the valuation process remains very much an art form, not a scientific procedure. The valuation process is actually conducted in two steps: Determine the value of the entity as a whole Examine the interest being valued to determine what adjustments may be necessary to reflect the fair market value of a specific part of the enterprise Because the valuation process is an art and not a science, it is generally desirable to consult a professional appraiser experienced in this area. The professional will also provide knowledge in relation to such issues as under-valuation penalties and discounts. The Significance of Obtaining the Best Possible Valuation If the company will be sold to outsiders, price, not value, will control; however, the individuals who have a stake in the business interest will base their decision to sell on the best information available. If the company will stay within the interest of the family, an equitable division between family members will be more easily attainable with the best valuation. The best possible valuation minimizes the burdens of any legal or tax related issues, such as under-valuation penalties. Grooming Possible Successors Establish a list of positions that require successors, accounting for both short- and long-term needs Identify anyone whose departure from the business today would negatively affect the company or who would be difficult to replace. Include officers, the director of sales and marketing, data processing manager, research and development director, controller, and other key managers. Identify possible future directors who could capably fill the remaining term of a director who for some reason becomes unable to serve. Identify all employees who show potential for advancing into these key positions. This may include a search outside the company for prospective employees. Establish an evaluation process for all such employees and others thought to be successors for each key job. Set up a succession ranking system for each position, indicating who would be first and subsequent successors If there is a position without a likely successor, the business should determine how it would fill the position (temporary successor, external hire, or another option). The company should consider what resources are available to help in hiring from outside the company. Prepare a thorough job description for each position in the company. Appropriate job descriptions make good business sense in any event. Some employees have significant knowledge and experience that they do not document or share with others in the company. Ensure that important information is documented and shared so that the company will not be at a loss if the employee leaves. Have all key personnel prepare packets of resources including lists of contacts, vendors with whom they have ongoing relationships, systems and procedures, and other data of importance to the company. This resource packet should provide everything the successor would need to know about the position if he were to assume the role today. Train potential successors so they are knowledgeable about all aspects of the job they might assume. Not only does this help develop the succession plan, but it also gives the required backup during vacations or other extended absences. Cross-train key employees in other responsibilities. This will assure needed backup and give the employees a greater understanding of the entire company. Obtain outside assistance to prepare a formal written succession plan. The company should have it ratified by the Board of Directors. Offer to explain it to all key personnel. Periodically review the plan with the company. Make it part of the company crisis or risk management plans so that it is frequently updated as circumstances change. Some resistance from certain key personnel may be expected, particularly in a family-owned or closely held business. Employees may feel that they are being shoved out the door, and they may be uncooperative in the succession planning process. Help them understand that succession planning is something all companies should do and that the cross-training and other activities associated with the plan will be valuable to the company. Checklist of Planning Techniques for Closely Held Companies Ownership Structure to Facilitate Succession Planning Board Members or Officers Consider whether to have family members on the Board to keep them involved in decision making. This can also provide them the benefit of Directors' fees and expense reimbursements. Consider having outsiders as advisors. They can serve as an objective third party to give advice regarding decisions, including decisions that affect the business succession plan. Planning Arrangements for Non-Family Key Employees Loyalty to employees is paramount because key employees who are not family members may be vital to the business. Focus on how to motivate them rather than how to control them. Retaining key employees will require empowering them, providing strong incentive and benefit packages, and providing a long-term perspective that they can share. Phantom stock plans give employees the rights to dollars, not stock ownership rights that last forever. These can be set up so that the employees can realize something on an annual basis without being required to sell stock in order to realize any value out of the plan. Non-qualified deferred compensation plans with long-term vesting requirements can serve to tie the employee to the company. Stock option plans are an alternative, but be very careful before granting stock ownership rights. Employee Stock Option Plans (ESOPs) represent another alternative Key man insurance can be employed to satisfy two needs: To fund buyout To replace employee service Identifying Human Issues Affecting Planning Techniques Entrepreneurs are by nature reluctant to give up control during lifetime. Even if willing to "pass the baton," an entrepreneur may be unwilling to give up responsibilities Desire to treat children equally affects planning techniques. The process can be painful, with more than just dollars are involved. Realize that there is no such thing as pure equity - everything is relative. Family pride is associated with the family business; non-active children may perceive receipt of equal value as not being equal Even if assets are split down the middle, some children have control or are employees, etc. while others are not. An entrepreneur loves the business. Children view this parent as leaving the most prized asset to particular children but not to others Realize that later conflict and family hostilities may result. The children's perception that they have been treated fairly is of more importance than absolute equity. If assets are split non pro rata, there will be different values twenty years later. Those later values are the values of which the children will be cognizant. Involve the entire family now to avoid conflict later. While facing the issue with the children now can cause some pain and discomfort, long-range advantages significantly outweigh the current difficulties. Case Studies Case 1: Choosing Between Siblings Paul L. Karofsky and The Family Firm Institute, Family Business Succession, The U.S. Chamber of Commerce, 1998 Pat, 36, and Jody, 35, are siblings employed in their family's $5 million company, Mayday Ambulance Service, Inc. Both have brand-name MBAs, and they entered the business at about the same time. They are both capable leaders and have achieved significant success in their own divisions of the company. Their styles are different, however. Pat is more introverted, a planner, and strong on detail and follow-through. Jody is more extroverted and creative and possesses excellent interpersonal skills. Though they have different personal interests and travel in different circles, they have always been fairly competitive with each other. Their dad, Malcolm, 59, founder and president of Mayday, wants to address succession issues. The future of ownership is perfectly clear to him. "Ultimately, Jody and Pat will each own 50 percent of the common and voting stock," he says. When it comes to leadership succession, however, Malcolm is stumped. "Every so often, I consider the notion of co-leadership, and I wonder if it might work. I have done a lot of reading about family-business issues and want to avoid a stalemate, but both of my children are capable leaders. I think they ought to decide for themselves who should run the company." And, of course, Pat and Jody think Dad ought to be the decision maker. So what is Mayday to do? Response 1: Take A Test Drive A co-leadership arrangement can work, but it can also lead to conflict. Rather than Dad or the children guessing about whether it will work, Pat and Jody should take a road test. The siblings can engage in a rigorous process directed by a neutral third party, and at the end, either they will have the confidence that they can forge a strong partnership or they'll know that working as co-leaders isn't for them. The road test consists of creating a "partnership charter." This is a written document that goes well beyond the legal and financial concerns of the usual shareholder or partnership agreement and beyond the obvious issues of decision making, compensation, perks, and resolving impasses. It deals with the sensitive issues, such as bringing in additional partners or family members, measuring and rewarding performance, comparing levels of ambition and commitment, discovering what each brings to the business and takes out of it, and determining what feels fair. As part of the process, they would examine their personal styles and values to see how these mesh and include what they would be willing to do to enhance their working relationship. Creating a charter also involves extensive scenario planning. A mediator or trusted adviser gets the siblings to negotiate their way through myriad "what ifs." For example, what if the company's fortunes nose-dived and capital infusions were required? If they learn that they can negotiate with each other and complete a charter, they'll deserve their father's, as well as each other's, trust and confidence. The process of working on a charter removes the guesswork. And if they can do it, they'll have an invaluable map to guide them into the future. Response 2: Decide As A Group The decision on leadership succession must be reached jointly by Malcolm and his children. Pat and Jody must be comfortable and confident that co-leadership is a viable option for them. Before starting the succession discussion, Malcolm needs to set his own goals, determining if and when he would like to retire. This information is crucial to Pat and Jody in setting their own goals. Mayday must also have a clear strategic business plan, and ultimately that plan and the succession plan must complement each other. The family must also appreciate the difficulties of co-leadership. It is an equitable and harmonious concept, but it can be very difficult to execute. It requires the following: · Well-defined roles Pat and Jody should evaluate their strengths and weaknesses to determine the roles in which each is most comfortable and effective. They should also define the roles of non-family members who are critical to the business. · Respect for the roles The family must clearly communicate the roles that siblings have agreed upon to Mayday's other managers and employees. Pat and Jody must respect the roles they have defined and insist that others also respect the roles. · Communication Each co-leader must be the alter ego of the other. They must have constant communication and share information while respecting each other's decision-making realm. The family may want to use a third party to facilitate the leadership discussions. This independent party will do reflective listening and keep the discussions on course. In addition, the family should seek out other companies with co-leaders; they can offer practical advice and help Jody and Pat avoid pitfalls. Case 2: JacMar Corporation - A Study of a Variety of Key Issues Gerald Le Van and The Le Van Company, Advanced Estate Planning Techniques: Non-Legal Issues of Succession for the Family Business, The American Law Institute, February 20, 1997 An S Corporation That Projects $27 Million in Sales in 1997 Background Jack and Margaret married shortly after he returned from Korea. Their sons, Jack Jr. and Frank, were born while Jack was working on his engineering degree. After graduation, Jack worked for an engineering consulting firm. Bright and restless, Jack's clashes with his seniors finally lead to his being fired. Jack determined to "show them." He designed and patented a device to solve a problem that used to plague his former boss, and then formed JacMar Corporation to begin production. Margaret worked with him until their last child, Karen, was born, when she gradually withdrew. Today Jack is 65, Margaret is 63, Jack Jr. is 42, Frank is 40, and Karen is 31. Both sons work in the business - Jack Jr. manages JacMar's accounting and computer operations; Frank is sales manager. Karen is an electronics engineer for an avionics firm in another state. Jack and Margaret believe they are ready to retire. For some years they have been giving $20,000 a year in JacMar common voting stock to each of the children. Today each child owns 5 percent of the stock, key employees own 3 percenet, and Jack and Margaret each own 41 percent. Jack and Margaret would like their children to inherit the business one day. (However, during a hospital stay some years ago, Jack named a key employee to run the company in his absence, not Jack Jr. or Frank.) Their wills leave all remaining shares equally to the children, without distinguishing between children active and inactive in the business. On Jack's death, Margaret would control JacMar as trustee of the marital trust, with a local bank named as successor trustee. Jack Jr. and Frank have been rivals since childhood. Jack Jr. is introverted, not a "people person," who makes a point of reminding employees that he is Jack's eldest son. Frank is easy going and a good salesman but has no interest in the technical side of the business. Karen has climbed the ladder at Boeing Company and is highly respected for her creativity, drive, and ability to manage subordinates. She has thought she might like working at JacMar, but her father has never offered her a job and has, in fact, suggested she should marry, quit work, and have children. Her husband, Kenneth, would be welcome at the company her father has said. Concerns About The Future Does the family really want JacMar to continue after Jack is no longer active? Should the company be sold? To an outsider? To the kids? To employees? How much is it worth? If JacMar continues in the family, how should ownership (blood equity) and profits (sweat equity) be divided? What are the tax consequences of the different choices? How can Jack finance his retirement? Assure Margaret's financial security? Avoid crippling taxes when the children ultimately inherit? The JacMar Family The most typical scenario encountered is the mature first generation family business, wrestling with issues of successor leadership and successor ownership. If the JacMar family is not typical, it is at least representative of these business families. Jack, the founder and business leader, is rather typical. Blinding energy, good health (until recently), high intelligence, intuitive decision-making, intense concentration, long hours, "street smarts," all are common among successful entrepreneurs. His wife Margaret operates "behind the scenes," like many entrepreneurial wives of her generation. However, she exerts a powerful influence on every member of the family. She is the "chief emotional officer" of the enterprise. Her relationship with her husband, children, and their spouses is critical to the future of the business. The eldest son, Jack Jr., operates under the unspoken assumption that he will succeed his father, though they have never discussed it. His marriage to Judy, a trial lawyer, is shaky. Because the specter of divorce looms large in family businesses, many sons-in-laws and daughters-in-law are not included in serious business discussions. The second son, Frank, is the company's very successful sales manager. Frank's unorthodox work style (on the golf course) and his drinking problem, create inordinate tensions with his father, Jack. Daughter Karen may be the most talented member of the second generation. As the only engineer in the family (other than her father), Karen may be his best qualified family successor. However, Jack's chauvinism may be an insurmountable barrier to their working together. Excluded from her own family's business because she was female, Margaret may be tempted to "square things" by involving Karen in JacMar Corporation. The relative ages of the JacMar family are important. Both generations are in typical zones of "mid-life crisis." As baby boom members of the "deadline decade," Jack Jr. (42) and Frank (40) are feeling trapped by the family business. As aging members of the "GI generation," Jack (63) and Margaret (60) are very reluctant to let go of the business that is a monument to their success and sacrifice. Like so many parents, they are not quite sure their sons are ready for such responsibility. Work is life; not to work might seem like a death sentence. Besides, Jack and Margaret are savoring their "todays." Their "tomorrows" are problematical. Jack Jr. and Frank are frustrated by constant appeals to wait patiently until "someday this will all be yours." Keep or Sell? For many families, sale of the business is thought to be undiscussable. Yet a thorough discussion of selling the business can be invaluable. If for no other reason, "walking through" a sale focuses on the costs of keeping the business, such as the eventual transfer tax burden. Is the business actually salable? Who might be a buyer? What is the actual value of the business, as opposed to an artificial estate tax valuation? Family Employees Perhaps no issue is more delicate than employing your relatives. Some entry rules for family employment are recommended. If consistently followed, reasonable entry rules can forestall most of the avoidable problems. The distinction between "sweat equity" and "blood equity" raises important questions about compensation, titles, and perquisites ("perks") for family members. Growing Up Rich For affluent parents there is (or should be) a fundamental question: "How much do I give to my children; and how much do I withhold?" Wealth itself is neither a blessing nor a curse. However, the undisciplined availability of wealth can create some very tough problems with children. Among them are inadequate self-esteem, delayed maturity, lack of motivation, inadequate self-discipline, outright boredom, abuse of power, guilt, alienation from others, and suspiciousness. Increasing affluence has had a profound effect on the JacMar family. Intelligent parenting can head off many of these problems. One must accept the fact that parenting never ends! Even though wealthy parents can afford to hire others to care for their children, parenting for them is usually made more difficult by the availability of wealth. Theirs may be the hardest job of child-rearing. Jack and Margaret have made some mistakes in handling their family wealth. Karen thinks her mother has "bought her off" with things. Jack has coerced his children to attend the college from which he graduated. All fear the loss of their wealth. With two incomes and a large anticipated inheritance, Jack Jr. and Judy are nevertheless quite frugal. With one child in college, and three more going soon, Frank and his wife Frances are forever borrowing, owing, and coming up short. Compensation and Job Performance Most family employees desperately need feedback and mentoring. Instead, they receive undue praise, along with ridicule behind their backs. Like many business families, the JacMars have not handled compensation and job performance evaluation very well. Leadership Succession For most family businesses, naming the next leader of the business is the toughest issue they face. To choose one child might appear to favor him or her over the others. Jack and Margaret are not certain that either of their sons can handle the job. Jack does not want to let go. Margaret is concerned about her future financial security after Jack retires or dies. Outside Directors Most family business boards of directors consist of family members and employees who sign and vote as directed by the business leader. Board meetings generate very little useful discussion. Recently, however, that has begun to change. More family businesses are appointing outside directors to their boards - peers of the business leader who are neither employees nor family members nor outside advisors to the company. Properly selected, outside directors can bring extensive expertise to the table, along with candor and diplomacy. Reconciling Outside and Inside Shareholders Next to leadership succession and ownership succession, the tensions between outside shareholders (those who aren't employed by the company) and inside shareholders (those who are) receive the most concern in family businesses. This tussle is sometimes referred to as the "Parasites" versus the "Plunderers." In the JacMar Corporation, the eventual tensions may be between the insider brothers and their sister, who is an outsider. To the extent they agree, she may feel left out. When they do not agree, she may have to cast the deciding vote. Older Companies; Multiple Generations As companies pass to second and third generations, family issues get more complex. More people are involved. They are less closely related - only cousins by the third generation. They have been raised in affluence and expect the company to be a continuing source of dividends and perks, earned or not. Buyouts Buyouts can be good solutions. Karen would like to be bought out; she has quite legitimate needs for the money. She does not want to invest her inheritance under her brothers' management. However, she is not willing to take an artificially low price, either. She is willing to accept the price she would receive if the whole company were sold. She is not enthusiastic about minority discounts or discounts for lack of marketability. Nor does she entirely trust her brothers. They might resell shares bought from her at a much higher price. Understanding Needs Needs make things happen among human beings. People work, play, love, fight, rest, eat, sleep, dream, dread - all because of needs. People involved in a family business have needs. Quite often the problem in a troubled family business is that needs are not being met. Understanding a family business begins with understanding the needs of the various family members. Sigmund Freud, the father of modern psychology, once said that the sources of meaning and self-esteem in life are love and work. What other enterprise so intimately combines both love and work? The need to work is very basic, just as is the need for love. We sometimes underestimate the need to work. Jack understands. Jack has had bypass surgery. It registers with Jack when friends retire, then die shortly thereafter. Rightly or wrongly, for Jack to work is to live; not to work is to die. He feels he must work. He needs to work. Jack cannot just turn it off. JacMar Corporation is life to him. He cannot just let it go - that would be suicide. Jack's sons also need to work. They need their work to be meaningful. Just warming up and getting ready because "someday this will all be yours" doesn't meet their needs. They need work that means something today! Together, these men need work that provides good relationships, an opportunity to develop their knowledge and skills, financial support, creative expression, and a sense of accomplishment. Fathers and Sons: Getting Along Together "Developmental" issues, such as "mid-life" crises, are crucial in business families. Consider the JacMar family at different stages of development - Jack at 45, Jack Jr. at 22; Jack at 54, Jack Jr. at 31, and finally at their present ages, Jack at 63 and Jack Jr. at 42. Their respective life stages can cause wide swings in their ability to work together. In family businesses, the family system overlaps the business system. It is almost impossible to deal with them separately. Key Employees Face it: Successful businesses are built on loyal key employees who give more than they get. In some instances, an unrelated key employee might be the best choice to succeed the present business leader. Jack is wrestling with this issue. His faithful general manager could probably "steady the course," but Jack is looking for a great talent to hire as his successor and thinks he has found one. Jack's problem is that his family wants a family member to head the company. Many business families have not given serious consideration to an outsider as head of the company. They should. And they should be prepared for an outsider to change things. Jack's Dream Great family businesses are built on dreams. Jack and Margaret have realized the classic American dream. But now and then they have nightmares about their business future. Turning Answers into Action: A JacMar Family Working Answer How shall we deal with family disagreements? (Between individuals? Between members of the same or different generations?) This is the JacMar family's working answer: "Though we are all adults, we have not always acted towards each other like adults, nor have we always treated each other as adults. At times, older generation members have treated younger generation members like children. At times, younger generation members have behaved childishly. We resolve to change that behavior. We will form a Family Council to deal with mixed family and business matters and other important issues involving the family as a whole." Their answer, and numerous others which they will have to consider, will take hours of soul-searching, discussion, debate, argument - and, yes, some tears and some yelling. These are not final answers by any means, but these interim responses reflect considerable progress on these issues. Back to top
Telephone (310) 556-4422 Fax (310) 556-4454