2. Creating Partnerships: Benefits and Risks of Passing Key Assets to More Than One Person
It is quite common for business owners’ estate plans to include passing a key asset jointly to more than one person. In many cases, transferring assets to multiple people may be the only alternative. A vacation home or investment property may be difficult to divide into pieces and spread to different children for emotional, financial, or other reasons. Parents may have more than one child working together in a family business and in cases where only one child works in the business, he or she may not be able to purchase the business without taking on a partner, such as a key employee. There are many estate-related strategies that include the creation of partners of one type or another among the heirs, or involving an heir and someone else, such as a key employee.
Including multiple successors in an estate plan can help ensure success. A priori, we know that partners taking over a business have a greater chance of success than one person alone because of the increased resources that additional owners contribute (money, skills, experience, etc.), at least if the partners can avoid conflicts with one another. There is also empirical evidence that demonstrates that having partners produces positive, tangible business results beyond what solo inheritors or successors can achieve.1
Estate plans that create business or real estate partnerships (regardless of the specific type of legal entity) may be laying the groundwork for future success; however, they are simultaneously creating challenges that are not present when assets are transferred to one heir alone. In the multiple-successor scenario, the partners have to cooperate to some degree or the transfer will ultimately fail. This is obviously the case, for example, when the sale of a business during the parent’s lifetime will be funded over time from the cash flow of the business. But it is also true in many cases whether or not the parents will be dependent on the cash flow. When one or more children are involved in taking over the business, parents are likely to feel that an asset transfer is a success only if their children get along well as partners. This is the case even if there is only one son or daughter involved and the other partner is a key employee. For many parents, the success of the child as an owner is more important than any money they will receive.
Plans that turn heirs into partners also create risks that are absent when an asset is passed to one child alone. All plans that rely on the success of people working together must face one serious drawback: Partnerships are notoriously unstable. It is for this reason that so many advisors warn people to avoid any kind of business partnership. It’s also why a poll of business people reported that two-thirds of the respondents thought partners were a “bad idea.” 2
There are no meaningful statistics available on the half-life of the kind of partnerships we are discussing because a business or jointly held property may take almost any legal form. However, it is much shorter than most people realize. A conservative estimate of the number of businesses with partners that fail within five to ten years may be as high as 50%. Perhaps more revealing, among family businesses the most frequently cited statistic is “30-13-3.” It claims that only 30% of all family businesses survive to the second generation (which is taken to mean that 70% fail); only 13% survive to the third generation; and a mere 3% ever see the fourth.3 Whatever the validity of that statistic, there is little doubt that the success rate of family businesses as they pass from generation to generation has a great deal to do with the challenge of having siblings, cousins, and others as partners; and the more partners, the greater the risk. Any family that can minimize those risks improves their chances of success, both for the individuals involved and for the estate plan. Understanding the sources of risk in estate-related partnerships can help reduce the level of risk. Continue…
1
Researchers at Marquette University investigated a sample of nearly two thousand companies and categorized the top performers as “hypergrowth” companies and those at the bottom as low-growth companies. Solo entrepreneurs founded only 6 percent of the “hypergrowth” companies. Partners founded a whopping 94 percent, and many of those companies had three or more founders. In stark contrast, solo entrepreneurs founded nearly half of the lowgrowth companies.
2
Inc. “Are Partners Bad for Business?” February 1992, p. 24.
3
Beckhard, R., & W. G. Dyer Jr. (1983). Managing continuity in the family-owned business. Organizational Dynamics, Summer, pp. 5–12.
1. Introduction
2. Creating Partnerships: Benefits and Risks of Passing Key Assets to More Than One Person
3. Why Is Having Sibling, or Other, Partners So Risky?
4. The Roots of Poor Partnership Planning
5. Lowering Risk through Effective Planning: The Partnership Charter
6. The Role of a Partnership Charter in Succession and Estate Planning
