Did you know that 80% of all wealth in the United States passes through family-owned or closely held companies?
Unfortunately, 90% of those companies fail within two generations of the founder’s death. The reason? Failure to properly plan for transitioning the business to the next generation.
In a recent episode of the Wealth Matters Radio Show, partners Adam Gaslowitz, Craig Frankel, and Robert Port discussed preparation tips that can prevent messy family business disputes and lasting resentment.
Do Family Businesses Need Standard Corporate Documentation?
One of the biggest mistakes many family business owners make is assuming they do not need legal documentation such as Operating Agreements, Shareholders Agreements, Buy-Sell Agreements, etc., simply because they are a family. Problems arise when the original owner dies or becomes incapacitated and no transitional authority plan has been set up to guide descendants who own an interest in the company. The best way to prevent disputes is to establish a future transition plan while the founder is still alive.
How Should You Fairly Transfer Your Family Business to Your Children?
Another problem arises when owners decide to pass equal shares of their business to their children. In most cases, one child’s contribution to the growth of the business exceeds that of his or her siblings. That child is likely to resent the fact that his or her contributions were not recognized with a larger share of the company. Resentment among equal owners often leads to management disputes.
Avoid these problems by hiring expert business and estate planners who can objectively help make decisions before any damage is done. Conversations about future management structure should take place early in business transfer planning.
Adam Gaslowitz discussed this concept in more detail. “It’s just like talking to your own kids about wealth,” he said. “When do you talk to them about it? Well, it’s not one point in time. It’s an ongoing conversation. It’s the same with business transitions. These are conversations that have to go on over time, and they have to be consistent.”
How Do You Avoid a Family Business Dispute in the Event of Divorce?
It is no secret that divorce can create a mess for familial relationships, but the disruption is even worse when those relationships are tied to a business. On one hand, there are business decisions to make regarding the future ownership of the company, whether to buy out your spouse, etc. On the other, there are tremendous personal matters to address — emotional hardship, dividing up your assets, reviewing life insurance policies, and more.
Avoiding discussions about business transitions in the event of a divorce is a big mistake. Any feelings of discomfort that could arise from these conversations do not compare to the financial damage, including potential business failure, that could result if these discussions are avoided.
In terms of planning and document preparation, Robert Port says “Give yourself options for what might happen in the future. Think about what might happen, and lay out a roadmap so that there’s at least a fair indication of what the intent is going to be if your family breaks up.”
If you are involved in a dispute and want to know whether Alternative Dispute Resolution is right for your situation, Gaslowitz Frankel can help. We specialize in such disputes and are equipped with the experience and knowledge to guide our clients to the best decision. We have helped hundreds of families arrive at a fair outcome in fiduciary disputes of all kinds. Contact us today to find out how we can help.
