Death and Family Business Succession Planning

We’re living longer, but that doesn’t mean you can put off planning for your store’s future

Recently the Centers for Disease Control and Prevention produced a paper called “Death in the United States, 2017.” While this might seem to be a morbidly unusual article, please bear with me because this data has some important implications for family and closely held businesses, and it will change the nature of both management succession and ownership succession planning for family businesses over time. Here are some of the key findings from the CDC report.

The age adjusted death rate for the United States reached a recorded low of 728.8 per 100,000 population.

Life expectancy at birth for the average American reached a recorded high of 78.8 years.

In 2007, the five leading causes of death were heart disease, cancer, stroke, chronic lower respiratory diseases, and accidents. These accounted for more than 64 percent of all deaths in the United States. The death rate is now 43 percent lower than in 1960.

Hawaii had the lowest age adjusted death rate of all the states, while West Virginia had the highest state age adjusted death rate.

Generally speaking, states in the Southeast have higher death rates than those in other regions.

Death rates for all ethnic groups have decreased over time.

Since 1980, the three leading causes of death (heart disease, cancer, and stroke) have not changed in rank order. However, death from heart disease tended to decrease throughout this period, whereas deaths from cancer have generally tended to increase. It’s likely that, at some point in the near future, cancer will overtake heart disease as the leading cause of death in the United States.

This is—mostly—good news! People are leading longer, healthier lives than at any other time in human history. What does a longer, healthier lifespan, then, have to do with your home furnishings store? Here’s a quick list of challenges family businesses may expect to experience as family members and employees live longer.

Differing generational mindsets. World War II babies gave way to Baby Boomers who gave way to Generation X. The WWII group lived to work. The Baby Boomers tried to find work/life balance in their lives. Generation Xers work to live. There is truly a generation gap; families struggle with the older generation’s insistence on 60-hour work weeks compared to the younger generation’s desire to work smarter—but not as hard—and delegate more.

Longer life spans mean more adult family members will become eligible to work at the family business. Family companies will need rules about who is and isn’t eligible to work there and who is and isn’t eligible to own shares in the enterprise. Furthermore, they’ll need airtight shareholder restriction agreements and other governance tools to make sure the generations can co-exist harmoniously together—and have exit plans when harmony is hard to find.

Diseases which would kill us a few generations ago now don’t. However, aging still places a toll on the body; many of us are now coping with physical and mental limitations and diseases endemic to aging like dementia. Family businesses must adapt. Tools like healthcare and durable powers of attorney can allow younger, healthier family members to assist in financial and other types of decision making for senior generation members. Many senior generation family business owners bought life insurance to indemnify against a great number of issues. Some are now in danger of outliving their life insurance. Many types of term insurance stop at age 80. All traditional insurance matures at 100. If life insurance is a big part of the family business continuity or estate plans, it should be reviewed—especially considering the volatility of the financial markets in the last few years.

People living longer have a greater need for money. When Social Security established the “normal” retirement age at 65, the typical American male lived only two to three years beyond that, so his requirement for funds was limited. Now, a male who lives to age 65 is likely to live to 81, and life spans continue to increase. Instead of financing for a retirement of three years, now retirement lasts 16 years on average. Women who live to age 65 can be expected to live to 85! Longer life spans mean a greater need for financial resources for life’s necessities, not to mention supporting successful family business seniors in the lifestyle to which they have become accustomed.

Defining a challenging role for senior generation leaders. If people are living longer, what is the senior generation going to do with their additional time on earth? How are they going to stay challenged, energized, and productive? What roles will they have in the family business, and what role does the junior generation have? How will the generations share power and make decisions?

Demographically speaking, we are on the cusp of what might be called a “sandwich generation.” A gentleman called a few years ago saying that his 78 year old father had passed away, and he now owned 100 percent of the family business where he was the newly installed president at age 56. His problem was that his 30-something children were already agitating for him to begin an aggressive round of succession planning! His lament was, “I’ve only been ‘the man’ for less than a year, and they’re already after me to get out of the way. I’d like to enjoy my day in the sun for a little while.”

This will become more and more common, and with the legal profession’s disposition to use tools like generation skipping trusts, the sandwich generation may find their days in the sun to be rather more limited than they had imagined.

[When living longer has a catch]

Junior generation family members might well be senior citizens themselves before they inherit family business assets. Because many family business ownership succession plans contemplate transfer of the business only upon death, junior generation family members may well be 65 or older before they inherit! Estate plans often tend to be tax-wise but family and business foolish. Speaking on behalf of many frustrated younger generation family members with whom we’ve talked over the years, the prospect of waiting until age 60 or 70 to inherit the family business simply isn’t very exciting. The age old problem, first identified by Leon Danco in the early 1970s, of the senior generation holding on to the business past the point of productivity will only be exacerbated as people live longer.

Employees are graying. Most non-family management leaders tend to be roughly the same age as senior family business owners. Some of the same falling productivity issues will challenge family business managers as well as owners and relatives. Family businesses—known for loyalty and sentimentality towards long-time employees—will have some difficult personnel decisions to make.

There are probably many other family business stresses which may be created by the happy circumstance of longer life spans. On a much more positive note, longer life spans have some upside benefits. The most obvious is that senior generation family members will be around longer for us to love, learn from, and enjoy.

They’ll be able to pass along their accumulated wisdom and share in a meaningful way with their adult grandchildren and maybe great-grandchildren. Longer life spans mean your store might have more time to get it right. The planning horizon will be longer, you’ll be able to assimilate short-term mistakes a bit easier, and you’ll have more opportunity to professionalize the business for sustainable growth and prosperity.

A longer life doesn’t necessarily mean more challenges for your store; they just mean that family home furnishings store will continue to face challenges of an evolving and ever changing sort.

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