5 Truths for Family-Owned Businesses When Passing the Torch

At the 2024 summer Olympics, the U.S. men’s 4×100 meters relay team’s attempt to win gold once again ended in ignominy when they suffered early elimination after botching the very first baton pass. A one-off debacle? Hardly. It was, astonishingly, the eleventh time since 1995 that a quartet of elite American sprinters were either disqualified or outright banned due to faulty handoffs.

This same set of athletes had arrived in Paris as overwhelming favorites, being both reigning world champions and having posted the quickest qualifying times.

When it comes to succession planning for family businesses, the difficulty of seamlessly passing the ownership torch—even when everything appears auspicious on paper—is something with which many ultra-high-net-worth individuals will be painfully familiar.

The dreaded ‘shirtsleeves-to-shirtsleeves’ generational dissipation of dynastic wealth is a curse so well-known as to have become almost a cliché in the corporate world. The true failure rate may well be higher than the oft cited 70% to 90%, given that many such calamities are likely to fail to show up on surveys.

In real life, however, there are several red flags, as well as golden nuggets, that controlling parties and their families should heed to safeguard their legacy and make their own succession planning as drama-free as possible.

An estate plan is not a substitute for a succession plan

Estate plans tend to be set up as ‘time capsules.’ In practice, this means the founder basically hopes for the best, since they will be long gone before anyone opens it up and begins analyzing what’s inside. As a result, the impressions of what people will do or see in that time capsule are routinely unrealistic.

In our work with multi-generational families, we’ve seen a lot of time capsules get opened. Frequently, second- or third-generation family members are destined to inherit a byzantine and inflexible business structure, one which essentially forces them to manage today’s wealth with yesterday’s tactics. Even if the framework was established with the very best of intentions for tax planning purposes, in practical terms, it often ends up causing untold frustration and family infighting.

It’s crucial for family business owners to step back and honesty ask themselves, “Would we be better off by simply hiring a professional management team?” History confers countless examples of how this has been beneficial for numerous high-profile families.

Preparing for contingencies is vital

In prudent succession planning, it often pays to say we’re going to maintain control at the equity level, but now is the time to bring in an expert team of outside managers who can formulate a long-term transition process. This is especially important when the enterprise originally comprised a small cohort several decades ago, and the family has since expanded dramatically.

Families who are open to taking on a role in the boardroom, as opposed to being an executive in the business, can help alleviate future conflict. Pride aside, it’s important to acknowledge the statistically low probability that the ideal candidate to run your business will be in your own bloodline.

Flexibility can be a family’s best friend

A main factor in failed transitions is an unwillingness to diversify. This is not to be critical, for life is complicated and the sheer financial and political complexity of the issues involved can quickly become daunting. Thoughtfulness in long-term succession planning should never be mistaken for weakness. Lest one be overwhelmed by the process, it helps to hire experienced professionals who can guide you.

In contrast, stubbornly sticking to a Rube Goldberg machine of an estate plan—one which involves multiple trusts which will run myriad foundations and take over countless privately held business assets—is often a recipe for future disaster.

It behooves family business owners to instead establish planning protocols which are more malleable and less restrictive (even if it means sacrificing a modicum of tax efficiency) rather than essentially placing handcuffs on stakeholders that limit the scope of succeeding generations and can sow the seeds of subsequent acrimony.

Equal is not equitable

Simply awarding all of your heirs an identical ownership amount, irrespective of their active involvement in the business, can cause serious discord among family members.

Working in tandem with trusted wealth advisors, sophisticated methods and thoughtful planning can instead be devised to satisfactorily manage expectations and appropriately reward whoever has created value and is tasked with running the business going forward.

Such a strategy, transparently communicated, incentivizes those individuals who are destined to play a greater role in future upside growth. This approach also simultaneously avoids alienating others whose involvement in the organization isn’t as hands-on.

Ownership is not synonymous with control

A key fear we hear expressed by exiting family business owners is “How can I give away the equity in my business while still maintaining day-to-day decision-making control over the company?” In reality, there are numerous time-tested corporate structuring and tax planning techniques which allow exactly that. For specific strategies, we recommend starting with a conversation with your Corient wealth advisor.

In conclusion

Ending, as we began, with an Olympics analogy, the wisdom of Warren Buffett is worth recalling here. Almost a quarter-century ago, the Oracle of Omaha inveighed against companies exclusively selecting their future executives from among a small coterie of family heirs. Doing so, he said, would be akin to “choosing the 2020 Olympic team by picking the eldest sons of the gold-medal winners in the 2000 Olympics.”

Sage advice, for in reality, family business succession planning is never that simple. There is no panacea. Rather, the process involves a painstaking series of steps that invariably take years to successfully execute.

Maintaining structure and discipline is all-important. The ‘quick fix’ isn’t to be found in a trust document or business plan. Above all, it involves a change of mindset by family business owners.

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