Estate Planning Steps For Saving The Family Business

It’s time I had a talk with the business owners out there. The sad fact is that, even if you follow all the Estate Planning advice I give, few of those businesses will survive to benefit your children. And a scant few will benefit your grandchildren. But that doesn’t have to happen.

Lack of preparation is what hurts most family businesses. There are two types of preparation. The financial and legal type I discuss with you each month. That involves wills, trusts, life insurance, buy-sell agreements, family limited partnerships, and that sort of thing. Believe it or not, that is the easy part.

The second type of preparation involves the personal and family issues. That’s the hard part. In fact, a reason many people put off the financial and legal issues is because the personal and family issues are so tough. I’ll show you how to tackle those issues.

Family businesses tend to mix personal and family goals, and the goals might be in conflict. The business goal usually is pretty simple economic success. Look at how family goals might conflict with that.

The parents want to use the business to build the self-esteem and maturity of their children, to nurture them into responsible adults, and to provide for them financially. That’s fine, but sometimes it means the business becomes a kind of family welfare agency. In addition, the parents often feel obliged carry over their personal family policy and treat the children equally in the business, even when the children don’t have equal skills, interest, and business savvy.

The children might use the business to continue their childhood sibling rivalries or to look for signs of favoritism by the parents. And many children feel that simply being a family member entitles them to certain benefits from the business and gives them the right walk around the business issuing orders.

You can see how the personal and business goals can conflict. If the business goals don’t prevail, then the business won’t be run properly and might founder. In addition, the children might spending their time fighting instead of working, and even employees will be unhappy. Quality employees often leave a firm when they see children overpaid or occupying jobs their abilities don’t warrant.

You can avoid these problems and get your business on the road to supporting several generations of your family. The first thing you need to do is focus on the long-term for a while. It is easy to get caught up in the daily operations. But for now you need to spend some time thinking about the very long-term interests of the business.

You also are going to have to set up a communications system. Often, the biggest problems in family business succession and survival begin with poor communication. You also might need to work with a family business counselor or another professional who is experienced in helping family businesses survive for generations.

Here are some specific steps to take.

• Identify the areas in which family and business issues mix and often conflict. These include hiring, compensation, ownership, and management succession. Your business and family might have additional issues.
• Put some order to these issues by drawing up some objective rules, guidelines and agreements concerning them. The goal here is to create written policies that ensure there will be arms-length, objective dealings with family members when the family and business goals conflict. That way, every one will know the rules ahead of time and will know why they exist. And problems will be handled the same way each time they come up.
• Set up a family governance structure. This structure will be used to help identify the problems and set up the rules and agreements. The guidelines will work much better if everyone is involved in the process of developing them through this governance structure.

The first part of the governance structure can be the Family Council. This includes all family members affected by the business and their spouses. You need to involve spouses, so that they will be fully informed and won’t be saying things outside of the governance structure that undermine the agreements. The council should know what is going on with the business, what decisions are being made, and what the ownership and compensation arrangements here. The council should meet at least annually, and more often as issues arise.

The second part of the structure is the Family Board. This is a smaller group that includes the major owners and key managers of the business. It could be the same as the business’s board of directors. As the business grows you probably want some outside expertise and perhaps some key non-family employees on your board of directors, so the Family Board might be different from the business board. The Family Board is the group that actually manages the business and, perhaps more importantly, manages the areas in which family and business conflict. This group also will decide when money is paid out of the business and how much is distributed.

This structure accomplishes two important goals. It opens up communication. Everyone gets the same information about the business and knows what rules govern the relationships. Everyone also knows there is a forum for airing complaints, suggestions, and grievances.

Using this structure, the family council and write and agree to rules and policies that cover the important issues. For example, there might be guidelines that say family members who work in the business get compensation and benefits based on ability and performance, not family or ownership status or longevity; that owners are compensated based on ownership share, not through salaries; and that profit distributions from the business will be made only to the extent that the cash needs, including reserves, of the business are satisfied.

The policies also need enforcement mechanisms, which will depend on the policy issue. At times the policy might provide for a third party to make a judgment or settle a dispute.

Doing all this is a lot of work, and most of that work involves meetings and communication. But the only way to make the business last for all family members is to develop a structure everyone understands and can live with. You need everyone to recognize that the continuing success of the family business is the most important goal, and everything else is secondary.