HVACRDB

The Family Legacy: When Tragedy Strikes

“Good morning, sir!” his secretary says with a smile.

“Good morning, Olivia, it's a great day for selling!” retorts Mr. Jameson, the CEO.

“It sure is, sir, how are your boys doing?”

“I'm so glad you asked. Kevin just graduated with a degree in accounting and will be starting here on the first of the month. Brad, as you know, has been involved in the business with the sales and marketing, and is coming along well.”

“Yes, sir, he has been doing fine.”

“I am so proud of the boys and how they've chosen to be a part of my company that I started with my own two hands. Nothing makes me prouder as a parent than my boys wanting to continue the family legacy,” he says with a glowing smile.

“Yes, sir, it will be great to see them learn alongside you and take the business to the next level.”

“Olivia, it will be the proudest day of my life when I can pass this business on to my boys, watch it grow and travel my golden years with my beautiful wife.”

The next morning when Olivia gets to work, she sees the sales staff huddled in tears. “What happened?” she asks. A co-worker turns and says, “Did you see the news report last night about the car accident on the highway?”

Olivia, taking a deep breath, says, “Yes, I did.”

“Well, it was Mr. Jameson's car that was totaled. He did not make it …”

Imagine yourself faced with this very emotional and scary situation. Brad and Kevin have one set of concerns while their shaken and affected employees have a whole different set. Let's consider the employees' reactions first. On one hand, they have just lost a boss, a hero and, in some instances, a friend and adviser. On the other hand, they still have to make a living to support their respective families; what is going to happen? There has been “buzz” around the company that Brad and Kevin don't get along so well. What does that mean for their futures? Although they have suffered a great loss, they also must consider what is best for their own situations.

A completely different side of this ordeal involves Brad and Kevin. They have just lost their father in a very sudden and unexpected way. They have also lost their mentor, consultant and sometimes even a counselor. Although they don't realize it at this time, they will have to put personal (and family) feelings aside and work together to keep the business afloat. Where do they begin? What do they tell the employees? What, if anything, did Dad have in place to move the business forward to our generation?

The main concern that needs addressing instantly is what do Brad and Kevin tell the employees? They need to be honest with them, but they also need to establish an immediate confidence level from the employees toward the two “kids” who are now in charge. Because the two boys are well aware of the “buzz” that's out there, they MUST present a united front when speaking to the workers. Although they are disagreeable and emotional, they need to make sure that the message that goes to the employees is a positive and reassuring one. They decide that Brad should be the one to speak with the employees since he is the one who has been most identified with the company.

As Brad begins his speech, the employees have lots of questions. Brad takes notes and lets them know that he will address each and every question in a timely manner. But at the moment, he and Kevin need to get together and be sure the information they share is correct. He listens to their concerns, reinforces that the family legacy will continue and sets a meeting in order to give answers to all of their inquiries.

The funeral is now over, and Brad and Kevin must begin the task of finding Mr. Jameson's estate and succession plans. Mr. Jameson did not share with them any ideas that he may have been pursuing regarding passing the business on to them. Their mother had already informed them that she knows that she had signed some documents in the past, but “your father took care of all that stuff” is all they can get from her. They begin calling lawyers, CPAs and any other financial planners that they can find in their father's contact list. They finally contact a lawyer that their father had hired to draw up will and trust documents. He informs them that their mother and father signed and finalized all the documents. After searching their dad's office high and low, they locate a single file that says “estate.” They open to read his will and trust. It is clear to them that they have a problem. Mr. Jameson was the sole owner of the business, and he has given all of his belongings to his beloved wife. Although the boys understand his thinking, they both know that mom is incapable of running (or even working for) the business. Now what do they do?

What can we learn from the dilemma that Brad and Kevin now find themselves in? The answer is several things. First, Mr. Jameson did not share his plans or ideas with anyone. He should have been sure that his wife knew what his plans were. He also should have shared his business plan with his sons and possibly even some key employees. When preparing key employees for a potential disaster, they can be very valuable in supporting the thoughts and ideas of the original owner as the children (or other designate) step into their proper roles. The more support the new generation has, the easier the transition will be for both the employees and the kids. In the case of Brad and Kevin, there is bound to be some disagreement about who should take over. Brad will think that because he is familiar with the business and most of its employees, he should be in charge. Kevin will think that his college education should play a major role and has trained him well for the enormous financial decisions about to face the family and its business. If their mom or any key employees knew of the CEO's intentions, this conflict was avoidable.

Secondly, Mr. Jameson had no business plan in writing. The controller of the company only worked with annual budgets. There were no plans to prepare the company for sale, transfer or any ownership other than Mr. Jameson himself. His ambivalence toward retirement meant that this tragedy was waiting to happen. He passed away while still in charge, leaving lots of unanswered questions.

Most importantly, Mr. Jameson left no succession plans in place. Because he was the sole owner of his company, there is no shareholders' agreement to help put a value on the company or his stock. This will become a major obstacle for Brad and Kevin because the IRS has the right to come in and value a company as they see fit, at what they deem to be fair market value. This could have been avoided if the CEO had put a valuation process in place that had the following characteristics:

  • The stock price is set by a determinable formula.
  • At the existence of a buy/sell agreement, there is an obligation to purchase the stock.
  • That obligation was binding during life.
  • The arrangement has bona fide business reasons and was not for the sole purpose of avoiding penalties.

Because this was not in place, Brad and Kevin face having to plan for a “tentative tax,” which at current rates can be as much as 45 percent of the total value of the company. With a little bit of added estate and succession planning, this mess was avoidable had the Jameson family purchased some form of insurance to fund the valuation at the time of Mr. Jameson's death and moved forward into another generation of prosperity. Unfortunately, the boys not only have to deal with the IRS, they also have to deal with their mom and what will happen to her. According to the will, all property of Mr. Jameson's became hers at his death. She is unwilling and unable to work at the company but insists that she maintain a certain lifestyle. The two boys hastily agree to buy her out over a period of time. This move lets them keep control of the company and its day-to-day functions, but allows their mother some time to plan for her future. Keep in mind that this buyout of Mom is a LEGAL transaction and REQUIRES the proper paperwork. They will need to hire a good attorney to draw up the contracts so there are no questions down the road.

Several months later, Brad and Kevin are having their weekly dinner meeting to discuss wide-ranging business issues. They have generally accepted that Kevin makes the final decisions because his background and strength are in finance. Brad is the “face” of the company. He has most of the employees reporting to him. The vendors and major customers deal with him. The two have put their differences aside for the good of the company and its employees. They open a bottle of wine, toast to each other and fondly remember a time when their father told them that he was building a business to move from generation to generation to support not only his family but EVERY family that is employed by him. They have learned several lessons from their father's mistakes and have begun researching their own succession plans.

Kelly Trolia, CEO of the South El Monte, CA- based Burke Engineering Co., owns the business with her two brothers, Mike Burke and Craig Burke. The family experienced this type of sudden tragedy and hopes to help others by sharing their experiences. Her fictitious account highlights some of the problems you might face if you do not address the issues now. Contact Kelly at 626/579-0037 or [email protected]

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