Aspen current thinking column


Spring 2013

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Saturday, February 06, 2016

Family Business Mistakes: How To NOT Set Your Widow Up For Failure

by William E. Roberts, CLU, ChFC

In the past year, we have been exposed to several situations with widows whose husbands ran significant family businesses. In some cases, the passing of the husband/founder was sudden, in other cases, an illness preceded the demise, but the death came at an unexpected time. All the dialogues had remarkably similar issues and problems, so much so we decided to address the issues and create a series of questions that you might use to evaluate your readiness should a catastrophic event occur in your family.

In two of the families, the loss of the founder and driver of the family business success was sudden and completely unexpected. Until the event, one a boating accident, the second an unexpected heart attack, neither of the spouses were involved in the business other than from the periphery. Also evident was a lack of a Catastrophe Contingency Plan directing what actions should be taken if an event occurred. In both cases, the estate plan of the owners passed 100% of the stock to the widow. In some instances, this might work, and the widow might make wise decisions that results in the business continuing successfully. Unfortunately, neither of the aforementioned examples resulted in a happy ending. Let's explore what happened and what could have been done differently.

In one case, the stock passed to the widow, conferring all the power to make/enforce decisions, take distributions from the company, and hire/fire employees. Their son, who was in the business with his father when he passed, was completely unprepared when his father dropped dead of a heart attack. While friends and advisors provided advice, the fact remained that he was hamstrung in the running of the business, leaving him little room to make decisions to allow the company to continue much less grow to its capabilities. Key employees left as the situation deteriorated, finally leaving them with only one alternative. They were forced to sell at a deeply discounted price to a competitor. The mother was left with a depleted lifestyle, and the son was forced after a short period with the new buyer to leave and find a new position.

In the second scenario, the surviving spouse, despite her inexperience running the business, decided to step in and continue the business her husband had founded. While valiantly attempting to manage a complicated business, she made decisions to bring in relatives to run divisions of the company. Unfortunately, while loyal to her, they proved inept at the job they were required to do, and in too many cases, more enamored with the salary and perks their position afforded. Eventually, the business fell apart and was forced into liquidation.

The third scenario did not involve an unexpected event. An illness of the founder preceded, but his passing came unexpectedly and without warning. In this case, considerable planning was in place. A complicated estate plan had been completed by the owner and a successor selected. Control, however, remained with his spouse through trusts set up for her benefit. A Board of Directors had been created with outside board members, which his spouse chaired. While the potential for success had been put in place by the founder in naming his successor, creating the Board of Directors, and completing a thoughtful financial estate plan, problems still arose that would ultimately result in family conflict.

This case is more complicated because considerable planning had been done. The spouse was placed in a position that has taken her a good two years to understand. Her responsibility was far beyond mere financial issues and grieving for her lost spouse. She was thrust into a role as trustee and running a board that required her to learn all new skills. What was it like to run a board? How to act as a responsible fiduciary of her spouse's trust? All were challenges she was unprepared to handle. She turned to the family attorney to assist her in understanding her new roles, but felt fairly or unfairly that he was pressuring her to make decisions unfavorable to her family. Rather, he urged her to accede to the wishes of other branches of the family. She felt very alone, left searching for answers.

What steps could have been taken to change the results of these situations and hundreds like them, to avoid the tragedy of losing the family business? The following are a few questions that you can use to assess your own plan.

Does your business have a Catastrophe Contingency Plan to handle the stress caused by the sudden loss of the CEO/owner? This is not simply purchasing a key person life insurance policy. This is addressing the next day, the next week, the next month, concerns of customers, vendors, advisors and your banker. This is the “first 90 days plan.”

Is your estate plan the substitute for a well-thought out succession plan? Will it really work, and have you thought through all the scenarios that could arise?

Will stock be owned by non-operating family members? How well will the operating shareholders get along with the non-operating shareholders?

Does the company have compensation plans in place tying key employees to the company particularly during a difficult transition like the loss of the key driver in the business?

If your spouse will inherit the business, how prepared is she/he to make decisions about the operations of the company? Which advisors would they turn to and how well do they know them? How versed are they in the governance factors of running a company or a Board of Directors? What time frame will be required for them to overcome grief and learn the details of running the business and the board?

Complete succession planning is composed of seven elements, and an important practice that goes hand-in-hand with avoiding some of the aforementioned situations. For an in-depth look at the seven dimensions of succession planning, read our previous musings here. Also, for coping with the devastating effects of losing a loved one suddenly, Bonnie Brown Hartley’s Fire Drills for Sudden Death offers meaningful and constructive advice.

By no means is this a complete list of the issues faced in the scenarios described above. There are, of course, specifics unique to each situation, but what was true throughout was the lack of focus on the reality of the loss that occurs in these situations. While some planning had been accomplished, the in-depth planning and communication needed to survive was lacking. Whether it was an unwillingness to face the reality of mortality or serious procrastination, we will never know. What we do know is that the result was predictable, but also avoidable with the right effort and focused thought.


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