Family-owned businesses are the backbone of the American economy, accounting for 64 percent of U.S. gross domestic product. However, they face unique challenges in trying to remain family owned while nurturing the values that led to success.
For example, in 1850, German immigrant Bernhard Stroh opened a brewery in Detroit. One hundred and thirty years later, that company, still owned by the Stroh family, was worth $700 million, making them one of the wealthiest families in the country. By 1999, facing massive debt, the family sold the 149-year-old business.
What happened to ascend this family from a single brewery to a multimillion-dollar company to bankruptcy in four generations? According to Frances Stroh, in the book, “Beer Money: A Memoir of Privilege and Loss”, it was a slow eroding of the work ethic and values that helped found the company and family members being pressured to enter the business even though it was not their passion.
Ensuring that a family business remains in the family is as much about passing on core values as it is the assets. That relies on a careful combination of estate planning and succession planning.
“Often, when you see family businesses wither away or crumble, it is because the grandchildren or great-grandchildren don’t understand the sacrifice,” said Chad Spencer, an attorney and counselor at law with the Hammond Law Group, which practices only in estate planning and elder law. “That their grandparents or great-grandparents didn’t have everything already in place and had to build a business from nothing. Allowing that next generation too much access, not having them work through the business, can cause those problems to happen.”
The saga of the Stroh family is not unique. In fact, less than 33 percent of family businesses survive the transition from first to second generation ownership, and 50 percent of those don’t survive a second to third generation transition.
“A lot of times people don’t integrate an estate plan and the succession plan. That’s one reason why I like working with the Hammond Law group – they see the importance of both,” said Misty Meschter, vice president of Pass It On, Inc., a business succession planning firm. “It’s common for someone’s will or a trust to say one thing and then create a shareholders’ agreement that says something different. And that situation will likely cause a fight that will end up in court. So, when we work with business owners and we help them reach a conclusion for what’s best for their company, we quickly move onto what happens to the family and make sure the estate plan works in tandem with the secession plan.”
For a closer look at the importance of estate planning for family-owned businesses, click here.
The Role of Estate Planning for Family Businesses
Business owners often mistakenly view estate planning only as a way to mitigate taxes. Estate planning for family business is actually more about helping to ensure the long-term prosperity of the family and the business.
“From an estate planning perspective, it can be easier to understand by comparing the business to a retirement account,” said Spencer. “A child or grandchild of someone that’s retired and living off their retirement account, sometimes can’t remember that wasn’t an instantaneous $1 million IRA. It took a lifetime of work to build. With estate planning, we can help guide those successive generations and say here’s something that you could continue to grow even though the person who created it is gone. Don’t just cash in. Don’t just sell the business or take it for granted. Because this is something that they worked hard for.”
Estate planning can also help ensure that family members are cared for even if they aren’t suited to step into managing the business.
“For example,” said Spencer, “if I am a partner in a law firm and something happens to me, my interest in the business needs to pass to my wife. But she’s not a lawyer. So, she’s not all of a sudden going to become a partner in that firm. The firm handles that by having insurance policies on those partners or have a buyout agreement so that a surviving spouse can still benefit from the business.”
For those families that have been extremely successful, estate planning can also help maintain the work ethic and drive that created that success.
“Often, the grandkids or the second generation will get involved to be charitable. The thinking is our family built this and we’ve been given everything we need; how can we use our family name to give back to the community? Setting up a charitable foundation where the kids and grandkids are involved with making decisions in how the money is used for charity can be useful for passing along those values,” said Spencer.
The Role of Succession Planning for Family Businesses
Succession planning helps business owners determine who in the next generation has management potential and how to get them in the best position to lead.
“In many of the horror stories that you hear of family businesses disintegrating over many successive generations, the emphasis is placed on keeping a business in the family rather than who are the right people to run it,” said Meschter. “Not enough attention is given to who understands the motivations of the founder of the company and the values the business has operated under. It starts with having the right people chosen and not just divvying the business up because someone is a blood relative.”
Family business that have looked holistically at the whole business and carefully planned for asset and management transition, have the best chance of future generations succeeding – and having the core company values pass through those generations.
“From the very beginning we separate business succession planning into two categories,” said Meschter. “One is the exit or strategic plan, that’s the how-do-I-get-out-some-day plan. That plan changes every single day, from today to the day when the business owner has completely relinquished control and management in the company.
“The other plan is the more urgent one; it’s the emergency or contingency plan. When we’re doing secession planning with family-owned companies we start by asking, ‘What happens if anything occurs to you?’ In most cases, if no planning is done, the spouse will wind up owning the company, whether he or she wants to or not. So, we start with looking at who could run the company now, while still keeping the spouse and children financially secure? For children who are too young, who could help guide then so they get where they could actually begin to take over leadership of the company? So, we design plans with each of those contingencies in mind.”
To discover how proper planning can help a family-owned business be successfully passed through generations, click here.