A detailed succession plan, decided upon long before it is executed, is not only necessary in a family-owned business, it can also prevent a family-destroying fallout. Scali Rasmussen’s partners share tales from the trenches that prove that point.
“If you don’t plan ahead for succession, and build in the right guard rails, it can tear families apart irreparably,” says Scali Rasmussen partner Jeffrey Erdman.
Erdman wears a litigator hat at the firm and says dealership succession issues don’t often end up being litigated. When they do, says Erdman, “it is often catastrophic.”
One such catastrophe involved a family-owned auto franchise. The dealership was passed from the original founder to members of his family who had grown up around the business, with the expectation that it would continue to pass down through future generations of the family. Some family members were excited to join the family business, while others were not as committed. However, that was not taken into consideration with the succession plan. Instead, the family members were each treated essentially equally, and this led to disagreements and family strife that was not easily reconciled.
“As you go generation to generation, there isn’t always the same enthusiasm about the business,” says Erdman. “It is hard to know how future generations will feel about the business. Auto sales are, for example, a consumer sales business at its heart and not everybody likes the sales business… the hustle, the ups and downs.”
As a result, it cannot be assumed that future generations want to be part of the family business or that they will have the skill set to succeed at it.
In any family business, but especially when so many people are involved, a clear plan is essential. The estate planning arrangement for the family auto business was “well-intended but ill-conceived,” says Erdman. “It did not fully account for the possibility of disagreement or family strife, let alone the interests or skill set of the downline family members.
“There are many litigated succession matters that began with the assumption that blood is thicker than water. They believe people will do the right thing by their family members. A family succession plan has to take into account that this may not always be the case,” says Erdman.
The moral: “Always treat it like a business. You may want it to always be a family business, but you have to account for the possibility that something could go awry,” he says.
The manufacturer’s role in succession planning
The automobile manufacturer, or “factory,” has the final say regarding who takes over at a dealership. Scali Rasmussen partner Halbert (Bert) Rasmussen has more than 30 years experience in dealer/factory relationships.
“Manufacturers believe the amount of control they have over succession is enormous, yet how much effort they put in to exercise this control varies greatly among manufacturers,” he says. “The laws, as protective as they are to the dealers, still give the factories a significant right to approve or disapprove who will be the dealer owner.”
Scali Rasmussen works to ensure the dealership owner’s chosen successor does take over the dealership.
The legal structure can take several forms. In the case of estate planning, there is usually a trust, limited liability company, or family limited partnerships. Scali Rasmussen not only helps with the structure of these entities, but “our job is to ensure the ownership receives proper approval and documentation by the manufacturer,” says Rasmussen.
When it comes to putting ownership into a trust, some manufacturers are fairly hands-off, and usually just want to make sure the trust is revokable so that they can stop a transfer to a successor should something bad happen. Others “get deep in the weeds on the trust details,” he says.
Another path involves a nominated or approved successor, as usually documented in a so-called successor addendum signed by dealer and manufacturer. While the factory may sign a successor addendum that gives the family some assurance that their chosen successor can take over, Scali Rasmussen has found there are almost always factory-inserted clauses in these documents that allow the manufacturer to “take back” any pre-approval of an approved successor.
As an extra safeguard against factory interference after the dealer operator’s death, several states have laws that says no manufacturer shall deprive the heirs of the opportunity to run a dealership after the death of the owner without giving the heir a reasonable opportunity to continue ownership. Such clauses vary in their effectiveness, however.
Scali Rasmussen has worked on cases where family dynamics have created messy situations and the manufacturer steps in. For example, a successful dealer operator passed away. In the trust agreement encompassing all the dealership assets, the wife was the trustee, but the son who was active in dealership management said he should be the dealer operator. The wife – his mother – wanted the other children to be given a chance, as well.
“It was a disagreement based on family dynamics,” says Rasmussen. “Fortunately, California law expressly protects the window and the heirs from factory efforts to rush the process. Without these protections, manufacturers tell the widow or widower that she or he cannot be the dealer due to a lack of experience, and that the only options are to sell or wait for the factory to terminate.”
The statute provided the time needed for Scali Rasmussen to create a comprehensive operating agreement that took into account the interests of the wife/mother and the children in continuing the dealership into the future.
The case highlights the harsh truth that one can’t avoid detailed succession planning and hope it goes away, says Rasmussen.
This article was written for Getting to Go, a buy/sell newsletter from Scali Rassmusen.