The in-house counsel for a family-held business must play a daunting
number of roles. In addition to mastering many legal disciplines, including real
estate, litigation, employee benefits, labor and estate planning, counsel also
must be a consigliore, a psychotherapist and a business consultant.
When working on business succession, in-house counsel must not only ensure
that the legal documents (such as buy-sell agreements, shareholder agreements
and wills and trusts) are properly drafted and executed, he or she also will
have members of the successor generation ask questions about the senior
generation's intent, questions that often have more to do with family dynamics
than with legal issues. To effectively assist with the succession, in-house
counsel must help the family come together to determine why the family should
continue operating this closely-held business, and the value it continues to
bring to the family.
As Stephen McClure, a principal of the Family Business Consulting Group,
Inc., points out1, transfer of ownership and control of a
closely-held business is always difficult because it creates a clash between
business values, owner values and family values. For example, one business value
is that a business should operate as a meritocracy: the best qualified candidate
should always receive the promotion. However, this business value clashes with
the family value that all children are loved equally, regardless of ability. By
"anointing" one child as the CEO, the parent can unintentionally deliver the
message to the other children that they are not loved equally. A third value,
held by the owner of the business, is that the business reflects the owner's
identity, and that any change to the business is a challenge to that owner's
legacy and to the owner's sense of achievement. Added together, these values
create a troublesome mix of competing views that lead many family businesses
down the wrong path.
The key to resolving these conflicts is objectivity, not any particular
business structure. A family gains objectivity, for example, when it sets forth
ground rules for business operations. First, the family must establish a mutual
set of values and culture so that people with differing views can work together.
Indeed, these mutual values and culture give private companies a significant
competitive advantage over public companies. All family members must agree about
what it means to own a family business: the passion for the business, promoting
family values, stewardship (both of family wealth and of non-family employees)
and understanding that ownership doesn't equate to a right to liquidity. Owning
a family business is more than a financial undertaking; it's a mission. All
family members must agree to this mission for the business to continue to
thrive. Providing objectivity and facilitating open discussions can be the prime
role of in-house counsel in the succession process.
Second, the business must have objective standards for family members who
want to work in the business. For example, a family member may have to work
somewhere else (perhaps for a competitor) for a set period of time or until that
person receives at least one promotion. The older generation must also make sure
that the younger generation receives the appropriate mentoring in the business
without the overlay of family emotions. This usually means that the mentor
should be a key employee who is not a member of the family.
Perhaps most importantly, the family must balance the interests of family
governance, business governance and business management. This is particularly
true where there are family "insiders," who own equity in the business and who
also are involved in management; and family "outsiders," who own equity but have
no say in management decisions. Family governance can be covered by a family
advisory council that, in larger families, might have separate "subcommittees,"
which address family employment policies, education, philanthropy, vacations and
assemblies. The "outsiders" then have a significant family role and provide
input to management.
Business governance (the board of directors) and business management (the
day-to-day operations) can be conducted either by family members or by outside
management. The involvement of outsiders in business governance and management
can be critical to the success of the business for two reasons. First, the
outsiders can provide the objectivity needed to balance all interests. Second,
the business must provide opportunities for employees and non-family
shareholders or it can become stagnant.
To conclude, McClure (citing the original work of his partner, John Ward)
summarizes all of these points in fifteen guidelines for managing the succession
1. Succession is a process - not an event. The process of succession
involves the owners communicating business issues with their children at all
ages. This includes not just the nuts and bolts of the business, but also a
sense of the owners' passion for the business.
2. Present the business as an option - not an obligation. Not all
children need to participate in the family business. Involvement in family
governance or the family's philanthropic efforts may be enough. The key is to
make sure that each child is involved in the family in some way so that no one
feels left out.
3. Get outside experience. Such experience should be derived from
working for other people before working for the family business (ideally from
three to five years and in the same industry).
4. Hire into an existing job. The business should not create new jobs
with unclear descriptions simply to keep a child or family member employed. By
hiring into existing jobs, the owner creates objective standards for the family
member's performance and lets the non-family employees know that children have
to play by the rules.
5. Encourage the development of complementary skills. For example, if
the parent and owner is a great salesperson, the child may want to bring
operations or information systems skills to the business. Coming out from under
a parent's shadow is key to a child's success.
6. Teach the foundations. This includes the older generation teaching
the next generation about the historic, cultural and strategic foundations of
the business. This education gives the younger generation a sense of the
underlying principles that hold the business together, the passion for the
business and the industry in which it competes.
7. Start with mentors. Children should not work for parents but rather
for a valuable, loyal, secure and long-lasting non-family member employee, one
who can teach the business values but does not have the familial relationship
with the child.
8. Designate an area of responsibility. New family employees should
have a well-defined area of responsibility; this is a counterpart to putting the
child into a well-defined job and to encouraging the development of
9. Develop a rationale. Both the founder generation and the successor
generation need to create a statement that explains why this difficult
transition is worth it. Remembering the rationale for this change helps families
get through the rockier periods in the transition. Just as the business itself
needs a mission statement, so too does the family to remind itself of what this
business means to the family.
10. Recognize that the family is not alone. Every family has
difficulties settling these issues. Conflicts between parents and children are
universal, as are the behaviors of first-born children and younger children. The
family must remember that its behaviors are less idiosyncratic than it thinks.
11. Have family meetings. Family meetings should allow the whole
family to discuss important matters, perhaps by selecting a topic and moderator
in advance. There should be communication, not simply mandates coming from the
older generation. These meetings can take place at the office, but they also can
be very successful if located at a vacation spot, giving the family not only the
time to talk about the business, but to play together as well.
12. Plan, Plan, Plan. Long before the succession takes place, the
founders should write a business plan, an estate plan, and a succession plan
simultaneously. Integrating these activities makes each more powerful and more
likely to succeed. These planning documents must be reviewed periodically to
ensure that the plan still makes sense for the family in light of changed
circumstances. Even buy-sell agreements and shareholder agreements are a
statement of family values!
13. Create an advisory board. This board might include outside
advisors (lawyers or accountants) and a person from the business's industry that
the owner respects. This group can provide the necessary objectivity.
14. Set a date. This is the date by which the business is handed off
to the next generation in whatever manner the family has agreed to. The founder
must be fully committed to that date, the staff must be aware of it and the
successors must be able to depend upon it.
15. Let go. Finally, the founder must not go back on his or her
agreement. The founder must let go of control of the business and allow the plan
to move forward, even if it endures rocky periods.
By remaining sensitive to all of these issues, the in-house counsel can help
resolve the personal and family conflicts that the business succession process
creates. He or she can (subtly, of course) take the lead in ensuring that the
appropriate family as well as legal structures are in place, that candid
discussions are held among family members, and that ultimately objective
standards for the roles of all family members (both "insiders" and "outsiders")
are implemented and followed.
1 The work attributed to Mr. McClure in this article comes
from his presentation in Portland, Oregon, at the Holland & Knight LLP
Annual Family Business Seminar, sponsored by its Private Wealth Services
Christopher P. Cline practices in the area of estate
planning and administration in the Portland, Oregon office of Holland &
Knight LLP. He is a Fellow of the American College of Trust and Estate Counsel
and has been listed in Best Lawyers in America. Mr. Cline is a frequent
speaker and author on estate planning and charitable giving topics, including
the author of the Tax Management Portfolio on Powers of Appointment,
articles in Tax Management Estates, Gifts and Trusts Journal, Estate
Planning Magazine, Probate and Property Magazine and Oregon State Bar
publications. He can be reached at (503)