Passing the Torch Without Burning Bridges

Mar 5, 2024

Passing down a family business from one generation to the next is tricky. Without proper planning, things can get messy really fast and stir up all kinds of drama within the family. As someone who's seen a lot of family business transitions—both seamless progressions and more challenging situations—there are some key things I emphasize to families to help make the transfer of ownership go as harmoniously as possible.


I once worked with a family where the original founder left the business equally to his children and brother. His son eventually led the company, while his brother did not want to participate in the business and just wanted dividends. This caused constant tension and fights over money which ultimately resulted in the children buying out the brother's shares for $25 million. In the process, the family relationships were fractured beyond repair. This situation demonstrates the importance of separating involved and uninvolved heirs from the start to prevent conflicts over money that can permanently damage family ties.


Deciding which family members should be involved in running the business after you pass can be challenging with several elements at play. From my experience, handing off ownership evenly to all the kids rarely works out, especially if some want to lead the business and others just want financial returns. I’ve found that it's better to only involve the successors who are truly dedicated to the business. That way they'll be committed to the company and willing to sacrifice for its success. An option to give those not taking an active role is to provide an alternative asset or inheritance. Life insurance can be another option to even out inheritances between the involved and uninvolved heirs.


If you’re planning a transition due to retirement or stepping down from the business, clearly defining roles and decision-making after the transition is also critical. Business owners need to set clear expectations about their ongoing involvement shifting to an advisory versus controlling role. Formal structures like boards allow oversight without day-to-day meddling. The next generation needs breathing room to put their own stamp on the business without mom and dad peering over their shoulder.


It’s also important to plan ahead. Starting preparation 5-10 years beforehand allows for incremental shifts in responsibility and authority. Roles and plans may need revisiting and adjusting as things play out. Experienced advisors can provide invaluable guidance as objective third-party facilitators and sounding boards.


Above all, the senior owners need to embrace that the business will change under new leadership. The next generation should have the freedom to take the business in new directions, even if it makes their parents or founders uncomfortable. This requires managing expectations and resisting the urge to interfere in operational decisions.


Family disagreements are par for the course during tense conversations around business and money. Any family arguments or discord should be hashed out with open dialogue, mediation, or counseling before finalizing transition plans. Sweeping unresolved conflict under the rug will only make it fester after the torch passes.


Being transparent about valuation and deal terms is key to avoiding suspicions of unfair treatment. Even with the best intentions, perceptions of inequality can brew if the process isn't out in the open. And "equitable" doesn't always mean "equal" when dividing up assets—again, those putting in more “sweat equity” may deserve a bigger slice of the pie. Contingency planning is equally essential, requiring the next generation owners to have succession plans for themselves for risks like death, disability, or divorce.


With care, commitment, and communication, family businesses can successfully pass the baton from one generation to the next while keeping family harmony intact. Prioritizing fair treatment of heirs, transparency, contingency planning, and flexibility empowers the rising generation while respecting the legacy of their predecessors. Though challenging, with diligent planning, exiting a family business doesn't have to mean exiting the family and we're always here to help navigate the passing of the torch.

906 Rio Grande St. Ste 200 Austin, TX. 78701 | (512) 472-9033 | info@masterpiececap.com


© 2024 Masterpiece Capital, LLC. All rights reserved.


Masterpiece Capital, LLC is a registered investment adviser. Advisory services are only offered to clients or prospective clients where Masterpiece Capital, LLC and its representatives are properly licensed or exempt from licensure. This website is solely for informational purposes. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Masterpiece Capital, LLC unless a client service agreement is in place.


LLC FORM CRS