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Articles - Succession Planning in Family - Business

Five must-answer questions for passing on the family-owned business

Monday, November 30, 1998




By Kathy J. Marshack, Ph.D., P.S.


Our world is a bundle of contradictions. The other day I read that the American Heart Association will not allow its healthy heart logo to be placed on Post Grapenuts cereal because the company is owned by Phillip Morris, a tobacco company. Grapenuts cereal has relatively no sugar and no fat. On the other hand, the healthy heart logo is on Kellogg's Fruit Loops cereal, which is 50% sugar, because Kellogg's pays the American Heart Association for the privilege. With these kinds of mixed values going on, it's very important that you recognize the only one who can take care of you is you. Not even a private non-profit organization can be relied upon to guide your eating habits. While it may be easier in the moment to focus on only those pleasant uncomplicated things in life (such as the taste of Fruit Loops) in the long run ignoring the contradictions may prove quite hazardous.

People are often surprised to find out that I can have negative, suspicious, even paranoid thoughts, and that I waste my time researching things like the contractions of the American Heart Association. After all, I am a psychologist and professionally I encourage entrepreneurs and their families to find healthy constructive solutions to the problems that life dishes out. So if I am professionally supposed to look on the bright side, why then do I point out everything that is or could go wrong?

The simple answer is balance. We live in a world of duality ... positive/negative, good/bad, male/female ... and balance is the act of giving each side attention and respect. Having a positive outlook on life is just fine, but looking only on the bright side is like the proverbial ostrich with his or her head stuck in the sand. You also need to look at what is going wrong, or not working, or not even in the ballpark of reality. If you fail to account for the negative side of things, you fail to plan and live your life fully. How can you correct your mistakes, if you never sort through your flaws and problems? To sum it up, my motto is : HOPE FOR THE BEST, but PLAN FOR THE WORST. That way you've got everything covered.

For entrepreneurial couples and families in business, there are two unpleasant areas which are regularly ignored and therefore never planned for ... death and divorce. Some of the juiciest scandals come from family firms that failed to plan for the succession of the business after death or divorce. Because the founder never thought he or she would die, they never developed a plan for whom to pass the business on to. Even if they had a successor in mind, they may never have told this person, let alone trained them. Furthermore, the founder usually has no plans for employees, customers, vendors or even their files or inventory. If you ask these founders what they would like upon their deaths, they often have very specific wishes, but they have no plan to carry them out.

Still there are more entrepreneurs planning for business succession than planning for divorce. Planning for the possibility of divorce of an entrepreneurial couple is a real taboo, apparently. Most couples fear that if you plan ahead for the possibility of divorce, you are setting yourself up to create a divorce.

Matt and Kristen were a happily married young couple when they started their modem manufacturing business in their garage. They had a toddler and one school age child at the time. Kristen's Dad loaned them the startup capital. Both Matt and Kristen had the technical expertise for the business, since they each had a degree in engineering and had originally met while working at a high-tech company in the Silicon Forest. It all seemed perfect and it was for awhile. But business started booming and employees were required. Then the garage got too small and a warehouse was rented. Then a third baby came along and Kristen was fatigued trying to cover the home front as well as the business. Soon she opted for staying at home and Matt ran the business.

Even this set up worked for awhile because Matt was a capable business manager and had hired excellent help. He did not have to work excessive hours because he and Kristen had designed an excellent product that practically sold itself, especially with their combined contacts in the industry. So Matt was able to be available to his family almost as much as when he had worked a 9 to 5 job. The problems emerged, however, when Kristen became resentful that she was no longer at the helm of the thriving business. After all, she had prepared herself through education and training for a career that she thrived on before the marriage and children. Although she loved her children and Matt, she felt a great loss at not being able to use her education and intellectual talents too.

Eventually Kristen's resentments grew to the level that she and Matt couldn't talk anymore without a fight. Matt started working longer hours at the office. The children were stressed and scared because Mommy and Daddy weren't happy. When the baby came down with a serious illness requiring hours of Kristen's time and emotional energy, she brought up the topic of divorce. As clear as their thinking had been about how to develop the business, how to use their combined talents and resources to secure a financially successful future, Matt and Kristen had never considered divorce and therefore had no plan for parting ... as marriage partners nor as business partners.

But let's back up and take a look at what might have happened had Matt and Kristen built into their life/business plan the possibility of divorce, right from the start.

If they planned for an amicable divorce or dissolution of the partnership, they not only would have a legal document to follow (such as a prenuptial or partnership agreement), but they also would have had to look at what could go wrong and make contingency plans so the worst may not happen. In other words, in planning for the worst, they would look at these things among many others:

  • What if the business grew so big it moved out of the garage?
  • What if there was more to handle at home requiring one or the other partner to quit working the business and focus more on home management?
  • What are the desires of each partner with regard to career and business?
  • What are the desires of each partner with regard to the children and family development?
  • What are the desires of each partner for their marriage?

Paradoxically, by planning for the possibility of divorce right from the start of a marriage and business venture, the entrepreneurial couple has to focus on those things that actually will help strengthen their marriage/partnership. By digging deeply into who you are, and what you want, you have the opportunity to negotiate with each other to make your desires come true. Instead of resentments building, the trouble spots are planned for. Therefore the entrepreneurial couple has a better chance of facing the problems head on, learning from them, or even avoiding them. Planning for the worst in this case isn't a prescription for divorce, but insurance against it.

Remember the question isn't "What do I do with my business or marriage/family if I die?" The question is "What do I do with my business or marriage/family when I die?" And the question isn't "What do I do with my business and marriage/family when we divorce?" The question is "What do I do with my business and marriage/family if we divorce?" Death is inevitable and those who don't face this one are avoiding their responsibilities to others and courting a miserable demise for themselves. Divorce on the other hand is not inevitable, but avoiding thinking and talking about the possibility is just as foolish as ignoring the inevitability of death. If you want to get started planning for the worst but hoping for the best with regard to creating a healthy, long-term, successful marriage/business partnership with your spouse, try asking yourselves this question:

If one or the other of us wants a divorce in the future, why would that be and what can we do now to prevent this.