As you know, estate planning is so important for every family, but for those with a Michigan family business it becomes even more complex–and doing it wrong can be costly.
Try these numbers on: Only 34% of family businesses successfully pass to the second generation and only 13% make it to the third generation. Avoiding these problems is dependent on anticipating the right estate plan, taking into account different roles in the family business.
These Michigan family business successions are most successful with wise integrated planning of three roles: family, business and ownership – each of which have different goals and objectives as well as rules of behavior. Behavior that is appropriate or tolerated at home may be inappropriate in the business environment. And while many families avoid discussions where there is disagreement, encouraging the expression of disagreement is critical in the business realm, especially the “family business” realm.
For most family businesses, the family role is the most important. The emotional issues of unconditional acceptance and equality are both the friction and the glue in many families. Families are naturally inward-focused, seeking to nurture and develop the next generation. This is how it should be.
However, the challenge here is for the older generation to pass on not simply the acumen of the family’s finances, but the strength of the family’s values. Each generation has to be actively raised to the level of “peer” by the actions and attitudes of the generation before them. Proven family character must be required for leadership in the family business, and a board of directors with at least two outsiders would help keep family values intact.
The Business Role
It’s best to keep a boundary around the realm of the business. For a business to be successful, it has to be able to change quickly. Obviously, it has to generate profits, and therefore must be outwardly focused. As a result, family members can’t be treated equally. If one family member works part time, while another chooses to work nights and weekends the monetary incentive needs to be in proportion to the profit each brings into the business.
If a business is passed from one member of the older generation to a single member of the next generation many issues can be postponed or ignored. But if the business moves from a single owner to a partnership of siblings (and then to a set of cousins who are shareholders), the business must continue to run like a business–while simultaneously dealing with a possible wicked brew of family tension. You need to plan for: leader selection, the role of non-employees, conflict resolution, and the shared control of different family branches.
Further, those actually running the business must also be trained in the financial responsibility of management, preferably before the change of ownership. There will need to be policies for fair dividend distribution for those not employed. Again, it’s a very good idea to delegate certain outside governance by a carefully selected Board of Directors.
The Ownership Role
As soon as a Michigan family business is divided into shares there will be those working “in” the business and those who merely own shares in the business. Plans must be made for buy-outs, professionalized management, mentoring, and family council meetings.
Transfer of ownership is the least complex of these three roles for estate planning, but it won’t achieve your succession goals without a solid family structure AND a healthy business structure in place.
Family businesses are complex, needing to address multiple roles. Wise estate planning for the family businesses accepts, mentors and integrates others (family role); makes a profit and demonstrates objective professionalism in its decisions (business role); and plans for the inevitable – a successful transfer of ownership to the next generation (ownership role).
Michael Lichterman is an estate planning attorney who helps families and business owners create a lasting legacy by planning for their Whole Family Wealth™. This goes beyond merely planning for finances – it’s about who your are and what’s important to you. He focuses on planning for the “experienced” generation, the “sandwich generation” (caring for parents and children), doctors/physicians, nurses, lawyers, dentists, professionals with minor children, and family owned business succession – and he is privileged to do so from a Christian perspective. He takes the “counselor” part of attorney and counselor at law very seriously, and enjoys creating life long relationships with his clients – many of which have become great friends.