The Third Commandment Of Family Business Succession: Understand The Family's Rights

I once saw a great line that said something to the effect that, "Your family has the right to your inheritance but not necessarily to run your business."

This topic can be the cause of major misunderstandings and disagreements in family businesses. Often, both parents and children have a misconception that a child automatically has the right to be employed by the business and eventually take over the business.

There are two parts to understanding this situation.

1. Ownership Versus Management Or Leadership

While you may want or be happy to have your kids own all or most of the shares of the business, you might not want them to actually manage the business — especially, as I mentioned in my first article in this series, when they don't have the necessary expertise, you have senior managers in place who are doing a great job or there's competition between the siblings that could cause a serious rift.

(I personally believe that ownership of company shares should be given only to those either in or joining the business. Other assets can be given to those who aren't in the business.)

A family business that I know has developed a great plan to allow children to join the business, but only after they’ve worked for another business for at least two years. They also get a nonfamily mentor to help them get the necessary exposure and expertise. In addition, and probably most importantly, the business's independent directors are heavily involved in the succession process, which includes evaluating and eventually deciding who steps into the leadership role.

I once met with a very successful businessperson who had built a beautiful growing business from scratch. He shared with me his dilemma: A competitor in the same field approached him with an intriguing proposal for them to merge, and he (the person I met with) would become CEO. However, as the competitor had the larger business, he got the larger percentage of shares of the merged company.

All was great until, unfortunately, the majority owner had a massive heart attack and died. What they'd overlooked in their agreement was who inherited his shares. It was his wife and kids, and they insisted on joining the business, even though they didn’t have the expertise and too often meddled with the CEO's decisions.

I asked him whether he had a board (a topic I discussed in my previous article), and he said no, but I wasn't the only one who had asked him, so he was putting together a board. I also suggested that he have independent directors and not only his accountant, attorney, etc., and that they should decide who joined the business and in what capacity.

Make sure your family knows and understands your business's succession plan and policy very clearly because this can eliminate many headaches further down the road.