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Independent Assessment of the Successor Generation to Avoid Litigation

Is the Next Generation Ready to Take Over Your Business?

Having your child work in the family business that you helped grow from the ground up may be the thing you are most proud of, possibly in your entire life.  Knowing your business will not die with you can be a truly liberating feeling.  But when you do not own 100% of the company, and you have a business partner to answer to, that means that your child has to answer to him, as well.  Of course, the same goes equally for your business partner’s child, who has to answer to you.  But if neither of you sees everything that the other’s child does, how do you evaluate their performance?

For example, suppose your business partner’s child works on the plant floor, learning the business from the ground up.  How do you know if he is doing a good job?  Even if your supervisor tells you that he is, is it true?  Or, does the supervisor believe that your business partner’s son is his future boss?   If he does, can you trust that you are getting an independent assessment of his skills and talents?  Or do your current employees simply want to curry favor, leading them to give favorable reviews out of a sense of self-preservation?

The question goes both ways, of course.  If your child is receiving “rave reviews” from your supervisory staff, is your staff just sucking up to you?

The ability to accurately assess the talents of the next generation may not be important to you, especially if it’s your own child being discussed.   Not surprisingly, many small-to-medium-sized businesses think this is a greater issue when it’s their partner’s child under the microscope.  But this issue may be more critical than you realize.

The abilities of those who will take over from you will directly affect whether the company remains a success while you are supposed to be enjoying retirement.  One set of clients learned the hard way that their own children were incompetent.  The clients decided to sell the business to the children over time, rather than to an independent purchaser for cash up front.  Within two years, it was apparent that both of the founders would have to come out of retirement to save their business, as well as their retirement income, from ruination.

Ensuring quality management into the future can also avoid ruinous shareholder dispute litigation.  Allotting equal pay and responsibility to both succeeding children, when one is a superstar, and the other is incompetent, is a recipe for disaster; resentment and expensive litigation between business partners often results from such a situation.  Sometimes, it is far better for one child to manage the company, while the other has a lesser role equal to his talents.  As long as both have an equal ownership stake, they would be serving the company’s best interests.

Obviously, if there were a way for you to determine for yourself how well your respective children are performing, that would be ideal.  But this often is not possible for a variety of reasons.  Or one partner may think that his child is fantastic, but that his partner’s child has much room for improvement – while the other partner sees it exactly the opposite way.  Then what?

In my last posting (discussing Second Generation Shareholder Litigation), I discussed the wisdom of setting up the successor generation with a mechanism to have compensation set by an outside consultant, to avoid shareholder dispute litigation over salaries taken.  A similar thing can be done with performance evaluation, although it may not be easy, depending on the type of business involved.  If an outside consultant is impractical, having reviews and assessments performed by your most trusted senior manager, who has no fear of retribution from the next generation, can also lead to a more impartial result.  If at all possible, having an assessment performed by someone truly independent, who does not fear reprisal, could save you and your business partner from literally putting the company, and your respective futures, into the wrong hands.