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Family Business Continuation and Succession Considerations and Strategies

May 26, 2010 by Frank Goley, Business Consultant

What makes a family business unique, and quite often is the key to its Competitive Edge is its close family connections, experience and expertise.  In order to sustain this unique edge, a family business needs to plan early, carefully and thoroughly so successors can be developed and groomed from the family ranks.

Succession Issues

§  Treating all family children fairly

§  Reactions from non-family employees

§  Family communications and conflict

§  Estate Taxes

§  Executive and Management level organization and structure

§  Determine how best to select successors:

o    Groom one child from an early age to take over?

o    Allow family members to compete and choose replacements and successors with the aid of the Board of Directors and/ or the Family Council?

o    Choose successors without the aid of a third party?

o    Form an Executive Committee of family members (3-5members)?

o    Allow the children and/ or family as a whole to choose incoming leaders?

How to go about choosing future leaders and successors really is a factor of a particular family business’s history, current structure, planning, success, future growth forecasts, available resources (human, technical, strategic and financial), aspirations, goals, wishes and a host of contingent variables.  The complexity of succession issues really dictates the use of an experienced Business Consultant, Attorney and Accountant to help develop and implement a successful Continuation Plan.  The Business Consultant should be the quarterback of the planning process:  he or she should coordinate the inputs of the current leadership, Board of Directors, Family Council, key non-family employee, legal, human resources and accounting; along with the Consultant’s experienced advice, to come up with an acceptable, flexible, successful Business Succession Plan.

A Business Consultant can be a great investment when replacement choices are limited.  If faced with this challenge, a family business needs to utilize professional help to:

ü  Analyze present key position assignments, responsibilities and performance to determine current capabilities and weaknesses, as well as, future succession management and leadership gaps.

ü  Take a Close look at the current company structure and determine if the structure needs to be modified to meet future human resource challenges.

ü  Do present family members need cross-training, leadership education and mentoring?  Or are there key non-family employees who can fill future leadership gaps?

In order to find a solution to a leadership and management future gap threat, it is important to have sound, objective, experienced third-party professional advice and expertise at hand.  Moreover, all present managers and key people, family and non-family, should be included in the decision making and planning process when replacement choices present an inherent challenge.

Business Continuation and Succession Planning

In a family enterprise, succession occurs when the family business owner/ leader/ founder passes away, becomes incapacitated, exits the company or retires.  You can never start too early in planning replacements; along with succession and continuation contingency planning.  Having explained the various areas and issues to consider when planning for future Company leadership and management, we will now examine the importance of Operating Authority Planning; how this authority will pass from one generation to the next when planned for, as well as, putting in place emergency, contingency authority planning when the family business’s leader and/ or top management suddenly departs.

Ø  Sudden Departure Planning:  Sudden death or incapacity in a business’s upper leadership echelon can be paralyzing if not properly planned for.  It is very important to consult an experienced Certified Financial Planner, Estate Planning Attorney and Business Accountant to ensure a Business Continuation Financial Plan is in place, which sets up the necessary wills, trusts, insurances, investments and other vehicles to ensure the business can have a successful financial transition.  This is often accomplished with Key Person Life Insurance and Disability Insurance.  It is very important these advisors work in concert with the Company’s Business Consultant, Financial Consultant and Business Attorney so that the Business Succession and Continuation Plan link both Management & Leadership Planning with the Operational Authority Planning.

Ø  Planned Departure Planning: As previously discussed, there should be a Leadership and Management Continuation Plan in place.  This ensures a smooth transition and can be overseen by the Company’s Board of Directors.  This Departure Plan will kick in automatically with the Operational Authority Plan if a sudden, unplanned Leadership Departure occurs.  The Continuation and Succession Strategy should be implemented in stages so the existing Company leader can ensure a smooth transition.  Having finances in place to take care of any dips in sales and profits during this transition is key and should be part of the plan. It is important that the outgoing Company leader can retire comfortably and has a retirement life plan in place.  When it is time to go, according to the plan, the family Company leader must cleanly go and not hold on.  It is time for the next generation to move the Company forward.  A Certified Financial Planner and Compensation Structure Expert should be consulted to determine the best way to set up a successful Retirement Plan for outgoing family members- their retirement comfort is key toward continuing a clean break from the business.

Ø  Selling Stock to Family Members:  A successful transition is only complete when the outgoing business leader/ owner sells his stake in the business to the remaining family members as per the Operating Authority Plan.  The advantages of this type of transition are numerous:

ü  Business remains in the family.

ü  Business continues to provide a source of steady employment to family members.

ü  The family’s status and stature are preserved.

ü  The former owner/ leader is freed up to actually retire and travel.

ü  A successful successor(s) instills confidence and happiness throughout the family.

ü  Strengthens family bonds rather than causing additional friction and conflict.

ü  Future success rewards the family very well financially.

Ø  Selling the Business Option:  After several generations, sometimes family contracts or its members choose alternative careers and businesses.  It is better to sell a successful venture than one withering and dying on the vine.  This option should be included in the Operational Plan and be well thought out, utilizing the expertise of a Business Consultant, Registered Investment Advisor, Valuation Expert, Business Broker, Attorney and Accountant.  If planned for properly, a business sale can be a great thing for a multi-generational family.  The proceeds and resulting investments can secure future education funds, new business ventures, philanthropic organizations and other generational family interests and passions. 

§  Some things to consider when selling the family business:

ü  The business owner/ leader ought to plan a transition period into the business sale process.  An immediate retirement can reduce a Company’s attractiveness to a buyer as having the founder/ leader/ owner around during the transition is often preferable. 

ü  Utilized Valuation Experts and Accountants to evaluate assets, project profitability and determine good will mark up, among other value determinants.  A prestigious accounting firm conducting a full audit and investigator go a long way in deriving a premium sales value which is acceptable to the buyer.

ü  Building up profits, retaining earnings and instituting cash flow management strategies can go a long way to attracting good buyers.

ü  Structuring the deal with the family retaining a small, passive stake in the business can be very attractive to a buyer as it instills confidence in the new leader and management, while giving the family the opportunity to profit from the Company.  This can also make a premium price structure more palatable to a buyer.

ü  Shift assets to heirs to lower your basis in the business, thereby, decreasing and spreading out the tax load.

ü  Ensure financial records are up to date and audited with projections tending to air on the conservative side, while having realistic marketing outlooks and inherent assumptions.

ü  Need to understand what you and your family members will lose from the sale and plan accordingly with your financial advisors.  Things to consider:

·         Pension/ Retirement Investment Plan

·         Stock Plan

·         Health, Life, Disability & Long-Term Care

·         Company cars·         Club dues

·         Perks & Benefits

ü  Tax implications can be substantial in a business sale so utilize a good tax planning firm, along with garnering advice from your Certified Financial Planner.

Tax and Estate Planning Implications

One of the biggest threats to the successful continuation and succession of family businesses are the constantly changing tax laws.  Utilizing an experienced Estate Planning Attorney, Tax Attorney and Business Attorney, along with a solid Business Accounting Firm, to ensure you not only maximize present profits while minimizing your tax liability, but also successfully plan to pass your estate and business onto heirs in the most tax preference way.  Some Estate Planning considerations to keep in mind while planning for business continuation and succession:

Ø  Major concerns typically are the perpetuation of the business and maintaining liquidity.  Without sufficient cash to pay estate taxes, heirs have little choice but to drain cash from the business when it most needs it or worse, be forced to sell it or sell many of its prized assets.

Ø  Good Estate Planning can:

ü  Reduce the need for beneficiaries to remove funds from the business.

ü  Maintain beneficiaries’ interest stakes by keeping funds in the Company.

ü  Provide a smooth transition when developed in conjunction with the Management/ Leadership Strategic & Succession Plan and the Company’s Operating Authority Plan (see previous sections for more details).

Ø  Selling the patriarch’s / matriarch’s stake in the business, in advance of any Succession Plan implementation (whether a planned or sudden departure) to family members can be the best estate planning a family business can employ, while giving the business leader control of the Company until the agreed upon relinquishment.

Ø  There are a host of structural tools which can be used to minimize estate tax liability, that should be fully explored with your Financial Advisory Team, such as:

§  Gifting

§  Stock Sales

§  Trusts

§  Limited Liability Corporations

§  Family Limited Partnerships

§  Share holder Buy/ Sell Agreements

Ø  Critically Important:  Establishing a valuation of the business which is in compliance with IRS regulations is critically important.  Overvaluing, as well as, undervaluing a business for tax purposes can both be highly expensive mistakes.  This is why having an excellent Tax & Financial Team of Advisors in place is absolutely essential.

Conclusion

Not everything can be planned for, but if you adopt the strategies prescribed in this article, which are commonly unique to a family enterprise, running and managing the successful family business is significantly improved, while ensuring successful next generation business continuation and succession.  Family Businesses have a unique set of Competitive Advantages, which if planned for, can be used to exploit new markets and ensure future profitability and success.  In the end, if you, the family business owner / founder / leader successfully plan, build and manage the family enterprise, you will need to give up control and ultimately ownership in your cherished accomplishment.  If built well, the family business will continue to reflect the leader’s / founder’s ambition, innovation, initiative, entrepreneurship, character, values, integrity, ethics; all those things in testament to hard work and perseverance.  This is the legacy of the business, clearing the way for future generations.

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Common Family Business Issues and Conflicts

May 24, 2010 by Frank Goley, Business Consultant

Family Businesses can have their unique set of issues and conflicts. Having policies and systems in place to handle these typical hurdles can make running a family business a lot more effective and profitable.

Family Business Issues

Ø  Family members go straight to the top, head family position, skipping protocol and the organization’s structure.

Ø  Personality clashes and unrestrained emotional reactions among family members can cause inefficient operations and make it a hard environment to recruit talent.

Ø  Lines of authority and adherence to an organizational structure, with responsibilities clearly defined, should be firmly established and separate from the family’s personal authority lines. 

Ø  Due to the nature of a family business, the number of competent family members from whom to choose managers can be limited.  Therefore, it is important for the family business to ensure family members obtain the necessary experience and skills to assume management or find suitable outside-the –family managers.  This issue speaks to the next section in this article, Next Generation Preparations, so we will expand on it subsequent.

Ø  Family businesses must fight the common phenomenon of maintaining the status quo.  Just like any healthy, growing business, company leadership and management should keep up with the times and not be complacent with past successes.  Planning, Market Trending, Training, RE-Training and Continuing Education are incredibly important for a family enterprise, as complacency is a common challenge as the Company matures.

Ø  Family Management Gaps can be a touchy issue as family companies are often run and managed by family members.  However, if a qualified family member is not available for a post, it is important to fill the management position with someone outside the family who has ample experience and history with the Company and the family members.  Bringing in outside Professional Managers can be a mistake as they can alienate suitable non-family employees and lack an established relationship with the family members in the business.  Only hire outside management if no qualified alternatives exist within the Company.

Family Business Conflicts

Family businesses are naturally pre-disposed to conflict so it is very important to establish firm ground rules and roles:

Ø  Define responsibilities and accountability clearly.

Ø  Assign jobs and positions relative to experience, training, skills, capabilities and interests.

§  If jobs and positions aren’t clearly defined and respected, you often have siblings performing similar jobs or have over-lapping responsibilities, causing unhealthy competition and a constant vying for attention toward parents and authority positioned family members.  Additionally, clicks can form within a family company which is counter-productive, causing unnecessary strife and conflict.

§  Family Businesses should work with a Business Consultant to develop, design and implement a fair and firm organizational structure which promotes professionalism and shuns clicks and in-fighting.

Ø  Keep emotions out of the decision making processes in a family business.  Be sure you are fighting the issues, not the emotions or personality conflicts.  Discussing and agreeing to plans prior to major Company changes and events take place fosters a professional environment of respect and cooperation.  Keep the personal family business where it belongs, at home.  Again, an experienced Business Consultant can be very useful in this area to assist in developing business rules, regulations and protocols, along with, decision making structures and processes.  Additionally, it is important to develop structures, policies and rules to guide non-family employees and interactions between family and non-family employees.  Non-family employees often feel alienated and unimportant if these accountability, responsibility and organizational systems, processes and structures aren’t clearly defined and effectively implemented and adopted throughout the Company.

Best Advice

Form a Family Council.  This council should be composed entirely of family members who are key to the future of the business and have significant interest in the business.  The Council should have clear and open communications.  Family members should feel free to share their thoughts, concerns and ideas.  This forum ought to foster understanding and trust among family members, addressing and fixing issues which develop as the business matures and grows.  It is the vehicle to develop and put in motion Company plans; particularly the business’s Long-Term Strategic Plan.The council should provide the Company Strong Strategic Direction, Objectives, Goals, Milestones and Performance Standards. 

The Council can be headed by the Company’s Chairman (if a family member) so the board of Directors has a true understanding of the Company’s long term direction and growth goals.  While the Council takes in consideration all Key family members’ inputs and opinions, it is not’s necessary to have 100% family participation on its Board.  The Family Enterprise’s Board of Directors should contain the top family executives (Chairman and President/ CEO, etc.); however, it should also consist of non-family members to ensure objectivity, different viewpoints and experience levels.  The Council is for family discussions and providing strategic direction to the Board, which in turn, contains a mix of family and non-family alike.

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Starting and Joining a Family Business- The Advantages and Challenges

May 20, 2010 by Frank Goley, Business Consultant

Family Business account for over 80% of all US businesses, contribute 50% of our Gross National Product and provide half our workforce.  However only about 10% of family businesses make it to the third generation due to the unique challenges family companies encounter. 

Starting a Venture with your Family…

There are certain advantages to starting a family venture:

ü  Initial costs and losses are easily shared.

ü  Later success benefits the family as a whole.

ü  Enables the family to be together.

ü  Family may trust each other more than outsiders. 

However, there are many challenges which come up during a start-up venture that need to be addressed:

Ø  Tips for Spouses jointly running and starting a business:

ü  Follow business rules; romance is for non-business hours.

ü  Clearly define each spouse’s role.

ü  Accentuate each other’s talents.

ü  Keep business and personal life separate- understand the inherent conflicts of interest.

ü  Set strong ground rules and understand you won’t always agree.

ü  Define your expectations specifically and clearly.

ü  Set aside family time.

ü  Involve young family members in the business for fun, short tasks and jobs.

ü  Have a system for recognizing and rewarding hard work and accomplishments of family members.

Ø  Understand clearly what the business relationships of Family Members are.

Ø  Have a solid Business Plan which clearly defines the company structure, responsibilities, roles, strategic direction and so forth.

Ø  Clearly identify who is the lead entrepreneur.

Ø  Identify the strengths and weaknesses of each family member.

Ø  Understand each family member’s business experience and background.

Ø  Establish how much money each family member will contribute.

Ø  Agree up front how equity will be divided.

Ø  Honest and clear communication between family members.

Ø  Professional, business environment and structure.

Ø  How and where non-family will be incorporated into the venture. 

If You Join an Early Stage Family Venture…

Advantages for family members joining a new family venture are numerous:

ü  Family can help and are inexpensive during the development period.

ü  Family wants the opportunity to help the business as it benefits the family as a whole.

ü  Flexible hours, days and pay are attractive to family member initially, using minimum resources.

ü  The business brings family back together.

ü  Family members join the family venture because they are frustrated with their current work place and environment.

Issues to consider for an early stage family Venture:

Ø  Largely interpersonal issues.  Experience role reversals.

Ø  Resentment can build if a family member isn’t adequately challenged and rewarded.

Ø  Issues concerning power, rivalry and jealousy are common between family members.

Ø  Take in consideration a family member’s personal interest, skills, experience and training when assigning areas of responsibility.

Ø  Define, exactly, each family member’s area of responsibility.

Ø  Define who each family member is accountable to, as well as, for.

Ø  Determine compensation structures- salary, bonus and equity stakes.

Ø  How will a disagreement be handled?

Ø  What will be done if a family is not contributing?

Ø  If a family member wants out, what is the buyout plan and continuation plan?

Ø  Are you going to allow family members to be non-participating, passive investors in the business?

Best Advice:  Defining upfront the various rules, expectations and structure unique to a family business is vital for its success.  These unique requirements need to be well developed and delineated in the Company Business Plan and continually discussed in periodic family meetings.  This way, every family member feels they are vital and contributing to the overall strategic direction and future of the family venture.

Joining a Family Company As a Mature Business…

This can be the biggest challenge for a family member:  Where do I fit in a Family Business which has been in operation for a period of time and/or for successive generations? 

Some characteristics and challenges to consider for a later stage/ mature family business:

Ø  Having a policy that everyone starts at the bottom and works his or her way up through the ranks no matter their experience level, can initially set back family members joining the existing enterprise.  However, they will soon realize it is very important not to show favoritism between family members and non-family employees.  This nips in the bud issues of favoritism, entitlement, jealousy and resentment.

Ø  Family members can sometimes be transient, interim or temporary employees to help during seasonal demand, a particularly tough business environment or during high growth periods.  This phenomenon can increase spirit de corps, but it can also cause strife.  Again, having family meetings to decide such matters and ensuring the majority is on board with bringing in temporary family help, is critically important. 

Ø  Some family members may use the business as a stepping stone on a career path or starting their own venture.  Planning for this potential loss and contingency should be part of every family business’s Management Plan.  Also, establishing non-compete rules upfront and protecting the proprietary nature of the business if a family member moves on should also be part of the Company’s Planning Structure.

Ø  The issue of the family successor is huge in a mature family enterprise.  How will a family business choose its next successor?  Is there room for the next generation?  What are the expansion options for family members?  Is the Company growing enough to support new family blood?  Does the current management structure and style permit the flexibility and latitude the next generation seeks?  This all speaks to the importance of having well developed; family- contributed Business Planning in order to maintain successive-success for future generations.  This phenomenon becomes more urgent and important in maturing family operations.  We deal with this future outlook issue in subsequent section in detail, along with conflicts, limitations and issues faced by a family enterprise.

Advantages a mature stage family business enjoys are numerous, but the following are common, and often, keys to success: 

ü  Each family member is contributing to the overall benefit of the entire family.

ü  Family members can enjoy making and reaching goals together

ü  Be a member of a very special team which is very close knit.

ü  Everyone pitches in to do the hard work- getting things done, that “need doing”.

ü  Family teamwork translates into identifiable and quantifiable progress.

ü  A feeling among family that is “our business”.  It is “what we do”.  It is all about ownership and legacy.

ü  Special attitude shared by family members pushes them to work hard for the success of the business.

ü  Bringing in new life, new skills and added experience into the maturing business.

ü  Mature family companies often have and keep market advantage and competitive edge as new generations often ensure the company doesn’t stagnate.

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Small Business Leadership: CEO Qualities

February 22, 2010 by Frank Goley, Business Consultant

Company leadership is its most important and critical Resource.  Not just the CEO but leadership qualities throughout a company are paramount.  There are many qualities of a good Company Leader so it is important that your Management Team have diverse backgrounds and qualities that their “sum” can supplement each other’s weaknesses with strength.  In order to foster good Leadership within an Organization, you must first have a CEO with many leadership qualities in order to successfully promote and provide clear strategic direction and guidance throughout management’s structure.

The CEO is a critical position in a business as this person is the one responsible for every decision, direction and action of the company.  CEO’s knowledge comes less from school education and more so from the bottom up through the ranks.  As CEO you are allowed very few mistakes so development and successful implementation of the Company’s Strategic Plan is paramount.

A CEO has a certain innate talent for his particular business, along with extensive business experience at all levels, but as important are the key qualities a Leader has within which make him a successful CEO.  These Leadership qualities are:

1.     Determined and Self-Disciplined:  CEO is focused on the important Goals to be carried out by his Strategic Management Team.

2.     Inspires the Troops:  CEO has strength of character and he uplifts his employees, inspiring them to follow.

3.     Makes Timely, Decisive Decisions:  CEO is unwavering and confident.

4.     Has a Clear, Simple Vision:  which is carried out in the Company’s Strategic Plan.

5.     Very Strong Communication Skills:  Can teach, articulate and define a clear, powerful, straight-forward company message.

6.     Street Smart:  CEO is savvy, sharp, clever, quick on his feet, with the training of years experience in the “ranks” of various businesses.  CEO also has Talent.

7.     Inspires Employees to Follow Through Charisma:  CEO is a magnet exhibiting attractive qualities, charm and style so others will follow his lead.

8.     Strong Intelligence:  CEO is naturally smart and has well rounded, diverse knowledge.

9.     Very Strong Ethical Standards:  Solid character and chooses the high road, instilling that throughout the Company.

10.  Not Egotistic:  Essential for success as a Leader is the control of Ego.  Ego never gets in the way of good business. 

11.  Works on Performance:  CEO demands performance of himself as he does with his people.  Performance improvement is a daily discipline and mindset.

12.  Learns Quickly:  CEO adapts quickly to changes and has very high level adoptive learning capacity.

13.  Flexible:  CEO sees the merit in a Strong Strategic Plan, yet knows when to redirect Management as necessary to correct problems which arise.

14.  Knows Personal and Professional Weaknesses:  CEO can perform a self audit and shore up his Management Team and Key Employees where he is weak or lacking.

15.  A Great Listener:  CEO must be able to listen to his Board, his Managers, his employees and customers to gauge where his business stands in its Strategic Plan.

16.  Actions are Implemented with Clarity, Consistency and Commitment.

17.  Utilizes Different Leadership Approaches as Needed:   CEO can utilize a Strategic Approach, an Expertise Approach, a Human-Assets Approach, a Box Control Approach and/ or Change Approach for the given business climate and situation.

18.  Exceedingly Fair yet Tough.

19.  Humbled by Numerous Business Learning Experiences.

20.  Never forgets who He or She is as a Person:   Clearly knows what he or she stands for.

21.  Dynamic and Multi-Talented:  Taps a very diverse knowledge and experience base.

As evident, the CEO is multi-faceted, buffeted by many years of diverse experience throughout all levels of business.  The CEO has a firm understanding of everyone’s role in a Company and sees to it they have the Process and Resources to implement the Company’s Business Plan.  The effective CEO is an Entrepreneur, daring to always walk the envelope between success and failure, knowing when to pull back and regroup and when to aggressively move forward to exploit the market.  CEO knows he or she didn’t get their alone and understands how to assemble and utilize a highly talented Management Team.  Most importantly, the CEO cares about the lives of his employees and what is good for them and their families.  The CEO is accountable to his people.

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