In this series, we share some of John Sanderson's favorite insights and anecdotes from his book, “Lessons Earned.” Throughout the book, John shares dozens of lessons he has learned, starting as a young boy and culminating with his leadership as founder and chairman of Sanderson Wealth Management.
One of our clients at Ernst & Young was a privately owned manufacturing company that was worth many millions of dollars. In order to reduce the estate tax burden, the patriarch of the family that owned the company made significant gifts of company stock each year to many members of his family.
At the time, it seemed like a very wise strategy for estate planning. And it would have been, except for one regrettable decision. You see, before starting to gift shares, the patriarch did not split the shares into voting shares and non-voting shares. All of the shares were voting shares. He didn’t foresee any issues at the time, but this would quickly prove to be a disastrous decision.
Things were fine for a while. But as time went on, the patriarch—who was still the largest single shareholder—gave away so many shares (all of which were voting shares) that he no longer owned more than 50 percent of the business. When he and his long-time wife got a divorce, the children banded together and fired the patriarch, since he no longer controlled the company. Because of one mistake, he essentially gave away his company, although that was never his desire.
The takeaway from this sad set of circumstances is that if you want to keep control of a company, you need to be intentional about your plans. Now, any time I do succession planning within a family or within minority shareholders, I always recommend splitting the stock between voting and non-voting shares. This crucial step allows the owner of a company (often the founder) to keep voting control until he or she no longer wants to influence the company.
The silver lining of this case is that, after that misfortunate incident, several others have benefitted from this insight—myself included. As I write this, the stock of Sanderson Wealth Management is split so there is one voting stock for every 100 non-voting stock. Other people own a percentage of the non-voting stock, but I still control 100 percent of the vote.
As you’re advising people about succession and estate planning—or any matter—urge them to be intentional about what they’re giving away, and when they’re giving it away. Never underestimate the importance of retaining voting control. A founder who wants to hand the business over to the next generation may be ready to give away the value of the company, but may still want to have control.
Money and control are two very separate things, and they need to be treated as such. Not doing so, as we’ve seen, can have significant consequences.
You want to give away money when you’re ready to give away money.
You want to give away control when you’re ready to give away control.
Be deliberate with your choices, and have the foresight to keep control until you are truly ready to let it go.