How to transfer the family business to your kids without igniting a family feud

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Pat Komadowski is confident her parents didn’t intend for her to lose her house when they left their business to their children.

Komadowski, the owner of a real estate development business in Manitoba that operates strip malls, had to sell her house and nearly lost the family business due to her parents’ poor succession plans.

It began after Komadowski’s father died, followed by her mother five years later. Their parents’ deaths left her and her brother with 49.5 per cent shares in the company, with the remaining portion distinct but shared between them.

“When mom did her will, she did what she thought was right,” said Komadowski. “But if the two siblings cannot work together…

“We were deadlocked because the lawyer did not understand the corporate structure.”

The business was paralyzed as things were sorted out, said Komadowski. The two siblings’ signatures were needed for every expense. As the relationship deteriorated, Komadowski and her brother sparred over several issues, leading to three prolonged court cases that cost her the home she was living in before they were resolved.

“Ensure the lawyers know what the corporate structure stipulates before doing your will,” she advised.

Succession planning reveals generational differences

Finances are complex topics at the best times, but when they involve businesses, they multiply concerns and highlight generational differences.

Michael Cassata, vice president and business owner advisory strategist with Rockland Trust Investment Management Group, said the process should begin with understanding the emotions transferring a company or foundation evokes amongst all stakeholders. 

There are generational differences in how owners approach their companies, said Cassata. Baby Boomers were generally workaholics, with long days, working on weekends, and the drive to succeed as hallmarks. 

Their children often seek a different path.

“They operate their business differently,” said Cassata, who has spent 20 years helping places make these transitions.

“They operate their businesses seeking that balance and [are] not necessarily financially-driven as they are balance-driven. Success is defined differently.”

Many families avoid the elephant in the room, said Cassata, which ensures the first owner finds a way to cope after the transfer.

The older generation worked long days for decades, and it’s not easy to stop doing that, said Cassata. To help, founders should explore other charitable activities and hobbies years before the transition or discuss a reduced role in one specific area of the company or non-profit. 

Boomers were also well-connected to the community at large, and after building their businesses, often from the ground up, many have become cultural institutions that define neighbourhoods. 

One example is Pollock’s Hardware in Winnipeg’s North End neighbourhood. Opened in 1922, the store was locally owned until 2007, when the current owners could not find a buyer, and their children did not want the business. 

The store closed.

The potential of the business ultimately closing means owners may not want to give up the business at all, said Matthew Erskine, who owns and operates Erskine & Erskine, an estate planning business.

“Succession planning means giving up control soon or at death,” Erskine said. “For the founder, a successful transition (might be) no transition at all. 

“Sumner Redstone couldn’t understand he was mortal; he never let go [of Viacomm] until he was well into his 90s. Rupert Murdoch is the same way.”

Those giving up control experience a grieving process similar to a death, said psychologist and executive coach Donna Marino. The company is like a member of the family.

“When they don’t have that, they question who they are without it,” Marino said.

The good news for Pollock’s Hardware is when it closed, the community rallied. 

Losing their only hardware store in one of Winnipeg’s most vulnerable neighbourhoods, with no alternatives nearby, brought community members together.

A year later, it was re-opened as a community co-op and became financially stable in 2011. It is still running and successful today, even after the COVID-19 pandemic.

An independent voice is best when transitioning

While the advisors may approach business transitioning from different angles, they agree on the importance of having an independent voice with no stake in the company leading discussions. 

Marino said such a person can start by helping family members work through their emotions and feelings, which are rarely considered or suppressed. 

She said the sooner the conversations occur, the better, as the best decisions are seldom made under the stress of a family death. 

The generations often argue over competing visions. The older ones might want to maintain a path, while the younger ones want to make their mark. She added that if the family decides to sell the business, this can raise feelings of loss and guilt.

During the process, Marino asks the retirees to describe their plans. Executives typically are high achievers and intelligent, she said, so they need new challenges or risk becoming bored, depressed, and anxious.

While it may seem premature, beginning discussions three to five years in advance is best, said Cassata. 

The long period allows family members time to immerse themselves in the emotional process, he said, adding it can begin simply with annual meetings to discuss financials. 

Gradually, discussions can become quarterly and then more regularly, with more diverse issues on the agenda.

If the controlling family member is reluctant to have those conversations, Erskine advised that the other stakeholders discuss things independently and develop a plan with a coach’s help. 

It doesn’t have to be elaborate, said Erskine, but should cover financial and human resources, the company or foundation’s present state, and future possibilities.

For example, if the controlling family member dies, who signs cheques, deals with human resources, directs the sales force and monitors production?

“It comes down to anticipating the future,” Erskine said. 

“It gives you a plan for dealing with possible things coming up before they’re a crisis. If you die suddenly… and your kids have no idea how to run the company, you’re going to end up with this firefight because either they all want to run the company or none want to. 

“You can’t predict the future, but you can predict multiple futures.”

Employee ownership trusts another way to transition

Earlier this year, the federal government paved the way to make it easier for employees to buy the family business.

Called an employee ownership trust, the logistics are relatively simple: the company is sold to a trust, so employees do not pay out-of-pocket. The loan is then paid off from company profits, and employees begin to receive dividends.

One massive success story comes from Altona, Man., where Friesens Corporation has 600 employee-owners in a town of 4,300 people. 

In the 1950s, the owners began investigating new ownership models once they knew no next generation would take over. 

They started gifting shares to employees who, for a time, could exchange them on a private market. About 30 per cent of the staff owned all of the shares.

That worked until the early aughts when Friesens created an EOT since more people were retiring than purchasing shares. 

Friesens lent money to the trust to buy back shares and preserve value for the employees. 

Now, every employee is an owner, and every employee is a beneficiary.

The community implications of no succession plan

Losing a small business because there is no succession plan in place has broader implications than just a single family’s wealth. 

Preventing outside interests that have little concern for the health and wellbeing of the neighbourhood around the store is key to keeping neighbourhood character, said Arnold Strub, executive director of Employee Ownership Canada.

“You lose,” Strub said. “The economy of the community goes down.” 

Well-paying jobs are often lost to minimum-wage jobs, and less money is spent in the community.

According to the Canadian Federation of Independent Business, 66 cents of every dollar spent at a locally owned business is directly returned to the community.

For chains and stores owned by outside interests, that figure is about 11 cents.

In addition, shopping at one small business often drives people to shop at other small businesses nearby. 

Closing a popular restaurant or store could mean other small business failures follow.

“It reduces the overall demand and activity in the whole community and can even shrink it,” John Deskins, director of West Virginia University’s Bureau of Business and Economic Research, told media late last year.

Friesen’s Corporation is keenly aware of its essential role in the region’s economic health, said CEO Chad Friesen, adding their employee-owners generate wealth quicker than they could elsewhere. 

While creating jobs is vital, delivering well-paying ones has more significant residual effects throughout the area.

The benefits to Altona and the surrounding region have been immense over the two decades since Friesens adopted its current employee ownership model.

“Friesens doesn’t exist in Altona today if it wasn’t for employee ownership. Period. Full stop,” Friesen said. “This company has been a massive contributor to the region’s economic engine for decades.”

Do the kids even want the business?

So, you’ve decided to do everything you can to keep the business local and open after your ownership ends. What next?

When the transition begins, the first consideration should be who wants to be involved in the company. 

Older generations, whose business is their passion, may assume their children want to continue in their footsteps, but many do not, said Lauren Befus.

Befus — a former journalist — founded Memory Lane Jane, a boutique family biography company that helps business owners preserve their stories.

As owners reflect on their lives, it creates conversation opportunities and clarity, said Befus.

Those who successfully transition their business to their kids often value their relationship with their children over everything else, she said, and refuse to define themselves solely by the company.

“When the founder takes their identity and ego out, that has been very successful,” she said. “This isn’t about them anymore. What is going to maintain the relationship is vulnerability, authenticity, and open conversations.

“This transition is so hard. It can take a family out.”

Those interested in being involved with the business must identify the areas they are best suited to contribute to, with outside help filling the gaps. Before that happens, Erskine said the family must agree on the position’s responsibilities and give the manager the appropriate authority.

“If you don’t give someone the authority and just the responsibility, you’re setting them up to fail,” Erskine said. 

“There’s nothing worse than hiring someone then immediately undermining them by allowing people to go around them.”

The practical considerations of family transition

Many times, family members have different levels of involvement in the company. Some may work there, while others are involved as shareholders. 

How that will look when an owner retires can also be prepared years in advance. 

For example, Erskine recommended adding a provision to the transition plan, allowing someone to buy the rest of the stock. 

Erskine said stakeholders should consider the situation where someone inside the company forces outsiders to sell when developing that stipulation. The easiest time to ensure fairness is well before the fact.

Another practical consideration is insurance to protect the company should a key figure suddenly die or become disabled. 

Quantum Insurance Services founder and CEO Jennifer Burnham-Grubbs said business succession planning works best if proper insurance is in place to provide instant liquidity should a key member pass away or become disabled.

“The life insurance is designed for buy-sell and cross-purchase agreements that the attorney handles in advance so things are clean and the business can enjoy a stable, sustainable transition,” Burnham-Grubbs said.

She’s seen many cases where the lack of insurance has led to trouble. In one instance, in a dual partnership, the person in charge of sales and marketing died suddenly. 

The remaining partner, who was more comfortable in operations, ran the company alone while grieving. The deceased partner had the key relationships, so several accounts moved elsewhere, she said.

Had there been insurance in place, it would have provided the liquidity to hire an experienced manager to ensure continuity.

“That was hard to hear, the pain in his voice,” Burnham-Grubbs said.

Without a plan, should a partner die, the heirs replace them. If they do not want to be involved, or there is a conflict, the insurance liquidity may allow the business to buy them out. 

Don’t wait to buy insurance, either. Burnham-Grubbs said the best time to buy it is when people are healthy because they may not be there tomorrow.

Avoid the family feud

As she prepares to pass the business on to her son, Komadowski is determined to apply lessons from her experience. She has regular discussions with her son, who completed a business degree and ran a retail operation.

She also has a stepson. While he will not inherit any share of the company, Komadowski and her husband Warren have made provisions for him in their estate.

As she reflects on her experience, Komadowski stresses the importance of communication. Ensure everyone has the same information. 

The quality of that information matters, too.

“I have a lawyer. I have an awesome accountant I rely on often,” Komadowski said. “I trust them to do their jobs.”

She’s confident the transition to her son will be smoother than she inherited, and she’s glad.

“Family feuds are harsh,” she concluded.