The more money in a family, the more problems that can arise when it comes time to pass the estate or business on to the next generation.
It doesn’t have to be that way, of course, but as we’ve seen in countless anecdotes and even our own client engagements, wealthy families have a tendency to fight over inheritances or the family business empire even when each member has been left more than comfortable by their deceased parents or relatives. Sometimes the squabbling starts long before—and there are even cases when the parents who built that wealth lead the fight.
Recent revelations about the Stronach family’s rapidly-escalating legal battle only underscore this risk.
Family patriarch Frank Stronach, who founded and grew the Magna International auto parts manufacturing empire and related businesses, is reportedly suing daughter Belinda and a host of others—including two grandchildren—for more than $500 million in damages for allegedly mismanaging the business and assorted trust funds. Belinda argues that Frank’s claims are without merit and that efforts were made to resolve the dispute long before it made the news. The family also has extensive interests in horse racing tracks around the world, which adds an extra layer of complexity to the question of whether funds were mismanaged or whether over-dabbling in various extracurriculars eventually weighed heavily on the Stronach bottom line.
Although disputes such as these are usually resolved out of court with a settlement of some form, they often inflict huge emotional wounds across families that can never be healed. Other squabbles result in protracted legal battles that take years and cost millions of dollars in legal fees. Sometimes there is a middle way, with both sides becoming exhausted by litigation and eventually settling. What is clear is that no one wins in a succession dispute. What’s truly frustrating is that already wealthy individuals typically end up squandering large sums of money simply to prove a point, or because they refuse to understand the other side’s position. It’s not surprising that disputes such as these are often borne of basic greed and entitlement.
In other situations, the founder of the organization disapproves of the next generation’s strategic management decisions and objects to the new direction they try to impose on the business—often vehemently.
While few entrepreneurs will ever manage a corporate succession process the size or scope of the one undertaken by the Stronach family, it’s important to note that the bestowing of business assets of any kind requires careful consideration. None more so than the choice of a leadership successor. In a family with multiple children, for example, it’s important that any wills or succession plans—and every entrepreneur should have both of these key documents drafted, updated and communicated long before their passing—outline rules of participation for each beneficiary. If one child is to take over the business, will the others still have a role? If not, they may maintain an ownership stake as shareholders or board members. Will they have voting rights? Setting out rules of participation and ensuring equal treatment is one of the surefire strategies to ensure the business succeeds over the long term.
So, too, is choosing the right individual to take the helm. That may not always be an adult child, of course. Many founders select trusted lieutenants to take over until their children are ready to move up the ranks—or because they know that family succession isn’t in the cards, opting instead to turn their business into a cash cow for the kids, but run by someone more competent and with the right corporate bona fides to keep it profitable. Either way, selecting the right successor involves asking a host of tough questions:
Do their values align with the organization?
Many founders build their companies on strong client relationships, outstanding service and an obsessive dedication to product or service quality. Their brand is defined by these characteristics and helps drive everything from innovation to client retention. It’s not uncommon for successors to take an organization in a very different direction. Some inherit a company that’s been run as a true family affair—even offering higher wages and forgoing certain efficiencies to retain top performers and create an environment driven by engagement and camaraderie—only to turn it into a well-oiled, if impersonal, machine. In the latter case, efficiency and productivity become religion and weaker, yet affable, performers are jettisoned in favour of those who can deliver all the time, every time. The thought of their business becoming an Amazon-esque hive of productivity governed by analytics is anathema to many founders. So, ask yourself: does your organization’s chosen successor share your vision for what the company should be going forward? If not, it’s time to find someone else to hand the proverbial reins.
Do they have the expertise to do the job?
This is the major shortcoming that many founders face. In the case of the Stronachs, scion Frank seems to be arguing that daughter Belinda lacked both the acumen and the focus (also the strategic wherewithal) to maintain the company’s growth and success. A judge will decide whether there’s any validity to his charge, but it shines a spotlight on the awkward question of whether a successor has the necessary experience and expertise to make a go of it once the founder retires or dies. Many future leaders will come armed with a plethora of degrees including the coveted MBA, only to tank the business in a matter of years. Ask the Bronfmans how the succession process played out at the venerable Seagram Co. after new CEO Edgar Bronfman Jr. decided to steer the family business away from ultra-profitable booze and into the rapidly-evolving entertainment business back in the early 2000s. Their likely answer: Not well.
Having the right expertise usually means spending time working in the company, analyzing the industry, having the foresight to see and respond to trends before they impact the business, and managing when industry or economic downturns risk its future success.
Can they be coached?
Headstrong, alpha-dog leaders are great at acting decisively, but if their moves are ill-advised, they can often do more harm than good. It’s crucial that any comprehensive succession plan includes the assignment of coaches and mentors to help the successor through the transition phase to provide both perspective and support when difficult decisions are on order. That team could include the outgoing founder, perhaps the president of the company or other senior executives, key employees with keen operational and client insights, family members or even outside trusted advisors (chartered public accountants, lawyers or board members) who might have the expertise to lay strategic options on the table when the going gets tough. Not everyone will be willing to take such advice. That’s why it’s important to find a successor who understands that strong leadership requires a willingness to, at times, be led in the right direction.
Can you manage the transition?
Sometimes passing the family business on to the next generation just doesn’t work. There are many founders who can’t let go, let alone watch as another individual nurtures their ‘baby’ and raises it in a way that they don’t approve. Others are happy to cash out, move on and let their kids or the company’s buyer take over. Of course, there is the option of managing a successor’s transition, perhaps over several years. This would involve the successor being afforded responsibilities in a slow and deliberate manner, with those duties escalating over time. Most founders will opt for this approach, particularly when passing a business along to their children. But in the event of an untimely death, doing so may not be possible. In that case, a founder’s will could appoint an interim CEO who transitions the business to a chosen successor over a period of months or years. Whatever the case, the terms of the transition should be defined, transparent and involve ample support.
Now, if you arrive at negative answers to any of these questions, then perhaps selling the asset outright and distributing the proceeds to your heirs is the best bet. At least that way money can be evenly distributed, largely mitigating succession risks. Or, maybe it’s time to find a new successor, possibly from outside the family.
Whatever the decision, ensure that a qualified chartered public accountant, strategic financial advisor and estate lawyer are involved in the succession-planning process. This is not a DIY task that any busy entrepreneur should attempt to manage on their own.
Marshall Egelnick, Managing Partner