Howard Sharfman
It’s a common scenario: You stand to pass down the family business, but no one in the next generation is equipped to run it.
What do you do?
You want to honor the work your family has put into the business, but you also need to do right by the workers and the customers and see to the day-to-day management of the business. It’s a common dilemma with no straightforward answers. Without proper planning, the process can lead to family conflict, unexpected taxes or even the forced sale of the business.
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In many cases, families struggle with balancing the desire to keep control of the business within the family against the contributions and expertise of longtime employees. Overlooking an experienced employee for a family member to run the company can create tension and cause valuable talent to leave.
Equally important is how ownership and control are divided. Voting and non-voting stock, for example, can help define who has decision-making authority. It's essential to consider who will actually control the business and how decisions will be made, particularly when some heirs are involved in day-to-day operations, while others are not.
Beware of family tension
Families often believe equal ownership among heirs is the fairest way to proceed, but this can lead to conflict. What about balancing the interests of heirs who are active in the business with those who are not? Active heirs may prioritize reinvesting in the business for growth, while non-active heirs may expect regular cash distributions.
Without a clear plan in place, this divergence in priorities can lead to disputes. The working heir may think, “Why am I paying my non-working siblings so much money?” And the non-working siblings might think, “They’re taking all the money out in compensation,” or “They aren’t distributing enough from the company.” That kind of stress can break families apart.
Establishing a buy-sell agreement can mitigate these issues by providing non-active heirs the ability to sell their ownership to other family members, to third parties or to be redeemed by the company. It can also give the family a “right of first refusal” — the right to buy shares being offered to a third party.
When we consider ways to handle business succession with fairness, we often turn to life insurance solutions. The key is to match the asset to the liability.
For example, permanent life insurance policies provide liquidity that can be used to cover estate taxes, buy out inactive heirs or keep the business running smoothly during the transition. This ensures that the business does not have to be sold quickly or under unfavorable terms to meet financial obligations. Or, life insurance can be used to equalize inheritances — allowing one heir to inherit the business, while others receive cash. This avoids the need to divide the business in ways that could create conflict or undermine its future success.
Life insurance can also be used in conjunction with a buy-sell agreement, providing one family member the means to purchase another’s shares without putting financial strain on the family member or on the business by depleting its resources.
Transparency and communication are key
No matter what financial vehicles you use in a succession plan, you won’t get far without transparent and explicit communication with all parties involved. Surprises about who will control or inherit the business after the owner’s death can lead to unnecessary family strife. Discussing the plan openly with heirs helps head off future conflict and ensures everyone knows their role and what to expect. While some details of the estate may remain private, clarity around the future of the family business is essential to avoiding disputes.
Our clients often realize that hiring outside help, whether that’s a consultant or executives, is the best way to protect the family business and honor the family’s contributions. The family may take a place as part of a larger advisory board, maintaining their influence while allowing the business itself to flourish in new hands.
This is all to say that when it comes to succession outcomes, we would rather see families go through thoughtful planning and frank discussion today than suffer from avoidable conflict and financial disputes in the future.
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