Neil Sedaka was right. Breaking up is hard to do, and breaking up a family business can be even harder.
In addition to the interpersonal relationships, the financial aspects can be overwhelming.
Trying to accommodate individual preferences can lead to poor decisions that might affect families for years to come.
Family business dissolution strategies can take many forms. For example, the business might be sold to an unrelated third party; sold, given or transferred by inheritance-or a combination of all three-to a family member or members; or sold to employees through a leveraged buy-out or an employee stock ownership plan (ESOP).
The sale to an unrelated buyer generally is the easiest exit. The seller seeks the highest price on the most favorable terms and attempts to limit their exposure to post-closing liabilities and conditions. The seller might be required to sign a non-compete agreement, to assist in a management transition, be required to continue to operate the enterprise as a subsidiary or division of the buyer's entity, or be required to leave the premises on closing and never return.
An additional set of complications and hazards accompany the disposition of a business to family members. Perhaps the family won't or can't pay cash at closing, so how will the family's indebtedness be collateralized? For example, will the children or siblings be required to give their personal guarantee, secured by their homes or the voting stock of the enterprise?
Business owners also should be aware that, depending upon the structure of the transaction, adverse income, gift or estate taxes can result. Because of the possibility of a transaction being designed to benefit the natural objects of the seller's bounty, related party transactions come under greater Internal Revenue Service scrutiny than unrelated party sales. And while the tax risks easily can be addressed, the interpersonal issues that arise among parents, children, siblings and in-laws might prove insurmountable.
Traditional succession planning requires parents to make uncomfortable choices: designating specific successors and deciding their responsibilities. This is where the plan hits the ultimate bottleneck because the parents are reluctant to address these critical issues. It is not unusual for the parents themselves to disagree on these matters, and the decisions can create family acrimony that lasts for years.
A much more effective plan is to reverse the system-called ``bottom-up planning''-which places the responsibility for the decisions with the successors. Often with the help of a facilitator, family members determine among themselves their titles, a compensation system, who will have authority over daily operations, what decisions should require consensus and a plan for resolving discord.
The percentage of ownership each will receive in terms of what is fair and necessary for success also is decided. It is not unusual for the successors to devise strategies compensating family members not employed in the business to achieve fairness in the context of overall family planning. Their willingness to be fair often is a revelation to the senior generation.
The sale of a business to existing management or employees can be tricky. The employee managers will need to negotiate the price, terms and structure with their boss. The normal stresses of any negotiation are magnified. Each side feels the other is being unfair under the circumstances, because each has contributed significantly to the business.
For example, the buyer might argue for a lower price because the seller has taken too much out of the enterprise in the past and significant new investments in plant and equipment are needed to remain competitive. The seller often feels the buyer has been more than fairly compensated in the past and all the necessary resources to allow the staff to prosper are being provided by ``his'' business.
If the transaction is not consummated, the buyer often ends up looking for a new career and the seller for a new key employee.
The dissolution of a family business can be frustrating and exhausting without a plan. Whether the decision is made to sell the business outright, enlist the involvement of the next generation or transfer it carefully to faithful employees, a plan is vitally important.
Like Neil Sedaka wrote: ``Think of all that we've been through-Breaking up is hard to do.''
Mr. Aussem is a partner in the Estate & Succession Planning Group at Brouse McDowell in Cleveland.
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Family-owned business stats
* Family-owned businesses comprise about 80 percent of all business transacted in America.
* Only 30 percent of all family businesses will survive the next generation.
* Only 12 percent will survive the third generation.
* By 2005, virtually all closely held businesses will lose their founders to retirement or death. Nearly 40 percent will change hands in that same time.
* 78 percent of all U.S. jobs come from family businesses.
* The top reason for selling or disposing of a family business: ``lack of planning''; 47 percent have no current plan.
* Nearly 65 percent of all family businesses do not have a vision-driven strategic plan.
* Nearly 63 percent of family business owners have not shared their business transfer intentions with their family or management teams.
Source: Henning Family Business Center, Effingham, Ill., based on a survey of more than 800 family businesses.