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.

Attorney Danny Markstein, in the July 2006 issue of Estate Planning magazine, identified eight practices of successful families. Of course, not all families follow these practices, as indicated by Prince & Associates research in which 31.4% of family business owners stated that they avoid discussions of succession planning because they are "uncomfortable making the necessary decisions." In fact, it is the exceptional family that can speak openly about emotionally-charged issues like retirement, death, money and passing on power and control. The planner, according to Markstein, should be careful to identify, encourage and nurture these eight practices with his clients:
1. Articulate a clear vision.
2. Cultivate entrepreneurial strengths.
3. Plan ahead to reduce risk and act on opportunities.
4. Build unifying structures that connect family, assets and community, such as philanthropic activities and family councils.
5. Clarify roles and responsibilities.
6. Communicate.
7. Help individuals develop competencies.
8. Foster independence and provide exit options.

In conclusion, with the proper plan in place, a family business can be strengthened and allowed to grow and benefit future generations of family members. Dennis Jaffe, a professor at Saybrook Graduate School in San Francisco, and Tim Habbershon, a professor at Babson College in Babson Park, Mass., writing for Families in Business, cite the following real-life example:

Even after a merger, the J.M. Smucker Company has kept a focus on the Smucker family and their values. After the merger with Jif and Crisco in 2002, the ownership of the Smucker family dropped from 55% to 13%. But the Smucker family has taken focus off of family ownership; instead, they value having shareholders who share their common values.
First, the Smucker family values long-term performance and reputation instead of short-term profits, and they have incorporated this value into their shareholder system. Each new shareholder of Smucker gets one vote. But after four years of ownership, the shareholder gets ten votes. This ensures that people who share the long-term vision of the Smucker family-whether family members or not-have the biggest voice in the company.

Second, despite this technical change in ownership, the corporation has kept a focus on the Smucker family as a symbol of quality and of employees who are experts at making quality products. An advertising campaign begun in 2008 features Tim and Richard Smucker, now co-CEOs, as children growing up in Orville, Ohio in 1954. One commercial shows Richard staring at a fruit on a tree, waiting for the exact moment to pick it. The announcer explains, "Tim and Richard Smucker grew up learning that you have to pick fruit at the peak of perfection if you want jam to taste extra delicious." In another ad, Richard complains that no one asks him what he'll do when he grows up. The announcer again explains, "When your last name is Smucker and you live in Orville, everyone knows what you'll do when you grow up. You're gonna make the world's best jam." Smucker's has been able to take the focus off of the "accidental partnership" of brothers Tim and Richard, who run the company of their grandfather. Instead, the commercials focus on them as a "family of affinity" who grow up learning about what is needed to ensure quality. Each of the commercials in this campaign concludes, "For five generations, with a name like Smucker's, it has to be good."

As the Smucker example above shows, counseling owners of family businesses, especially in succession matters, is one of the most difficult tasks facing an estate planning professional. It requires tact and diplomacy, especially if the owner's desires are to meet with a minimum of family conflict on the one side and a minimum of taxes on the other. Fortunately, there are a wide variety of planning techniques available to owners of a family business. Through the effective use of the techniques discussed above, advisors can greatly benefit clients who own a family business.

Charles D. "Skip" Fox IV is a partner in the Charlottesville, Va., office of McGuireWoods LLP, where he concentrates his practice in estate planning, estate and trust administration, family businesses and charitable organizations.