Family Business Succession: Lessons the Roys Never Learned
HBO's Succession made great television out of a founder who would not choose. In real family businesses the same instinct destroys value quietly. A succession plan names the people, the documents and the money for taxes, and it does so before the founder has to.
HBO's Succession ran four seasons on a single premise: a founder who would not pick a successor, and children who spent their lives competing for a decision that never came. Most family businesses are not Waystar Royco, but the dynamics are familiar to anyone who advises them. The founder cannot let go. The children disagree about who is qualified. Nobody has put anything in writing. And the business, which is usually the family's largest asset, is the one asset with no plan.
Why it goes wrong
- Emotional ties. A founder's identity is bound up with the company. Choosing a successor feels like writing an obituary.
- Family conflict. Sibling rivalry and perceived favoritism spill from the dinner table into the boardroom, and employees take sides.
- Loyalty over competence. A less qualified family member is placed in a key role because the alternative, an outside executive, feels like a loss.
- Founder's syndrome. The founder nominally steps back and keeps deciding everything anyway, which leaves the successor with a title and no authority.
- No timetable. Larger companies plan leadership transitions years ahead. Family companies often start when the founder has a health scare, which is the worst possible moment.
None of this is a legal problem, and none of it is solved by a document alone. It is solved by a process that the family agrees to follow and a set of documents that make the outcome stick.
The elements of a plan
- Decide what needs to transfer. Ownership and management are different questions. A child who should run the company may not be the child who should own most of it, and a child who will never work there may still deserve an equal share of the value. Voting and nonvoting interests let a family separate control from economics.
- Choose on qualifications. Leadership skill, industry experience, temperament under pressure and alignment with the company's values matter more than birth order. Where no family member fits, a professional manager with family ownership is a legitimate answer and often the best one.
- Train in advance. Successors need years in roles with real accountability, ideally including time outside the family company. A transition that begins the week of the founder's retirement is not a transition.
- Govern the family. A family council, a shareholder agreement and a written employment policy for family members take the hardest conversations out of the kitchen.
The legal and tax layer
- Buy-sell agreements. A buy-sell agreement among the owners fixes what happens on death, disability, divorce or departure and sets the price or the formula. Where the agreement is funded with life insurance owned by the company, the Supreme Court has held that the insurance proceeds increase the value of the company for estate tax purposes and are not offset by the company's obligation to redeem the deceased owner's shares.1 Cross purchase arrangements, or an insurance LLC, avoid that result and should be considered in any agreement drafted before 2024.
- Lifetime transfers. Gifts and sales of nonvoting interests to children, or to trusts for them, move future growth out of the founder's estate while the founder keeps control through the voting interests. Valuation discounts for lack of control and lack of marketability reduce the gift tax cost, provided the interests are real and a qualified appraisal supports the numbers.
- Trusts for the long run. Placing the ownership in a trust, rather than in the children's names, protects the shares from a child's creditors and divorce and keeps the company from being split among fifteen grandchildren. A trust with a directed structure can leave business decisions with the family while a corporate trustee handles administration.
- Estate tax deferral. An estate whose closely held business interest exceeds 35 percent of the adjusted gross estate may pay the tax attributable to the business over as long as fourteen years, with interest only for the first four.2 Many families do not qualify because they never checked, and the fix is sometimes as simple as consolidating interests before death.
- Income tax on the exit. If the eventual plan is a sale rather than a succession, the entity's structure, the availability of the qualified small business stock exclusion and the timing of any transfers to trusts all affect the after tax proceeds and should be decided years ahead.
The hard part
The Roys never got a plan because Logan Roy did not want one. Most founders are not Logan Roy, but they share his reluctance, and the cost of that reluctance lands on the people they built the company for. A succession plan does not require the founder to retire. It requires the founder to decide, in writing, what happens if he does not get to.
Notes
Terry L. (T. L.) Turnipseed, J.D., LL.M., CTFA, is a tax, trust and estate attorney in Fort Lauderdale, Florida, and Head of Estate and Tax Planning at Alta Trust Company. He is a former tenured professor of law at Syracuse University. Reach him at tl@turnipseed.law or on LinkedIn. This article is general information, not legal advice.