Maintaining family unity within a family-run enterprise
At 68, Colin Patterson* is ready to put in place a succession plan for his real estate and construction company, which he founded almost 40 years ago. With four children, two of whom are substantially involved in the business, Colin must now clearly define who will succeed him and what the ownership structure should look like. But one of the key challenges is navigating the divergent views of his children Natalie (44), Robin (42), Zoe (41) and John (35).
- Oversees the financial and operational side of the business
- Strong affinity for numbers
- 15% stake in the business
- Handles the creative direction of the company
- Assesses development opportunities for the business
- 15% stake in the business
Robin and Zoe
- Careers in healthcare
- No role in the family business
- 5% stake in the business each
Still fully motivated, healthy and able to run the company, Colin was initially resistant to the idea of handing over the reins. However, he’s inherently wise enough to understand that strategic succession planning is vital to ensure the future success of the company. As a general rule, an agreed-upon succession and governance plan can help a family manage their wealth, define roles inside and outside the family business, set boundaries for all family members and deal with competing and interrelated interests.
The core challenge for the Patterson family is navigating the divergent views and business vision of siblings Natalie and John – tension that has spilled over into family relations. Natalie, who joined the company after completing her business degree and was instrumental in helping her father expand the business, feels strongly that she be the chosen business successor. While Natalie wants to focus on scaling the business within the mass-market segment, John is adamant about focusing on developing more quality, upscale projects and ensuring the company is recognized primarily for its design excellence and innovation.
Breaking with his typically calm demeanour, Colin along with his wife Gillian, 66, are finding the situation stressful.
What are some options for Colin and Gillian to move beyond this impasse and implement an effective long-term plan that maintains family unity, addresses each individual’s preferences and best interests, and allows the family enterprise to survive beyond the second generation?
The Richardson Wealth Private Family Office says family situations like the Patterson’s, which share ownership and control of family assets, are complex and, although vital, don’t just involve technical elements like shareholder agreements, and tax and estate planning. We believe that having a common vision and a guiding set of principles is a necessary first step before embarking on more technical plans. This is especially true when family members have starkly different opinions or goals, there’s unequal control of the asset, or certain family members have more access to information.
Colin expects to retire fully at the age of 75 allowing seven years for succession planning, and has three main goals:
- Clearly define who will succeed him as company president and chief executive;
- Adequately prepare the next generation for leadership; and
- Ensure the two children who aren’t involved in the business are treated fairly when it comes to the family’s wealth.
It’s critical that Colin and Gillian’s ultimate decision be considered fair by all family members and inspire confidence so that the whole family accepts, supports and follows the new structure and the new leader’s decisions. A successful or effective transition should avoid the perception of picking a ‘favourite’, although it can often be interpreted that way.
Facilitated by their Advisor, a series of meetings and family sessions helped to draw out each family member’s personal vision and goals. The meetings established that Natalie and John would be capable of working together productively in line with a shared family vision for the direction of the business. For the medium term, they would avoid either business extreme (mass-market or luxury end) and John would continue to ensure the company’s design direction conforms with the current vision. Ultimately, the responsibility of CEO would fall to Natalie once their father retires as expected at the age of 75. Colin and Gillian felt naming their eldest child as successor best aligned with their original vision: to focus on providing quality residential housing for the mid-market.
Starting succession planning early is vital to enable family members sufficient time to develop frameworks that support family cohesion and collaboration. It can also provide Colin with the best opportunity to mentor the successor and allow his children to develop the proper skills for long-term success.
Colin believes retiring in seven years at 75 will be sufficient time for his children to settle into the new management structure. The family, and new management, can use this transitional time – and the post-retirement period – to leverage Colin’s experience and knowledge. As Colin hands over greater responsibility to his two children, one option is to establish an appropriate role for Colin, such as senior member of the ‘Family Council’. Moreover, the role needs to be clearly delineated and communicated to all affected parties (staff, customers, family members).
One of the most important steps to prepare all family members to accept any new management structure is to discuss all core elements of the family enterprise and how it will be governed. Here are the key areas to consider:
- Compensation. How will management be paid? Who decides this, and how often is this evaluated?
- Performance. What is the process for evaluating performance?
- Ownership & shareholding. Should family members who don’t work in the business be allowed to be owners? Who can own shares, and how can you buy/sell them?
- Decision-making. Who makes certain decisions (management, board, family) and how will they be made (majority ownership, consensus, mediation, other)?
- Dividends. What formula is used for paying out dividends to all shareholders (including inactive shareholders)?
Colin and Gillian’s Advisor highlighted an important distinction between treating children equally and treating them equitably when it comes to succession and estate planning. The couple wished to preserve a sense of fairness in their overall plan – neither over-compensating or penalizing daughters Robin and Zoe, who are not actively involved in the business. “To preserve long-term family unity in this situation, it may be best not to provide one set of children with the equivalent dollar amount in liquid assets versus the other family members who may never be able to sell the family business or gain liquidity,” Mr. George recommends.
Insurance can be an effective way to solve for a number of these issues, depending on what the family wants to accomplish:
- Personal insurance can be used to equalize the ownership disparity between the siblings who have an active and passive role in the business.
- Insurance can also be considered as an effective way to ensure there is liquidity to pay for any taxes owing on Colin’s ownership in the business when he dies.
- Many family businesses look at key-person insurance to help the business continue in the event that one of the siblings who is active in the business dies.
- Colin could also use insurance as a way of creating some liquidity for the company in case one or more of the children want to be bought out of the family business.
In addition to insurance, some families also consider existing assets like pension assets, investment accounts and real estate, among others, to equalize the distribution among children – and help maintain unity. Conversely, other families are content with a situation in which siblings do not have equal ownership. “If they truly trust their siblings who are managing the business to generate strong returns for them, this can also work,” the Family Office notes. “However, this is where governance is so important to protect everyone’s interest and to continue to motivate the family to grow the business.”
Summing up the situation, the Family Office emphasizes that ensuring there is sufficient trust and communication is key to a successful and effective succession plan.
The benefits of independent advice for business succession
Why opt for an independent third party to evaluate and help select a successor for a family business? Professionals who are skilled in identifying the company’s needs and recognizing each family member’s strengths can help substantially in navigating this critical transition period.
Additionally, having a third party provide impartial advice can dispense with the view that business owners like Colin Patterson chose his favourite child – which could lead to irreparable family harm.
Finally, having a qualified third party help to choose the successor takes away from the inherent biases of what the business owner, like Colin, may think the business needs. Most entrepreneurs forget that the business style or management approach that defined the company’s past success may not necessarily be the same style or approach required to drive future success.
Are you prepared for the future?
An agreed-upon succession and governance plan can help your family manage their wealth, define roles inside and outside the family business, set boundaries for all family members and deal with competing and interrelated interests.
*A fictional example for illustrative purposes only.