Family Business Succession Planning

One of the biggest tripwires that can blow up a family business is the transfer of leadership from one generation to another. During this episode, Mark Briol and Scott Benson discuss how family business members can establish parameters for orderly succession and how to effectively broach the prospect of leadership change with a company founder. Plus, they explain how a legal team can even the playing field for minority shareholders navigating the treacherous waters of power transfer.

On Divided Dynasties, attorneys Mark Briol and Scott Benson guide you through the ins and outs of family business and other complex commercial cases, and how they cut through the madness to deliver positive results.

Podcast Transcript: Divided Dynasties – A Family Business Podcast Episode 2

Mark Briol

It turned out to be one of the most successful businesspeople in the United States and was known for that. If you would have gone to him as the son, seeking to try and wrest control from the business, with or without a lawyer, your actuarial time on the face of this earth would not have been very long. I’m serious. He just wouldn’t have tolerated it.

Pat Milan

Hi, everybody. Welcome to Divided Dynasties. It’s the family business podcast from Briol & Benson. I’m Pat Milan, with Mark Briol and Scott Benson, two of the nation’s leading attorneys in the area of complex commercial and financial cases. On this podcast series, we’re examining family business, what makes it unique, and how to navigate the issues that often arise when you’re trying to manage a family business. We’d like to start today’s episode by saying we want to hear from you. If you have questions about family business or other complex commercial and financial cases, you can send them right to us by emailing podcast@briollaw.com. We will address your questions on future episodes, we want to help you navigate the challenges that you’re facing. So guys, I’d love to start today off with something that had been near and dear to me, and I’ve kind of experienced it in our own family business. One of the biggest tripwires that literally can blow up a family business, I wonder if you agree: the transition of leadership from one generation to another is a big tripwire. Do you agree?

Scott Benson

I do. I think a lot of times, that’s what will cause the lawsuit that we eventually get. It’s a time when all of the sibling rivalry probably comes to play, and sometimes the best laid plans for the founder of a company just don’t play out the way he thought. We had a case where the founder, the father, wanted to pass the company on, and he actually had his kids placed in the spots they really belonged in. The one with the most business acumen was the CEO, and the father passed along to him more voting stock than the other kids got. Our client was in the field and the operations of the business. Two of the kids were not involved in the business at all, really didn’t have an interest in the business, and then the fifth one was the marketing person for the company. So it was interesting that the CEO of the company, because he had more voting shares, really was stacking the board in his favor, with a goal towards what we found, in the end, really forcing his siblings out. He forced the two out who weren’t involved in the business, probably for less than what they ought to have received had they hired us. I think they would have gotten more for their shares, and then went after our client. In the end, I think the father, the founder of the company, really regretted having set up the company the way he did. In fact, he told us he wished he had retained the voting shares of the company so that this didn’t happen. I think he just didn’t anticipate what the personalities were going to be and how they would come into play, because he probably had all of his kids in the right position in the company.

Pat Milan

Mark, it seems to me like what the father was doing was a good strategy, but something got fumbled there in the handoff. Greed, ego, those things come into play. You can have all the right words on the paper, right?

Mark Briol

Exactly. I think the strategy and the way it was documented and the way the voting shares were transferred, was all done right, except I think he had more trust in all of his children together than he should have. One of them took advantage of that. I think had the person not been as greedy and tried to wedge out the other shareholders like he ended up doing, it would have been fine, but as it happened in the end, our client who ended up going to trial on this case and got a large verdict doesn’t talk to him anymore. His father doesn’t talk to him anymore. His sisters don’t talk to him anymore. So he made the decision that running this company and stacking the board in a way that allowed him total control was better than having a family, and basically just jettisoned the family out. He had to pay some money because of that. But as I understand now, the business is still flourishing and all the others are out, they’ve just been paid for their shares.

Pat Milan

Right now we’re talking about one where the founder, the father, had a really good strategy and the execution of the kids, the thing went off the rails. Can we just back up a little further? Let’s go back to the founder still being in charge, reaching an advanced age, some in their 70s, some maybe in their 80s, and the kids are still floating beneath it. It’s the unspoken truth, that this thing needs to be handed off, and it doesn’t happen. I’m curious, I’ve seen that a lot. I wonder if that’s a usual experience. And if it is, what can the kids do to advance this thing along without causing a civil war?

Scott Benson

I have to say, we see that a lot too, and there’s a lack of planning and should the founder pass away or basically lose the competence to run the business, it really becomes a problem. In many cases, the business starts floundering and there’s nothing that the kids have the authority to do. In that case, the kids have to have a sit down with the founder, their parents, if they are their parents, and really have a discussion about how the family business can be saved. Because normally the founder, that is their main concern is that they started this business to succeed and to create wealth for their family. It’s a delicate topic to bring up, but really having that frank conversation as best you can, and understanding where your parent is, is really the thing that’s going to save the business in the end.

Pat Milan

Now, I’m going to tell you from my own experience, having that conversation with quote, “the old man,” about giving up the reins is probably one of the scariest things and nine out of 10 kids, if there are 10, wouldn’t want to do it. What is the advice for kids who really have a father or a mother as a founding CEO and they believe it’s time for this leadership change? Is there a graceful way? Does it reach a point where the kids have to do something and reach out to someone like yourself to help advance this to save the company?

Mark Briol

We had one situation where it was a family business, it was a huge family business, it was worth over a billion dollars. We didn’t represent the founders, there were two co-founders under their father who had actually started it. He had twin boys, they ran the business after he left equally as equal partners in the business. They got along just fine. Scott and I represented them in their divorces when they were both 85 years old. What they had actually done was they had maintained a good relationship together and run that business until they were 85 years old. They had their children in the business and some of the children were better in some things as others and you find that out, and some are not as good at certain things as others and you start finding that out. When it came to trying to transition the business, that became a little bit of an issue because one of the sons of one of the parents, one of the twins, wasn’t quite doing or really showed as much interest in running the company the way the other twin’s son did. Ultimately what happened is, I’m not sure this happened before. Soon before or soon after they died, but they actually ended up selling the company to a hedge fund for over a billion dollars. I don’t know who stayed and who didn’t stay with the company after that. But they held on to the company as long as they could and kept control of it. And when it didn’t work anymore, they sold it. That’s another strategy that can be employed in these things, is don’t let someone take control to sell the company. But it’s really hard. These guys were sharp into their 80s. They weren’t suffering any decline either in memory or in skill. But when they saw that it was going to be left to another generation that wasn’t going to either have the appetite, or the enthusiasm, or the ambition to run it the way they did, they just determined to put it on the blocks and sold it to a hedge fund.

Pat Milan

I think it’s hard for some of these, particularly for the founders, and we’ve talked about this when we were talking about doing this as a podcast, many of them started close to abject poverty, right? When they start these companies they take big chances, they want their family to do well, and their kids are affluent. They don’t have that same burning desire, quest to get through it. I think it’s hard for them to give up control.

Mark Briol

I think it is hard for them to give up control, and the way that they’ve raised their children, in a lot of these cases, doesn’t really facilitate the ability to give them control, as you just pointed out. Scott, you were going to say something?

Scott Benson

Oh, I was going to basically say the same thing. We had a client, who as you pointed out Pat, came from a very poor upbringing. He used to always tell us he grew up in a tarpaper shack, and he became extremely successful. I think he did so because he wanted to make sure he was taking care of his family, but his family for the most part wasn’t in his business. His son didn’t want to be in business with him. His son actually ran his own businesses and did fairly well, and his daughters, one of them was always grateful for anything she received. Her view was everything was from the largess of her father. The other was always suspicious that she should have gotten more, but he himself was really the one who was going to make this thing run and make it a success and didn’t really involve his kids.

Pat Milan

I made this point when we were talking about preparing for this, one of the biggest and most successful family companies in the world, solved this problem by mandating CEO retirement at age 65. Of course, that family has been in that business for 150 years, they’ve had time to figure out how to do it right. Either of you, what’s your advice for children of a founding CEO who believe it’s time for a leadership change? The prospect of bringing it up is pretty scary. What should they do? What’s your best advice to at least broach the subject and begin the process?

Mark Briol

Go ahead, Scott.

Scott Benson

I always say, bring your attorney with you. Let them make the hard arguments, let them actually raise the points. And listen, if you need to distance yourself from that attorney because they weren’t exactly representing you and what you wanted, later on, you can do that. But at least if you have your attorney there making the points that you’re not comfortable making, you brought that conversation a long way and a disinterested party, either your attorney or a disinterested board member, can really help drive that conversation. And lay out, if the time to make a transfer isn’t now, let’s talk about when it might be and how it might happen. At least it’s not as threatening if you’re not saying this is going to happen today. We’re going to decide how, in the next several years, this transition will occur.

Mark Briol

Individually dependent on personalities, the case I think Scott was just talking about a minute ago, he turned out to be one of the most successful business people in the United States, and was known for that. If you would have gone to him as the son, seeking to try and wrest control from the business, with or without a lawyer, your actuarial time on the face of this Earth would not have been very long. I’m serious. He just wouldn’t have tolerated it. So while in that case, and again, he died at 90, and ran his companies all the way up to 90. Right before he died, he sold his company and left all the money to his children, as he had set up trusts over the years. It was an interesting generational watch on what happened. The second son tried to do business but had no enthusiasm for doing business. He just wanted to spend the money. He just wanted to have fun. And that’s what he did. And he did that all the way up until the day he died alone in a Las Vegas hospital. And his son, he followed in his father’s, not his grandfather’s footsteps, literally never worked a day in his life and is now in a state prison spending the next six years, federal prison, a federal prison, spending the next six years of his life doing the same routine every single day. Literally the name that if I said the name, everybody in the country would know who it was, to his son, to his grandson.

Pat Milan

Alright, don’t say the name. And number two, welcome to the feel-good podcast on family business, folks. But these are disastrous results, which really begs the question: is there a best-case process to establish some rules and guidelines and parameters for orderly succession for family owned companies? Because I have to tell you, I don’t know of many that do it well.

Mark Briol

Well, the problem is to have the kind of personality that it takes to be an individual to go out and have nothing and make a big business out of it takes a unique individual. You can have seven kids in your family, and only one will have that kind of personality, much less your children who always say, “The acorn keeps dropping further from the tree as you go out from it.” The problem is to try and find a second personality like that. It’s hard to do. One of the things we didn’t specifically talk about during this podcast, it’s how you set up the first documents. I think there should be arbitration agreements put into every single corporate set of documents that you put together, in terms of buy-sells, in terms of your bylaws. Now, some people want their dirty laundry aired in court because they think they get more leverage against people to do it. I think the easiest way to do it is to get businesspeople listening to businesspeople trying to resolve those affairs, rather than just either duking it out in the backyard or having a jury of your peers try and figure something out, family that’s not getting along.

Pat Milan

One of the questions I want to ask is when someone reaches out to you, but there’s a whole period leading up to that, and I guarantee you, someone’s watching this, they’re going, “Oh my God, you’re describing my life, my family, our business.” If they’re not quite ready to reach out to an attorney yet, what are some of the things they should start doing or should start collecting or noting to set them up for success if in fact it does end up with someone like yourselves coming in to fix this problem?

Mark Briol

Watch our podcast.

Pat Milan

Okay. But we’ve talked about it because family businesses are notoriously bad for having policies and procedures on paper, or at least ones they can find, right?

Scott Benson

Yeah, I would say it’s amazing how many people don’t realize that they have documents, that there are bylaws, or there is a management agreement, or that there is anything set up. And even when they have set those things up, they’ve forgotten that they exist and they don’t go look at them again, and so they don’t really follow the procedures that are set forth there. So my first advice would be: check to see what the founding documents say, and where they are, and what they provide for, and have they been followed? Do you have yearly meetings of shareholders, if that’s required? Maybe you’ve never elected a board at a yearly shareholder meeting, that the board’s just been either appointed by the CEO or just gone on and on without an election. So checking if you have documents and what they say is probably the first step.

Pat Milan

That being said, I’m curious, do you feel like people show up to talk to you at the right time? Or you’re like, “Oh, you should have come and seen us nine months, a year or five years ago?” When’s the right time? How do you know when it’s the right time to call Briol & Benson?

Scott Benson

I always say that it’s never too late and it’s always the right time to call us if you’re looking like you’re going to litigation. Normally, I always feel, when we represent the majority or the owners of the company, I often wish they had come to us earlier before they had done things that might be oppressive to a minority shareholder. And for the minority, it’s typical that they would come to us when bad things have happened to them. It’s really hard for them to approach us before there’s been that oppression or they’ve experienced something from the majority owner that is bad for them. So normally in those cases where we represent the minority shareholder, they come to us at the right time.

Pat Milan

Yeah. Hey, Mark, I’ve got one last question I just want to toss out there. Let’s assume we’ve got folks who are watching. They’re in situations, it’s already been botched. There’s anger, fear, loathing going on. What is it that you guys can do to turn a bad situation around?

Mark Briol

When you say turn a bad situation around, nobody’s going to be friends again. It’s not going to turn around where I tell my clients when they come in, “I can make you have a happy family.” It’s not going to happen. So when you say, “Turn a situation around,” we can turn the situation around economically, meaning we can get them the amount of money that they’re owed and due, and the kind of rights they have in the company that they are entitled to. If the founder was the one that put together the corporate documents, get this person the amount and power that they were allowed to have under the original documents. Or in the case of the old Pedro case, he had an anticipation and an expectation, as the court found, of lifetime employment. You can’t just get fired. Now, I can’t make you work together. I can’t make you like each other. But I can even the playing field out economically for you, and that’s what we do.

Pat Milan

Cool. Let’s wrap this up. I just want to say to folks, these guys are the nation’s best when it comes to helping minority shareholders get a family business on track and performing in the best interest of all the shareholders. Whether it’s minority shareholder rights, securities fraud, patent litigation, or high asset divorce, Briol & Benson are prepared to answer your questions and figure out if you have a case, and how to get control of your rights. For more information, just go to briollaw.com. To subscribe to the podcast, you can find us on Apple Podcasts, Spotify, or YouTube. Mark, Scott, thanks for your time today, and we’ll see you on the next podcast.

Mark Briol

Thank you.

Scott Benson

Thanks.

Related Posts