The Liquidity and the Harmony Problem

If you are a business owner and care about your family, the biggest deal for your business and your family is to put your affairs in order!

If you didn’t show up for work today, would your family know what to do? Would they be prepared in their new role as owners? What would the likely short and long term financial impact be on your business? These are questions that too many successful business owners fail to ask themselves and even less do something about. The reason these questions are important is that statistically intergenerational transfer accounts for 60% of successions and is almost always the first choice if available according to a 2006 publication called the “Succession Planning Toolkit” developed by the Canadian Institute of Chartered Accountants (“CICA”).

How would you feel if a robber walked into your office last night, unplugged the hard drive from your main computer and there was no back up for this vital information? This is the best metaphor I can think of to describe what happens when the key shareholder of a successful business dies not having put his or her affairs in order nor having prepared the family stakeholders for their new role as owners. The family lost a loved one and they also lost their CPU and Hard Drive containing vital information regarding the Succession and Estate Plan.

There are usually two main problems that are triggered by the death of the key shareholder for the business and the surviving family members if the owner has not put her affairs in order.


The first problem is lack of liquidity in the deceased owner’s estate or the need for cash to pay debts that survive the owner. The first or second paragraph of the testator’s will (assuming the owner had a valid up to date will) usually indicates debts to be paid first. The biggest debt, which is sometimes overlooked, is the capital gains tax or estate costs owing on the deemed disposition of the owner’s shares in the Family Enterprise. The Executor will likely look first for cash inside a life insurance policy either corporate or personally owned to fund those debts. A life insurance policy can also ensure there is enough cash to fund a buy-sell agreement, provide the financial security for the spouse, as well as to buy time to retain or hire professional managers to run the business or get it ready for sale. Many entrepreneurs, if they can pass an insurance medical, are aware of this problem and acquire a permanent life insurance policy to provide for these needs. Also, if there are family members in the business, life insurance can be used to equalize claims to family members who are not gifted ownership in the business.


The second problem is a harmony problem or “family disharmony”. Virtually every successful family owned or controlled business may encounter this problem at some point in the life cycle of the family and the family enterprise. This I call Wealth Driven Family Disharmony (“WDFD”) and if not attended to can ruin the business as well as sever family relationships irrevocably. These are the stories we quite often read about in the media where family members who previously loved each other are engulfed in a legal dispute over the estate of the key shareholder/founder. This problem is created by a perceived unfairness by the surviving family members on the distribution of the biggest asset in the family – the business.

Family disharmony can be minimized by a shared family agreement. This is a non- legal agreement that ensures the business owner, spouse and family members (usually siblings) are on the same page when it comes to ownership succession and estate planning. This agreement Includes a shared vision of the future of the family enterprise and the family members role in it, a process of regular communication through family meetings and a governance structure ( set of rules) focusing on best practices of successful multi-generational family enterprises.

I realize that many successful entrepreneurs are reluctant to open this conversation with their family and with advisors because of the perceived emotional costs and the complexity of the issues that for the most part are outside the owner’s comfort zone.
Think about it this way – A Family Agreement is like a Succession and Estate Song you and your family created together and rehearsed together so that when you are gone the music will continue for your family and your family enterprise for many generations to come. The good news is that there is a good chance you and your family will be happier today and your family enterprise will be stronger today for having done this and that is priceless!

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