Other Challenges To Fairness In Succession Planning
Besides the four fundamental succession planning issues covered above, there are other succession issues a business owner may want to consider in the process of a transition. Here are a few of those other issues you might run into:
a. You plan to transfer your business to the child who is currently active in the business. However, the value of the business greatly exceeds the value of the rest of your estate. How will you decide to divide the rest of your estate for the non-active family members?
b. You have had one child active in your business for years. They have become invaluable to the business. Should you exclude a portion of the value of your business that is attributable to the efforts of the active child? How will you measure that contribution? Will you use objective performance factors to determine the value attributable to the active child? How will you communicate that process to the active child as well as those who are not active in the business?
c. When you own a business, it is sometimes beneficial for estate and income tax planning purposes to transfer a portion of the business to the next generation of family members active in the business. However, you may not want to transfer other assets outside the business because you expect to use those assets for retirement. As a result, the non-active next generation must wait longer to receive their inheritance. You will need to weigh the value of estate and income tax planning against how you can be fair to other family members.
These are just a few of the issues that you may be faced with. I am certain there will be more. Of course, you can always make a decision on your own, without the input of others, rather than following the five steps I outlined above. However, be careful with big decisions like these because the way you deal with them and communicate them will almost certainly impact the success (or failure) of your transition plan.
Governance Fosters Fairness
What happens when a difficult decision needs to be made and you don’t have a defined decision-making process? How does one operate a closely held business fairly? One thing that almost always guarantees that everyone feels they have been treated fairly is making sure your company has a strong governance structure. I have found, time and time again, that when a company has a good governance structure, most family members, employees, and even in-laws will respect decisions made by the board.
Generally, good governance starts with an active board of directors. Research shows that most successfully run closely held businesses have an active board of directors. Beyond this, many of these companies also have independent directors on the board who are not employees, shareholders or family members. When a board contains independent board members, there is at the very least a perception of objectivity in the decision-making process.
When a difficult issue arises and a decision may be challenged, it is often helpful to have a strong and active board. After all, one of a board’s responsibilities is to deal with challenging issues. When such an issue is brought before the board, the board should (i) develop a decision-making process, (ii) do its due diligence, and (iii) ultimately come to a decision.
Fairness As A Tool Or A Weapon
In summary, you can either use fairness as a tool or allow it to be used as a weapon against you. When used properly, creating a fair decision-making process can be a useful tool in deciding fundamental succession and business issues. If you develop a process in advance to decide on particular issues (such as the succession of the next CEO, compensation or a dividend policy) and gain consensus in the process, it’s unlikely that anyone will argue that the decision was unfair.
Alternatively, when a fundamental decision is made without the least perception of a fair process, anyone who feels negatively treated will likely disagree with the result. In these situations, they will use fairness as a weapon against you by arguing, “This is unfair” or “I have not been treated fairly.” I’ve seen this play out enough times that I can confirm that this is not a position you want to be in nor an argument you want to have.