Preventing Feuds in the Family Business
Q: I've worked in our family business almost all my life, starting out sweeping the floors on the weekends when I was a kid. Since I graduated from college, I've climbed up the company ladder and feel that I'm now ready to take over the business so that my dad (who's 70 years old) can retire. But when I talk to dad about retiring, he laughs and says "Retire, reschmire. There's a lot more miles left on my tires, so stop trying to push me out the door." The rest of my family agrees it's time for Dad to retire and start enjoying life while he and Mom are still active and healthy. What can I do to get Dad to do the right thing for himself, his family and the family business?
A: Your whole family should give you a big pat on the back for having the wisdom and courage to talk to your dad about the dreaded "R" word while your dad is still active and healthy. Your question about how you can help your dad to "do the right thing" needs to be examined on three different, but related, levels: family issues, succession planning and tax planning.
There's a wise saying that "A family business is just like any other business, only more so." What that means is that the joys, sorrows and the ups and downs that every business owner faces can be dramatically amplified and multiplied when the business is a family business.
For example, it's bad enough to have to endure the tension of having a long-running dispute with your business partners about the direction of the company. But it's far worse to have the same long-running business dispute erupt into a verbal brawl during a family holiday get-together or during Joey's third birthday party.
So before you say anything further to your dad about the dreaded R word, you must be very careful to take the family temperature and thoroughly understand both the family and business history. You must avoid taking actions that could not only wreck the company, but also destroy family relationships.
If you think this is a difficult task, you're right. Doing this type of a "tiptoe through the minefield" of a family business can be both very difficult and immensely frustrating, particularly if you are simultaneously trying to run the business with the same family members that you are trying to negotiate with.
Many times, it's a great idea to start the process by enlisting the help of either a trusted business advisor (such as the business's accountant or lawyer) or a specialist in family business mediation to provide you with guidance and a level of objectivity along the way.
The main thing to keep in mind in coming to grips with this level is that while it is possible to buy another business to call your own, the same cannot be said for your family relationships. So be sure that your motto in dealing with family issues is "handle with care."
Once you have a handle on how best to approach the family issues, the next level is to develop a succession plan that is not only a good plan from a business standpoint, but also has a good chance of being acceptable to family members who play a key role in the business.
Meeting both goals (having a good plan that's also acceptable to key family members) may at first appear contradictory or even a waste of time. After all, you might say "If it's a good business deal for Dad and Mom, then of course it's good for the family and everyone will want to do it."
All I can say is, "Lotsa luck." Family businesses (even the best ones) are never run strictly on a "dollars and sense" basis.
Just as every business has its own corporate culture that it lives by (regardless of what its slick brochure or Web site may indicate), every family business has a complex set of dos and don'ts that have evolved over the years that must be reckoned with in establishing a "saleable" succession plan.
For instance, here's a somewhat extreme but instructive example of how an otherwise good succession plan would be DOA if presented to your dad:
Let's say that four other family members also work in the business. As can be the case in many family businesses, two of the four are doing an OK job but make salaries and have perks that are more than they're worth to the business. The other two have been the problem children of the family who wouldn't otherwise be employable outside of the family business.
A good succession plan would recognize that in order for the business to be able to pay your dad for his fair share of the business and to continue to survive and prosper, at least two things would need to be done: First, the two problem children would have to be removed from the company over time. Second, the salaries and perks of the other two family members would have to be brought back to reality.
While that succession plan may get you an A in an MBA class, in real life, your father is not going to appreciate it.
Your dad consciously or unconsciously made the decision a long time ago to take care of those four family members by allowing them to work in and be handsomely paid by the family business, regardless of their fair market value. Your dad may not see your succession plan as a good idea. Rather, he may see it as both an accusation of having wasted company funds all those years and as a serious challenge to his self-defined role as protector of otherwise economically vulnerable family members.
To have a "saleable" succession plan in this case, you may have to factor in the cost of continuing the employment of the other four family members, while privately showing your dad how this extra cost will impact the amount that your dad can receive for his fair share of the business. The key to selling this type of succession plan may be to let your dad decide whether or not he wants to take less money for his fair share of the business in order to continue to support the other family members after he's gone.
In any event, keep in mind that a good or even great succession plan that violates the unwritten rules of the family business is unlikely to be accepted by the family and can even be counterproductive to any future discussions about that dreaded R word.
Tax planning must deal with the only two certain things in life: death and taxes.
In the transfer of ownership of a family business, your family must consider not only estate taxes, which may be imposed upon your parents' death, but also the income or capital gains taxes that Uncle Sam and the states will want to impose when your dad cashes out of the business while he is alive.
A word of caution at this point: While it's a great idea to work with professionals to help you handle the family and succession planning issues, it is mandatory, in my opinion, that you have a knowledgeable tax advisor to help you and your family successfully navigate the stormy waters of tax law.
Let's look at just one tax trap that you and your family could innocently fall into. Let's assume that you and the other family members decide that the best way to take care of your parents is to give your dad a lump sum payment for his stock in the company. Your dad will then take this lump sum money and invest it in order to comfortably live off the investment income.
Sounds like a plan, right? Wrong.
When your dad starts to complete his tax return for the year after the sale, he quickly finds out that the lump sum payment he received has resulted in his owing a huge tax bill that wipes out a significant amount of his portfolio. Worse yet, his tax advisor then tells him that the family may incur an enormous estate tax bill after both he and your mom die.
Fortunately, there are many legally sound and acceptable tax-planning strategies that family businesses can adopt that will allow the transfer the ownership of the business from one generation to the other while at the same time minimizing income taxes, capital gains taxes and estate taxes.
The main point to remember when dealing with tax-planning issues regarding your family business is that seeking sound tax advice isn't everything-it's the only thing.
It takes a lot of wisdom and courage to bring up the dreaded R word in a family business when the founders of the business get up in years. Successful transitions of family businesses can be difficult and, at a minimum, require careful consideration of family, succession planning and tax-planning issues and typically require the advice of trusted and knowledgeable advisors to help the family members reach a win-win plan that not only rewards the founding generation for a job well done, but also gives the next generation the opportunity to take the family business to the next level.
So good luck in your efforts, and always remember that blood can be thicker than money.
Note: The information in this column is provided by the author, not Entrepreneur.com. All answers are general in nature, not legal advice and not warranted or guaranteed. Readers are cautioned not to rely on this information. Because laws change over time and in different jurisdictions, it is imperative that you consult an attorney in your area regarding legal matters and an accountant regarding tax matters.
For reprints and licensing questions, click here.