June 18, 2014

Succession Planning: Seven Hard Lessons Learned From a Family Feud


Many family business advisors are drawn to the field from their own experiences, both positive and negative, of being a member of a family owned business. I fit this model.

My grandfather started our family business in the 1920s after he emigrated from Japan. It started with a small gift store located at 10th and Morrison in downtown Portland, Oregon. In its 70-year history the company has operated many different businesses. My grandfather had a patent on the bobby pin, which he had manufactured in Japan and sold throughout the country.

One of our greatest challenges occurred during WWII. Because the family was of Japanese descent they had to leave the city during WWII. My grandfather left the business with a neighbor to run in his absence. Following WWII the family returned to Portland and my grandfather rebuilt the business with the help of his three sons.

During the next four decades the business prospered. Today the company is primarily involved in real estate, but it still operates the wholesale giftware business started by my grandfather. In the early 1970s Grandpa retired from the management of the business, but he still came to work everyday and he continued working well into his 90s. My uncle, Sam, and my father, Bill ran the business for next 25 years, sharing control and working by consensus.

By the 1980s the third generation was well established in the management of the business. Five of seven third generation family members, plus one son-in-law, held senior management positions in the family business.

Then, on May 8, 1996, my father died. There was no succession plan in place. Instead, there was a 20-year-old buy-sell agreement between Sam and Bill that was put in place prior to the third generation entering the management of the business. The agreement provided that the survivor of the two brothers could buy 1% of the decedent's voting stock to become the majority shareholder. Upon the death of the second brother the heirs of the decedent could buy back the 1% at the same price. The buy-sell agreement did not address how leadership and control of the business would be passed to the next generation when the second brother died. It also did not provide for management succession or transfer of knowledge.

The loss of my father changed the dynamic of the business and the family. Within a year the problems that could have been avoided with a good succession plan had thrown the family into a morass of discord and misunderstanding. If you think succession planning is difficult when the principals are still around, try it when one-half of the senior generation is gone.

Attorneys' letters flew back and forth. The entire family attended a mediation session in early 1998 but was unable to reach a resolution. By May of 1998, just two years after my father died, the family was split into two camps and I joined with my mother and brother in a lawsuit against my uncle over his control of the business. One year and hundreds of thousands of dollars in legal fees later, the judge entered a judgment, which in effect became our family's business succession plan.

Lessons for Succession

The last three years have been very stressful for our family. We have watched long held assumptions and beliefs turn out to be untrue. The family business started by my grandfather to benefit his family and his family's families has become the focal point of conflict. My father always looked for the silver lining in every dark cloud. Therefore I have tried to follow his example here by sharing some of the lessons I learned from our family's painful experience. My hope is that these lessons will keep another family from having to learn them by personal experience.

Lesson # 1: Do Not Confuse Estate Planning with Succession Planning.

My father had an estate plan, which was designed to minimize estate taxes. His estate plan dealt with transferring ownership of the business. It did not deal with management or transfer of knowledge. It assumed that the business would continue to prosper even after he was gone. This was a big assumption, especially without a viable succession plan in place. The biggest threat to the continuation of a family business is not estate taxes — it is the inability of the next generation to effectively (and cooperatively) own and manage the business.

Lesson #2: Listen to Your Advisors.

Our family business had good lawyers and accountants. We even had two family business consultants. In the mid-1980s our lawyer begged my father and uncle to redo the buy-sell agreement and take into consideration the third generation's involvement in the business. Family business consultants also tried to convince my father and uncle to plan for succession. Unfortunately, neither one took the advice, and ultimately, a judge worked out our succession plan.

Lesson #3: Pay Now or Pay Even More Later.

A major stumbling block to setting up a succession plan is the cost. The cost is more then just paying advisors. In many cases a workable succession plan requires restructuring the business, bringing in outside management, and setting aside funds to provide liquidity for shareholders. There is also an emotional cost paid by the senior generation as they let go of control. An alternative to the high cost of good planning is to let the judge decide. If our experience is any guide, succession by litigation is much costlier than advance planning, both emotionally and financially.

Lesson #4: Money Matters — Provide Liquidity.

Stock in a family owned business might be worth millions on paper but if it produces no cash to stockholders you have a sure recipe for dissension. Unhappy shareholders in a publicly held company can sell their stock with a single phone call to their broker (or, nowadays, with a few clicks of a computer mouse). This is not true for most family businesses. If you do not plan for liquidity you may be arguing with the court over dividend policies or stock buyouts. A much-preferred alternative is to develop a mechanism to provide shareholders the ability to sell their stock, including a valuation and funding process. The cost of keeping unhappy shareholders in the business is high for both the business and the family.

Lesson #5: Use Real Information, Not Assumptions, For Your Planning.

My father believed that all family members wanted the same thing from the business and that the consensus decision-making model used by my father and uncle would survive into the next generation. It did not take long after my father's death to learn just how wrong both these assumptions were.

Lesson #6: Act Today to Shape Future Expectations.

Succession planning gets harder the longer you wait. The succession planning process forces family members to make decisions about the future of the business. This helps family members align their expectations with the probable future direction of the business. The longer you wait, the harder it is to change those expectations. One of the difficulties in developing a succession plan in our family was the divergent expectations for the business that had grown up over time among family members. By the time we started planning there was no single plan that could accommodate the different goals of all the shareholders.

Lesson #7: Build Trust. We learned how fragile trust is, especially during times of stress.

A prominent researcher has described trust as having four basic elements: caring, predictability, competency, and character. During the period following my father's death, trust in the family fell dramatically. As each side was feeling threatened by the other it became more and more difficult to act caring toward and supportive of one another. Family members began to doubt the integrity and honesty of other members as well as their competency and business skills. Predictability, trust went out the door as family members struggled to adapt to the unknown future. Without trust in a family business — or any business, for that matter — the risk of litigation to resolve conflict grows significantly. The stronger your trust relationships are within the family the better chance the business will have of surviving the stress and conflict of succession.

Succession, like death, happens. You can plan for it or just let it happen. It is not an easy process. I recommend not following our method — litigation. Hopefully you can take some of the difficult lessons learned during my family feud and use them to create a more positive, "family friendly" plan for yourself and your family business.

For more information on this topic, please contact marketing@jordanramis.com or call (888) 598-7070.


Back to Top