Passing the Family Business to the Next Generation Before Estate Planning Begins

Reprinted from Keeping Current, with permission from the author
and the Society of Financial Service Professionals.
All rights reserved.

By Gerald LeVan, Attorney

Bitter Statistics

All of us have observed how the death of a family member can cause smoldering conflicts to flare among the survivors. We have witnessed deteriorating communications between fathers and sons, and vicious sibling rivalries in business families. We harbor secret doubt about an unproven child's ability to carry on a business created by an aging, ailing, authoritarian entrepreneur. Statistics tell us that only 35 percent of successful family businesses survive in the second generation, and less than 20 percent continue in the third generation.

Intricate Systems — Built-in Contradictions

Family businesses have all the problems of businesses generally, plus a set of special problems created by the family's involvement. There is complex interplay between a family system, a management system, and an ownership system.

Frequently, there are built-in contradictions between family values and business values. Consider these examples.

• Change — Families are basically "right-brained" emotional enterprises; businesses capitalize on "left-brained" logic, data, and systems.
• Rewards — Families try their best to reward every member equally; businesses reward variously according to responsibility and performance.
• Acceptance — Families try to accept every member unconditionally; businesses retain productive employees and terminate the rest. Family and business can coexist even with these contradictory values. But it takes patience, understanding, and work.

The Entrepreneurial Profile

Most family businesses were founded by a single entrepreneur. Estate planners often find it difficult to deal with the entrepreneurial personality; so do members of his family. Today's senior entrepreneur made his money in the boom times following World War II. Almost all are male. Most have strong, dominating personalities that tend to make others dependent on them.

The entrepreneur does not "manage" in the business school sense; he is simply "the boss." He makes most of the decisions, large and small; he is not comfortable with delegating authority. He may be stubborn and egotistical. He is a charismatic leader who commands absolute obedience and loyalty. If the company has a board of directors, it is likely composed of employees and relatives who sign what he places in front of them.

Most entrepreneurs have struggled mightily, the family fortune constantly at risk. They may be basically distrustful of human nature and, as a result, quite secretive. They may be overcautious about sharing financial information, even with trusted employees. If so, it is unlikely that the business has developed an adequate management information system.

The business may have become the entrepreneur's alter ego, his power base, his favorite child. In a real sense, the business may be a rival of his blood children. This is why he may react adversely to a child who demonstrated genuine interest in the business.

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