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The Hidden Issues Behind Generational Transfer

One of the most difficult things for a family owned business to do is transition to the next generation.  And the more divided ownership becomes, with more members of the successor generation, the harder this is to accomplish.

The first generation is often comprised of Dad, and Dad alone.  (Family-owned companies with multiple siblings/cousins as founders face the issues discussed below much faster, and often without time to plan.)  When Dad ages, or as he starts to plan for retirement, the Estate Plan kicks in, and the company gets left to multiple children.  (Two successors are hard enough.  Three or more vastly decrease the odds of an intergenerational transfer actually working.)

The problems associated with such a transfer are obvious to any business owner who has lived, or is living, through it.  What are the odds that both children will be equally talented?  Most siblings not only have different skill sets, but also different abilities to self- assess those skills.  Brother A may realize that Brother B is a much better “people person,” and consequently, much better managing sales.  Brother B may simply believe that he is better than Brother A at everything, despite Brother A’s accounting and finance background.

Siblings who come into ownership of a family business, bequeathed from the prior generation, may also have vastly different goals.  One may want to sell and cash out as quickly as possible.  The other may want to continue the business and pass it on to his or her children.  Also, the more years apart in age siblings are, the more unlikely they will want to retire, or sell, at the same time.

Ideally, these issues should be discussed as amicably as possible, and dealt with at the time of the intergenerational planning.  Should there be a provision requiring one side to sell only to family members, or limiting the number of family members that are allowed to work at the company?  If the siblings can’t agree on a crucial issue, can a dispute resolution method be set forth in the agreement, in advance, to avoid shareholder dispute litigation?  Should one sibling be given total autonomy in one area, and the other placed firmly in charge of another, right in the shareholders’ agreement?  Should transfers to a third generation be permitted or prohibited?

Since it is impossible to anticipate every single issue, you have to be prepared for when a family member breaches the agreement.  It takes a special skill to navigate such disputes while maintaining family harmony (assuming that is a goal).  However, if you are not prepared to enforce the agreement by resorting to a shareholder dispute lawsuit, if necessary, you are ceding all of the power to the breaching party.

I have counseled many clients who ask the impossible:  “I want my sister to do what is right, and abide by the agreement we reached, but I can’t sue my sister.”  Any experienced business divorce lawyer should make every effort to reach a settlement to avoid the financial costs associated with shareholder dispute litigation, let alone the intangible costs to relationships that accompany such lawsuits.  But don’t ask your lawyer to do the impossible.  If you absolutely refuse to sue the person whom you believe is in the wrong, you weaken your own position, even if your refusal to sue is for the noble reason of maintaining family harmony.

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