Like most law firms, our firm's family business, succession, and estate planning practices utilize a variety of tools to assist our clients in achieving their goals of transitioning ownership and management of the family business, while preserving family relationships. The tools we use are typical of most law firms experienced in these areas, and include family limited partnerships, GRATs, sales to intentionally defective trusts, Buy and Sell Agreements, compensation programs for management, boards of directors or advisory boards with outsiders, charitable trusts, private foundations, and family councils and family meetings. Each of these tools addresses a specific perceived need, such as to pass ownership, retain nonfamily management, improve oversight of management, and create and sustain communication within the family. For many of our clients we are the principal adviser on succession planning matters. In some cases a small team consisting of the lawyer, the accountant, and perhaps a financial adviser are responsible for the planning. Using family business consultants and psychologists is less common.
In recent years we have noted that clients at both ends of the spectrum–the family experienced in succession planning, and the client new to the succession planning process–seemed to struggle at times with how to proceed with the planning process. In the case of the experienced family, as tools are implemented and the planning became more complex and sophisticated, and as the family grew and evolved, it became more difficult to coordinate the effects of all the different pieces and understand what roles they fill. Clients new to succession planning found the choices and decisions overwhelming. Each of these clients needed a framework within which to consider and understand the succession planning process, to see how the existing or available planning tools fit into this framework and to relate them to the needs they solve. From these differing needs and ends of the planning spectrum, we have begun encouraging clients to develop a "Succession Plan." By this we mean a single document summarizing the family's approach to the business, its goals and objectives with respect to succession of the business, and its family relationships. In a sense the family's written Succession Plan complements the business's written Strategic Plan.
The idea of utilizing a Succession Plan seems self-evident, simplistic, and perhaps unnecessary. After all, development of a plan for succession is the reason many of our clients seek our assistance in the first place. And yet none of the specific tools we might use in a given situation adequately explains or captures in its totality a given family's plan for the succession of its business.
As lawyers, such a document presents a number of concerns. Would this document create ambiguity and become fodder for future disputes? Would a lawyer's desire and training to cover every contingency simply create another long and complex document? Would clients accept it and be able to work through the preparation of it? Should the lawyer write it for the client or should the client be the author with some guidance, direction, and editorial oversight from the lawyer?
Despite these concerns, developing a single source Succession Plan document that attempts to set forth guiding principles, goals, and objectives helps the family in numerous ways:
Unlike any particular planning tool, including Trust Agreements and Buy and Sell Agreements, the Succession Plan explains in a single document the family's goals and objectives with respect to family matters, ownership of the business, management and employment in the business, charity, and succession.
Properly done, the Succession Plan is short, understandable to adults of all ages and backgrounds, and serves as a ready reference for members of the family and nonfamily management to understand the family's goals and objectives.
It offers a benchmark against which a proposed planning tool or decision can be evaluated to determine whether it advances the family's and business's agreed needs and interests.
It provides a way to determine if there are areas or topics to which the family needs to devote additional time and effort as part of its ownership of the family business and succession planning.
As a single document in which all constituencies join it provides a place where all of those constituencies can "buy in," commit to achieving the plan, and agree to be accountable for failing to do so.
It provides a tool for explaining to and educating younger members of the family and helps emphasize to the older members the need to mentor and educate the junior members on the matters, philosophies, and views that are most important to the family.
It can serve as an appendix to trust agreements to provide guidance and direction to the trustees regarding the grantor's intentions with respect to the business.
For clients new to succession planning, the process of writing a Succession Plan offers a framework for considering the many items that are important to successful succession planning.
So what is the format and organization of a Succession Plan?
We have clients write the Succession Plan, and we seek to confine our role to providing them with an outline for the Plan and general guidance on its contents, and offering editorial comments on the drafts. By having the client write the Succession Plan, the document sounds like the client and has a familiar feel to the constituents, can more accurately reflect a family's emotional commitment to the business, and avoids sounding like a legal agreement. The joint family effort of putting it together also serves to focus the family on the process and the issues.
The final product should be short (somewhere in the range of 3 pages, and not more than 5), general in nature, and reflect the existing efforts that have been made to transfer ownership and management of the business and to address family needs, as well as intentions for the future. The document states that it is a nonbinding expression of the parties' intentions and is not intended to create legally binding obligations. It compares to a letter of intent such as what might be used in the early stages of an acquisition. While attention to the language will be important, it can be relatively informal, and using bullet points is perfectly acceptable.
The Succession Plan is signed by each adult member of the family. As family members reach an age of "maturity" (the definition of which might vary from family to family), joining in the Succession Plan by signing may mark a rite of passage and be the "admission ticket" to full participation in the family with respect to the business.
Often it will be appropriate to include key nonfamily executives as parties. There are at least two reasons for including nonfamily members. First, successful implementation of the Succession Plan requires the active support of the management of the business. Achieving their buy in to the Succession Plan can be essential to its successful implementation. Second, although they are often reluctant to raise the matter, management and employees are keenly interested in the success of the Succession Plan. Their livelihoods and careers are intertwined and affected by the company's future ownership and management. Therefore, the Succession Plan needs to address the concerns and interests of family and nonfamily management and employees of the business, and the participation of one or more key nonfamily executives in the preparation of the Succession Plan will permit them to serve as proxies for the interests of management and employees of the business.
Statement of Purpose
A summary of the family's goal(s) regarding succession should be included prominently near the beginning of the Succession Plan. The summary should touch upon each of the major subjects or elements addressed by the Plan. These subjects include goals and objectives regarding maintenance of ownership and control of the business among family members, the leadership and management of the company, preservation and protection of the family's values and their relationships with one another, and sharing in the wealth and income derived from the company's financial success. The remainder of the plan expands on each of these elements.
Maintenance of Ownership and Control
A section on the maintenance of ownership and control describes in general terms the objective and plan for transferring ownership and control and summarizes the family's views regarding ownership. In writing this section, families consider who should be eligible for ownership (i.e., only descendants, spouses, employees, etc.), whether and in what form restrictions on transferability should exist, and how controlling ownership of the company should pass and when. This also is the section in which to include a statement of intentions regarding long-term control of the corporation. For instance, if it is the family's intention that one person or branch of a family should have control, or that ownership should be restricted to individuals active in the business, this is a place to express that intent.
Leadership and Management
This section describes plans for transferring leadership of the company. For example, if the family has settled upon a process for identifying, developing and evaluating future leaders, the Succession Plan can describe that process. In addition, the family can describe plans for the process and timing of a phase-down of the senior members from their roles at or involvement in the company.
Strong values and relationships are key to financial success and success as a family. The Succession Plan can also include statements regarding this topic. For example, if the family desires to maintain strong relationships and pass certain values on within the family, the document can state the family's intentions and describe how this will be achieved. This statement then can become the basis for creating a family council or holding regular family meetings and for creating accountability to follow through. A family that has a strong tradition of philanthropy can use this section as an opportunity to state its convictions and describe how it will strive to uphold that tradition.
Sharing the Resulting Wealth and Income
In larger family businesses, considerable income may be generated, with accompanying questions about whether income should be reinvested in the business, to the disappointment or even detriment of those not active in the business, or whether income should be distributed and shared broadly among the family. The Succession Plan can set forth the family's intentions regarding how the economic fruits of success will be shared and used or made available to members of the family. For example, a family might state whether they intend to utilize the company's income to grow the business or to provide current income to shareholders; state a desire to use other vehicles, such as real estate partnerships leasing property to the company, to provide supplemental income to members of the family; and/or the family's intentions to offer (or not offer) opportunities to periodically liquidate interests in the company to the shareholders.
For families that have been working on succession planning for long periods or even through more than one generational transition, the suggested parties to the Succession Plan could write something or describe orally their views on these issues, and there might be consensus on most or all points. Families need to be aware and consider, however, that it is possible that in raising these issues dissension could emerge or be revealed. If the senior generation is in good health, the likelihood of significant disputes can be reduced by the parents leavening influence. Similarly if the company is prospering, it is easier to work through difficult issues than it might be if the business is facing financial difficulties.
In those cases where disagreement may exist, which may be painful to contemplate, in the long run it usually is better to identify the issues early and deal with them. Ignoring them is not likely to make them go away and the concerns will eventually emerge anyway, perhaps even stronger than now. Nevertheless, sensitivity to this possibility is important and for those not skilled or trained in family counseling, identifying counselors who can be called into the situation may be advisable.
For many of our family business clients, developing a written Succession Plan has proven to be a helpful adjunct to their planning. It has helped them move their planning process forward, given them a framework for understanding the purposes of various planning tools used, and assisted in the education of family members.