Family Businesses: How to have the “Sensitive” Conversations – Conrad & Scherer
By Irwin Gilbert, Esq.
The U.S. Bureau of the Census reports that about 90% of American businesses are family-owned or controlled. They vary from two-person partnerships to Fortune 500 firms and account for half of the nation’s employment and half of the GNP. Yet, the failure rate of family-owned enterprises is shockingly high. An article in the Harvard Business Review reported that about “70% of family-owned businesses fail or are sold before the second generation gets a chance to take over. Just 10% remain active, privately held companies for the third generation to lead.”
After working with businesses of all sizes throughout my career, I see why this failure rate is so high. Families avoid talking about succession planning, as it’s a very sensitive topic. No one wants to think about the founder passing away or a parent being pressured to select one child over another to lead the business into the future. The result, unfortunately, is often contentious fighting between siblings. Plus, the collateral damage can be far-reaching. Key employees can sense the tension or see conflicts on the horizon. Many may choose to leave instead of riding out the storm, leaving the company with a damaging brain drain.
I worked with one New York-based company founded by a father who passed it along to his eldest son without incident. The third generation, however, faced the future with no succession plan. Conflict and confusion ensued, and key non-family members began exiting. The future of the company was being seriously threatened.
My experience as both a trial lawyer and mediator enabled me to help the family see that in order to succeed, they had to get beyond the hurts, slights and competition to make decisions that were best for the company. Perhaps one of the most valuable interventions was bringing in an experienced industrial psychologist who performed extensive interviews to determine who had the most appropriate skill sets and personality to run the company.
We also brought in valuation experts to develop fair compensation packages for each family member. In the end, the best people were placed in the right jobs for the company to continue to grow and thrive for future generations. It was necessary for two siblings to be bought out. Executive responsibility was placed with the most able of the siblings.
In another family-owned business scenario, a Midwestern company was started by a man with three children, two sons and a daughter. The oldest son simply assumed he was the heir apparent. The mother brought me in to find a way toward peace and to preserve the success of the company. In our first meeting, it was clear to me that the youngest daughter, in fact, had the strongest skills to lead the company.
Our solution was to spin off one division of the company for the oldest son to run and own. We were able to find a suitable position for the younger son that he could grow with. Most importantly, we created a clear map for the company’s future and the parent was spared the pain of having to make decisions about her own children. Outside experts provided non-emotional and sound guidance that worked for the business. A few years later, the daughter ended up doubling the company’s revenue, while the oldest son ran his company into the ground.
My experience has revealed two primary paths to success related to delicate family-owned businesses’ succession planning. The willingness to allow outsiders to provide advice rests with trust and likability. They simply have to feel 100% comfortable with the person who is guiding them regarding what to do with their own company. Although seemingly obvious, that approach to careful relationship building is often lost on counsel too laser focused on the transaction versus the people, patience and time. Identifying who is best suited to run the company is a process that takes some time but is critical to success.
Another approach that usually works is estimating for family members the total cost of waging a legal battle for control, one that in many cases could quickly top $150,000 for each person. That price tag alone typically encourages them to listen.
The ultimate goal, of course, is to leave each sibling with a feeling of personal investment and a role in achieving success for the company, even if that role is simply a share of the company’s value and relief from years of frustration and emotional strain.
For further information, please contact Irwin Gilbert at email@example.com or (954) 462-5500.