Strategic Planning for Family Businesses

You love your children equally, even though you know they have different abilities and personalities.

At Christmas, if you put a candy bar in one of their stockings, you did the same for all.

If you bought a bicycle for one, you bought a bicycle for all.

The same evenhanded treatment applied to their first car, college, and their first house.

You want to treat your children fairly, and that usually means equally.

One of the most troubling estate planning decisions is how to divide your assets when you and your spouse are gone.

It is one of the biggest reasons why family business owners don´t complete estate planning.

You bring your “fair and equal” mindset into this process. When people in corporate America retire, they take their profit sharing or 401(k) funds and away they go.

Heirs of wealthy investors can easily divide liquid assets, and the whole process is quick, neat and tidy. Not so in a family business.

Three factors make this division difficult for family business owners.

First, between 60 and 80 percent of their total net worth is typically tied up in the business or business-related real estate. Available cash (profit) is plowed back into the business. Family business owners often awaken to the reality that they have built themselves traps by having such a large percentage of their total net worth tied up in their illiquid businesses.

The second factor is determining the value of the business. Business valuation experts go into great detail explaining the three most commonly utilized formulas for determining the value of a business, and there are situations where it is worth the expense to have a formal valuation done. But most owners have a rough idea what their businesses are worth, and their seat-of-the pants estimates are usually very accurate.

The third factor arises when one (or more) of your children decides to work in the business and one (or more) doesn´t. If none works in the firm, your question is simply to whom will you sell it and when.

We firmly believe that children who work in the business should own it, and those who do not work in the company should not own stock. Parents often expend great energy describing how well their children get along and how much they love each other.

They are amazed to discover that sharing a closely held business that doesn´t pay dividends, doesn´t provide salaries and perks to non-employee children, and has no real value until sold creates conflicts, broken relationships, and lawsuits in even the closest of families.

Let´s assume your net worth is million, half of which is cash, publicly traded securities and real estate (passive assets) and the other half is stock in your closely held business. Let´s say you have two children – one working in the business and one who doesn´t. How would you divide these assets?

The typical answer is to give the child working in the business the stock in the company and the other child the more passive assets.

Is this fair and equal? No way. How much work will be involved in keeping the company worth what it is now worth? How much work is involved in keeping cash, stocks, and real estate worth their present value?

There is a vast difference in effort needed. How about risk? Owning a closely held business is far riskier than ownership in most publicly traded stocks, real estate, or cash. The child with the company must perform more work and assume a greater risk than the child who receives passive assets.

Even the IRS recognizes the fact that a dollar´s worth of stock in a closely held business is not worth the same as a dollar of cash.

A minority owner of stock in a family business cannot control decision-making, and since there is no ready market of buyers willing to purchase this stock, the IRS allows discounts on the value. Your financial and legal advisors can help determine the amount of these discounts, but they are often 35 percent or more.

The biggest hurdle family business owners must jump is the mindset of treating children equally.

In dividing family business assets there is rarely fairness in the equal division of assets. Instead, owners must consider being fair and equitable. These goals can be mutually achievable.

The process is to realistically determine the value of assets and arrive at a formula whereby children who do not receive stock in the company will receive a percentage of that value in other assets. The methodology will vary from family to family depending on the nature of the business, the composition of assets, and the number of children involved.

Wayne Rivers can be reached via email or at http://www.familybusinessinstitute.com.

Wayne Rivers is the President of The Family Business Institute, Inc. FBI´s mission is to provide complete solutions to help family businesses maximize their family and organizational success.
Wayne can be reached at (919)783-1880 or at info@familybusinessinstitute.com

What is a Family Business?

Far too often, when people hear the phrase “Family Business,” they immediately conjure up the image of a little Mom-and-Pop company.

Perhaps they think of family businesses as quaint reminders of an era passed, or see them as heroic little David’s fighting the corporate Goliaths.

Not so.

According to a study by the Raymond Institute and Massachusetts Mutual, 89% of all business in the United States are family businesses, including some of the largest publicly traded companies in the country. In fact, family businesses represent 64% of the Gross National Product!

Take a look at these companies, and see if your perception of family business is changed:

Wal-Mart (NYSE: WMT). With over 1.25 million employees and 4000+ stores, Wal-Mart is the largest retailer and largest private business in the U.S. Founded by Sam Walton in 1962, Sam´s son is the current president, and Sam´s descendent’s own 38% of the company.

Ford Motor Company (NASDAQ: FORD). In the world of publicly traded companies, it is often the case that when a single person or entity owns 5 to 10% of the stock, they can control the company. The Ford family still owns 40% of the voting stock in the Ford Motor Company.

Motorola (NYSE: MOT). Founded in 1928 by Paul Galvin, Motorola made the first car radios, later moving into television manufacturing, and is now arguably the most popular manufacturer of wireless communications and cellular phone equipment.

Considering the Family Business in the 21st Century
We can think about a family business in two ways: Whether or not they are owned and/or controlled by a small group of people, or whether or not they act like a family in terms of how they handle each other, their employees, and their business. The first scenario is obvious – the second, consider your workplace.

Invariably there are people who have taken on family-like positions that have nothing to do with their place on the organization chart. Someone is the person we turn to when we need help with a colleague, like our mom did when we had problems with our pesky brother or sister. There are people like our favorite uncle – he doesn´t seem to accomplish much, but he is such a great guy who could let him go? The parallels are endless.

And even large companies without the family component are operating with family systems. They exist in many business environments because it´s a well-known principle that family systems are successful at getting the most out of people.

Some Fortune 1000 sized companies are organized around a system of having no more than 150 people at one installation. They recognize the value of the family (teams) atmosphere and believe they are more important than the “economies” that could be achieved with larger business units.

Typically, when the experts consider the criteria that characterizes and organization as a “family” business, they look at these three characteristics:

1. A single family controls the company´s ownership
2. The controlling family´s members are currently active in top-level management
3. The family has been involved in the company for at least 2 generations, or it appears that they will be.

Not all three must exist, but all typically do. The huge misperception remains, however, that all businesses run by families are mom-and-pop. This couldn´t be farther from the truth.

Challenges for Privately Held Companies.

We´ve given examples of family businesses that have grown into giant, worldwide corporate entities. But what about the privately held family businesses? Can they compete against the Fortune 500?

Cargill Incorporated. Headquartered in Minnesota since 1865, Cargill is the world´s largest privately held company. Its 95,000 employees buy and sell commodities with operations on six continents. Cargill and MacMillan descendants have run the company for five generations, with family members owning 85% of the company, and key employees owning the remaining 15%.

Koch Industries: This privately owned company with over 11,000 employees in Wichita, Kansas, owns a diverse group of companies engaged in trading, investment and operations around the world.

Clearly, these privately held companies are playing in the big leagues. No Mom-and-Pop shops here. With publicly traded companies making up such a tiny percentage of all businesses it should not be a surprise to us that this is the case. Typically however, since the family owned companies are not continually looking for investors money, and because they do not have a public information staff – to keep their name in the media and hold their per share value up – we never recognize their dominance.

Common Ground.

What do these privately held companies have in common with large, publicly traded businesses?

When it comes to the problems associated with getting along and working together, they have exactly the same issues that any large company has! And, focusing down through smaller and smaller companies, it becomes clear that the problems are the same at all levels of business.

And bigger companies don´t necessarily mean bigger problems.

From a financial angle, smaller, privately held companies have exactly the same stumbling blocks as their megalithic counterparts, but the situations can be even more intense, and the consequences even more dire: After all, it´s one thing if you´re losing stockholders´ money, it´s quite another when you´re losing your own!

So, what´s the point? If you are a member of a family owned company, you already know this stuff. I´m really preaching to the choir. When I meet someone for the first time and they ask me what I do. I tell them I work with family businesses. Many of them will launch immediately into their story – how their great grand father…

This article is for the rest of you. Those who think family business and mom/pop businesses are the same things. Those of you who wish to serve this huge audience but are not sure how your experiences with government agencies and big companies will translate.

Business is Business.

It´s not about Mom-and-Pop. Business is business. Sure, everyone wants the big deals, but the businesses in your neighborhood are the ones that will benefit the most from your experience and expertise (and vice-versa).

For example, there are far more opportunities for conflict resolution professionals to build their client base and reputation in the family business arena than in the publicly traded arena. Professionals of all kinds will find a greater number of opportunities among family businesses than the public companies – there are so many more of them.

Fewer than 25,000 companies are listed on all the stock exchanges, but there literally millions of companies that are not. And “privately held” don´t necessarily equate with small profits: Over 20,000 privately held family business in this country have over million dollars in annual sales!

So, we ask again, how are they different? We´ve seen that, from a business standpoint, they are alike—same regulations, same structures, same challenges, etc. But family business means that people are related. And you can´t just choose, when the going gets rough, to stop being related.

People are often forced into situations where they must work cooperatively in an interdependent, long-term relationship with people they wouldn´t have necessarily chosen to work with, and they can´t (or won´t) easily leave. People need to be able to get along with their family members at work, because they will need to get along with each other outside of work.

In addition to the standard business angles, people in a family business are in the unique situation of having to juggle family and personal dynamics with other on-the-job stresses. For example, a family member feels that the matriarch or patriarch loves their brother or sister more, and gives them preferential treatment at work.

Or a brother-in-law with an advanced business degree is passed over for president in favor of the son, who can barely add a column of figures! Mixed messages come from the senior generation often keep one group of people thinking they´re entitled to something that they are not going to get.

So, if you´re working in a family business, you´ve got all of the issues associated with managing a business, getting along with people you may not want to work with, a lifetime of the personal baggage that comes with any family, and the knowledge that one day, all of this will be yours.

And it might be yours sooner than you think! On January 28, 2003, The Wall Street Journal featured a survey on the transition plans of business owners. The great majority of owners of family-owned businesses see their businesses continuing in family hands.

In fact, 9 out of 10 family leaders said that the family will control the family in 5 years. These are significant figures when you consider that 39% of businesses will experience a leadership shift in the next 5 years, and 56% in 10 years, as today´s leaders retire.

Family Businesses and Professional Solution Providers

Emotional issues often overrule logic in the family business environment, and by learning about the advanced emotional challenges of family businesses, becoming knowledgeable in the techniques of conflict resolution can provide valuable assistance. And it will greatly enhance your reputation as someone who understands them (the most important element in any relationship).

All of the business issues—the management issues, the human resource issues transition planning issues– are exacerbated by the fact that the entire process is highly emotionally charged.

Someone who understands simple conflict resolution techniques has a huge advantage over their competition, regardless of advanced degrees, professional designations, etc. They are recognized as the ones in the best position to help the company create an atmosphere where productive planning can take place.

Based on the principles of “Managing Differences”, each of us can learn the simple process of helping our clients manage their long-term family/business interdependent relationships. The strategies covered in this book will help people work together in the long run. Integrating them into your work will allow you to help your customers develop the common goals required for an atmosphere where active planning for the future can take place.

Simple Idea, Unlimited Possibilities.

The idea is this: if you can combine your professional knowledge with conflict resolution skills, the potential market for your services is huge. There are virtually unlimited possibilities to add to your business, your satisfaction, your client base, and your revenue by reaching out and going after the family-owned businesses in your area. They´re easy to reach because they´re everywhere. And once they understand how you can help them, they will reach out to you to help them.

Sure, everyone wants the big deal– The government contract, the training contract with the megacompany. Typically, those organizations take weeks or months or years to make decisions. Numerous meetings, an unwieldy chain of command, and decision by committee all slow things down. You will have made a huge investment of your time and effort before you even get the green light—if you get the green light.

Smaller, family-owned or privately held companies can make snap decisions. They can determine whether they like you or not, whether they think you can help them or not, they can say yes, and they can write the check. They can make these decisions without having to ask permission.

They can be found at the Rotary club, chambers of commerce, and through tens of thousands of trade associations located in every corner of the country. And if they like how you operate they´ll refer you to their friends whose family company is dealing with similar issues – a never-ending stream of contacts. And there will be no board of directors or screening process.

How do you get started – on the road to becoming the family business expert in your community? My recommendation would be to read Managing Differences. If you are serious about being recognized by your peers and your prospects as someone who can help – consider being certified as a workplace conflict resolution professional.

Information about the book, certification, and free online events to help you grow are available on the Mediation Works (www.mediationworks.com) web site.

Once you see the value of the conflict resolution process added to your business model, you will want to get started developing this area of your practice, while you are waiting for the committees to decide the fate of your big company proposals.

Wayne Messick can be reached via email or at http://www.iBizResources.com.

Wayne knows how the emotional climate in a family business impacts the decision-making process.
He is the publisher of www.iBizResources.com and the Family Business Strategies newsletter.

Smooth management succession and ownership transition is the benefit, the intention, the objective on just about any successful business owner’s mind.

The benefits of the family business succession process commence the day you get seriously interested in designing the future you desire for your firm and your loved ones. And the progression continues forever, just like your family’s involvement in the business will extend far beyond the lifetimes of everybody living today.

Here are three important planning elements uniquely connected with one another to create the succession and planning process, at least one that is certainly both smooth and financially successful.

Strategic planning is really a key element of the family business succession process. You may not use this expression in your daily discussions, even believing it belongs specifically to Fortune 500 companies, but strategic planning is exactly what you’re doing any time you plan beyond the following 12 months – regularly moving your planning ahead of you as you go.

Family business strategic planning is also about management training and leadership development for your successors so they will be prepared to assume full responsibility when the time is right.

Let’s be honest, we’ve seen this from our business friends, there are a few mistakes your company can absorb and keep right on zipping along and there are some that could absolutely annihilate what has been created. Today mistakes about exactly where you are going can destroy your energy and inevitably your entire operation.

Begin today by figuring out who is going to be in the next generation operating your business and begin with the leadership and management training they’ll need to be competent to do so efficiently.

Succession planning is the process where you choose the people to run the place in the future and start empowering them to conserve what you have built and leverage your efforts to grow the business even bigger in the future.

Growth is very important as a way to produce the profits required to satisfy the security desires of the retiring generation, offer a fair share of the company’s value to the beneficiaries whose interests don’t include the family business, and give an incentive to the successors for his or her risks and hard work.

When you start immediately to open up areas of responsibility, in the eyes of the successors not simply yours, you’ll send the right messages regarding your hopes for the future.

Estate planning, the wills, trusts, buy-sell agreements, as well as the legal agreements needed to accomplish your succession and planning requirements DO NOT come last.

Family business estate planning is crucial, too critical to be delayed, because it determines the ground rules, faces the tax consequences, and gives the force of law to the strategies that will result in your wishes being spelled out for all to see.

Estate planning measures should be made now based on everything you know today, where things are today, and based on the best guidance currently available.

As time goes by and the other components of your family business succession plan fall into place you only need to have your advisors update your estate planning documents.

How many movies have you seen where the old tyrant dies without having changed his will for decades – leaving the heirs and those who though they were heirs to fight over the spoils, leading to another thriller for Perry Mason to unravel. Don’t allow that to be your situation!

Throughout the last twenty years people have said to me, “but our business/farm is different” and it is. Generally this comment is made to help convince me that their situation was so extraordinary it defied the experts and therefore their lack of planning was validated.

Family business succession then is the result. Your organization and family’s unique situation addressed using well considered strategies that are being applied effectively by others.

Family business succession planning requires that you make the best decisions possible, to insure the most productive outcome. Effective leaders know that their best decisions are those made in collaboration with people whose success they respect and whose opinions they trust. Why not harness the power of your peers, to help you consider possibilities and alternatives about your family business succession strategy? Click here to find out how this is possible!

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Elaine’s father who is 80 years old is just happy with the way things are. Just feed them, let them go square dancing three times a week, and invite them for Christmas and life is really good. Elaine’s brothers were born in the 60s and like to use a lot of other peoples money, and don’t have the same attitude towards debt as her dad does.

If you want to expand and make some changes on your ranch that are going to cost a little bit more than what you can cash flow, and someones pushing back, think about where they’re coming from and what they need. In your 20s, you need independence. In your 30s, you’re exhausted. You have children, mortgages, and a lot of work to do. In your 40s, you need to own something and take charge. When you’re 50, you don’t want stuff. You want good experiences and good relationships. When you’re 60, its about legacy.

About Elaine Froese
Elaine Froese is an expert in helping family businesses talk about tough issues. She’s a catalyst for courageous conversations for positive farm succession planning. Like many of her clients, Elaine is an active farmer and she watches the sky. Her common sense and down to earth style of communicating and asking hard questions is deeply appreciated by folks who find it hard to ask for help.

Duration : 0:3:28

Technorati Tags: elaine froese, farm family coach, farm succession planning, generational needs, ranch changes

http://www.elainefroese.com

Remember, life is not like a straight line. It’s like a slinky. You are responsible for acting on it. Elaine Froese is not a motivational speaker – she is an encourager. When she was at a meeting with Thorton, Ontario farmers, only 1 out of 75 people said they had a regular business planning meetings. About 8% of farmers have regular business planning meetings. Beat the stats: Dream again, plan, get some learning, let go of what’s not working for you anymore, sustain your resilience and learn how to bounce back, do some reading.

About Elaine Froese
Elaine Froese is an expert in helping family businesses talk about tough issues. She’s a catalyst for courageous conversations for positive farm succession planning. Like many of her clients, Elaine is an active farmer and she watches the sky. Her common sense and down to earth style of communicating and asking hard questions is deeply appreciated by folks who find it hard to ask for help.

Duration : 0:1:46

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