Different Agendas

April 13, 2006

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Different agendas which can so often gum up the works of a succession plan can be avoided by communicating expectations in advance.

For example, Fred Founder may have convinced himself that it's time to start handing over the day-to-day management to his son, Successor Sam. Sam's been well educated, has worked for Dad over the years and is enthused about finally getting a chance to run the show. The business is going well and there are no external problems on the horizon. Sounds like an ideal set up for a smooth transition. Things hum along for a few months and Sam is making plans to refurbish and modernize in order to stay out ahead of the competition and in preparation for future expansion. Fred, on the other hand, has been looking at a string of race horses. He doesn't think of it as a hobby. It'll be an "investment." Who's going to get to set the agenda? Fred says "I earned it and I'm gonna spend it any way I like." Sam says "How can you expect me to keep this business successful if I have no working capital to plow back into it?" Not much of a contest here. Fred's gotta win-he owns it lock, stock, and barrel.

Communication of these apparently mutually exclusive goals could have enabled a satisfactory accommodation of both points of view, had it taken place at the outset of the transition. In this example, both Fred and Sam have good business intentions but the situation is bound to deteriorate into a useless power struggle that will set an irrational tone for all future relations between the founder and the successor.

Strategic planning can prevent situations such as this. The two generations need to sit down and define the mission of the business as well as that of the family. And they should redefine both periodically as circumstances, both internal and external, will change over time. The needs of the family and the needs of the business to achieve their respective goals may conflict from time to time, but these differences can be dealt with or managed around when they are identified during planning sessions.

The first issue to be discussed should be "can this business support all the family members who will be relying on it after the transition?" Then, ways of passing ownership without creating inequities, jeopardizing security or triggering excessive tax liabilities must be addressed.

Warning

Be careful not to let tax planning control your decisions. A tax lawyer can make compelling arguments for strategies that can minimize estate and gift taxes. A CPA can be very convincing when suggesting strategies for controlling income taxes. But no matter how talented and earnest your professional advisors are, their limited specialties should not dictate your choices for your business or your family.

There are indeed more important planning considerations than saving on taxes. Don't be bullied into compromising what's important to you and your family just to keep a few bucks away from the IRS.

First determine the result you want, and then let the professionals find the most tax-efficient way to achieve that result.

The agendas of non-participating family members must also be taken into account. The founder's spouse, for example, may feel she's entitled to some say in the matter of appointing a successor, transferring power and particularly in transferring assets.

Unresolved issues or misunderstandings in areas like this can cause severe problems down the road, particularly if the founder dies unexpectedly and is therefore not present to referee.