Open Communication

Communication is the key to a successful family business transition

Imagine the following scenario. Dad and Son are the sole shareholders in a successful family business. Son-in-law is a key employee in the business. Dad never discussed his will or his estate plan with either Son or Daughter. Dad dies somewhat unexpectedly. Son inherits remaining interest in the family business, becoming the sole shareholder. Daughter inherits cash equal to what Dad thought his interest in the company was worth.

Daughter does not exactly agree with Dad’s opinion of the value of the company. Son-in-law, who does not have a non-compete agreement with the family business, leaves company for a competitor. He takes a substantial amount of business with him. What is worse, Son and Daughter no longer speak to each other.

Unfortunately, this scenario is not an unfamiliar situation for many family businesses. While the facts may be different, too often family businesses are harmed when the head of the company is too discreet with estate or succession plans.

Is open communication a necessary evil?

Owning a small business is never simple. This is especially true of small family businesses, where management and key employees are either directly related or married to direct relatives. And whatever pecking order exists at Christmas dinner spills over into the daily operation of the business. Add that to the tendency of the business founder to operate as though everyone was still “living under his or her roof.” Is it a wonder that most family businesses never survive the transition to the second generation?

Related: Family business and the second generation curse

As a small business owner, you probably operate under the assumption that most employees, even many key employees, are on a need-to-know-basis. You will give them the information they need to do their job when they need it, if not a little after. This may work well for a while, but at some point someone is going to have to know what to expect should the unexpected happen.

If you have a succession plan, then you must share the plan with your management team, especially if they are members of your family. If you are not comfortable enough with your decisions to be able to discuss your plans with all those involved, then perhaps that is an indication that the succession plan needs a little work. At the end of the day, you have to be comfortable with your decision. And you must be willing to look your family in the eye and give an explanation of your decision.

Open communication is not just for family members

My example at the beginning of this article is based on a client situation that I am familiar with. Some of the facts may have been changed to make the story a little more dramatic. This particular client firmly believed in not letting his left hand know what his right hand was doing. Not only did he not communicate with his son and daughter about his plans for the family business, but he did not communicate all of his decisions with his attorney and accountant. It was not until after his death that all of the facts became known to the family, the estate attorney, and the accountant.

As a small business owner, you are responsible for keeping everyone in the loop. If you and your accountant decide to gift shares of stock to a family member, then you need to communicate this information to your attorney before the gift is reported. Your attorney should make note of the gift in the annual minutes and adjust the estate plan if necessary. Your accountant will probably need to file a gift tax return and change the ownership percentages on your K-1 if you are taxed as an S-corporation or partnership. Everyone has a job to do, but it is up to you to communicate your desires and wishes to everyone so they can do their jobs.

The bottom line

As the owner of a small business, you have worked hard to build something for your family. Any transition to the next generation will be difficult, whether you are there to oversee the passing of the torch or not. Don’t make the transition more difficult by hiding your succession plan.

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About David

About David

David is an accountant and adviser for small business owners. He also coaches clients on leadership and success. David is an avid reader. He blogs regularly on the books that he is currently reading.

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