Family Ties Online: Using Succession Planning as a Motivation Tool

Want less drama in your family business? Change the script.

PROLOGUE

FATHER: “Come into the business, and one day it will be yours. Your mother and I have worked hard to build something good. We would like you to continue what we have started.”

SON: “But, Dad, what can I do here? I’m not sure I even want to be in the business. And how are you going to give it to me without one of us having a huge tax bill along the way? What about my sister? She’s the one who is really interested in being in the business.”

FATHER: “Son, you can motivate people. You know about profit-sharing and retirement plans. You have been involved in creating ESOP trusts and banking relationships. You have worked here while you were in high school and college. You understand what our customers need. Everyone really likes you. And you have always made good business decisions. Come into the business, bring those skills and I’ll teach you the rest. Together, we’ll expand the business, and when I retire, you will own something that you helped build.”

SON: “Dad, what about my sister? Isn’t she more right for the business? She has worked her way through several businesses. She knows all about them.”

FATHER: “That may be true, but I want you. I can leave her a small interest in the business. Don’t worry about your sister. She understands. She wants you to take over the business. You have always appreciated what I’ve built here, and besides, you are my son, the favorite of the favorites. ”

(Six months later, the son came into the business. One year after that, this conversation took place.)

SON: “Dad, when are we going to start all those financial programs we talked about? Times are rough. We need our people working together as a team. These programs will really help beyond just the tax savings. When are you going to make it official? When are you going to tell the employees, the customers, the suppliers and our advisers that I’m going to own and run the business?”

FATHER: “Well, my son, I don’t really know. I’m not interested in retiring right now. The business needs me. Employee motivation programs are just for good times anyway, and times are definitely not good. You get to do interesting things here, and this winter when Mother and I go to Florida, you will be in charge—everyone expects that. I don’t have to tell them. ”

THE ISSUE

SON: “We have not talked with the accountants about profit-sharing, retirement and ESOP programs. Maybe they’re not as expensive to put together as you think. And consider all the good they can do to the employees and for the family.

“Our employees are not being treated fairly, and neither am I. Morale is low. Mistakes are on the increase. We need the benefits and programs now. They really don’t know who is in charge. They expect some of the tax benefit programs we’ve talked about. We’re confusing them. We almost lost one of our best people because you and I each have different ways of doing things and handling problems. And now this Obamacare thing is scaring everyone.

“Dad, you and I are different, and we have different management and communication styles. This situation is just not right. We must get on the same track. Our professional advisers can help us do that. Let’s form a Council of Advisers, and bring them in together to help us plan for the future transition that we know has to come.”

THE SOLUTION

Mixed family management styles and unclear family assignments, together with fuzzy communications, each send mixed signals to everyone. When they are combined, it can cause severe problems to employee morale, profit and productivity in a family business.

These threats are truly compounded by not working with competent and professional family business advisers who can help the family and the firm implement the right tax and business planning tools. The savings and productivity gains can be enormous compared to the cost. Bring in your accountant, attorney, insurance adviser and banker. Put them in your conference room, present the problems, and let them discuss and advise. You can then make informed decisions.

You can keep employee morale high, generate positive motivation and resolve the costly tax exposure of ownership transition by working with your professionals to develop and implement tax-saving programs for your family business. There are a weath of financial planning tools available.

Completing your succession plan gives you an added benefit: It allows the family to speak from the same page. And it should permit the senior family member to enjoy more of the rewards of having built a successful family business.

Family business advisers also need to be involved in providing the family and employees with strong financial tools that will benefit the business—tools such as profit-sharing plans, retirement plans, employee stock ownership plans, employment agreements, Section 125 programs (which will save employees money on their medical bills) and, of course, 401(k) programs and more. And they can handle the transition agreement, which will transfer ownership in an orderly manner with the available tax advantages in place.

Whether it takes six months or a lifetime, the processes of succession and transition need to be carefully planned, communicated and implemented. It must be handled in ways which maximize the likelihood of a successful transition and minimize the negative impact of taxes and the frustration of mixed signals.

As a part of the succession planning process, family businesses should consider the creation of appropriate tax-minimization programs, which at the same time offer tax-advantaged situations to the business and family.

This is best accomplished by working with knowledgeable family business advisers, advisers whose expertise provides the knowledge to handle the succession, transition and tax-minimization programs—and the delicate relationship issues often found in a family business.