Editor's Note: The following article is based on a presentation Fox will give at the 44th Annual Heckerling Institute of Estate Planning conference in Orlando, Fla., on January 27.

Advisors need to be prepared for the fact that the transfer of the ownership and control of a family-owned business often breeds conflict.

Conflicts can arise between older generation family members and younger generation family members, between family members in the same generation, and between family members and non-family employees and shareholders. The acrimony risks distracting family members and non-family members from pursuing a rational plan for the succession of the business.

Many issues arise when a family-owned business embarks upon its possible succession. These include:
Lifetime sale:  Should the business be sold during the owner's lifetime?
Continuance after death: Should the
business be continued after the owner's death?
Ownership of business: Who will own the business after the succession of the business?
Control of business: Who will control the business after the change of ownership?
Treatment of children: Will the owner's children be treated equally in the distribution of the owner's estate either before death or after death?
Treatment of owner: What provisions will be made for the present owner after transfer of the business?
Experts estimate that 85% of the crises faced by family businesses focus around the issue of succession. Therefore, in addition to addressing the legal aspects of passing a family business from one generation to the next, advisors, attorneys, accountants, family business consultants, trust officers and other professionals must help families overcome the conflict that will inevitably occur when a family plans for the succession of control and/or ownership.
In fact, such conflict is in most situations inescapable. Experts tell us that conflict is a necessary part of human relationships. Dealing with it requires both sensitivity to family dynamics and knowledge of the wide range of legal disciplines that impact succession issues.

A 2007 survey by MassMutual found that 40.3% of family business owners expected to retire within ten years. But of those business owners expecting to retire in five years, only 45.5% had selected a successor. Of those expecting to retire in six to 11 years, only 29% had selected a successor. Yet 30.5% had no plans to retire, ever. Since the median age of the business owner was 51, that meant many planned to die in office.

A business owner who fails to execute a succession plan can end up leaving his or her family, business and wealth in an uncertain state-subject to questions about what should be done with the business and who should have ownership and control. This article examines the human conflicts that arise when business succession occurs or even when it is first broached as a subject, and offer techniques either to avoid those conflicts or to diffuse them when they inevitably occur.

Succession planning in family businesses is particularly difficult for several reasons. When a business aims to keep its leadership within the family, it must choose its next leader from a relatively small pool of candidates, not all of whom may be interested in leading the businesses. Moreover, the family may be reluctant to fill management positions with experienced non-family members. Even when there are family members available to fill the leadership positions, their performance can be impeded by competition among siblings or other relatives.

Nepotism is another potential problem. A 2007 survey by PricewaterhouseCoopers found that almost two thirds of family businesses award family members a place in the business without measuring them. Thus, a founder might successfully transfer a business to the second generation, only to realize too late that the second generation will not be able to keep the business afloat.

Management consultant Bernard Kliska has suggested the following steps as a rough outline for developing successful succession planning:
1. Get a commitment from all family members to work on succession planning.
2. Help family members set aside competitive ways and teach them more constructive ways to work together.
3. Adopt a business planning process that begins with a mission statement and strategic plan.
4. Create a personal development plan for family members who work in the business.
5. Develop the appropriate governance structure.
6. Put in place the legal and financial structures to implement the succession plan.

Estate planners should also create a culture in which key employees-whether they are family members or not-are expected to be owners. Option plans, for example, will increase the value of the current owners' holdings and may provide additional sources of capital and facilitate additional borrowings.