Family Business Quiz
Questions
- True or False: A well-prepared will is the foundation document of any succession plan.
- True or False: Most successful transitions between generations follow the steps outlined in good buy-sell agreements.
- True or False: When working on intra-family transition, the pivotal "value" figure is what the business is worth on the open market.
- True or False: In succession and estate planning, tax considerations must be our first priority.
- True or False: Most children not actively involved in the family business do not want to be involved in the succession planning.
- True or False: One of the things that makes family business unique is that "ownership" and "management" are essentially synonymous terms.
- True or False: Estate and succession planning are essentially "family matters" that must be kept highly confidential and within the family.
- True or False: Estate and succession planning professionals are implementors of your decisions. Their essential role is to document, not guide, that decision-making.
- True or False: Spending significant time, money, and energy on succession planning is really not justified until the senior generation is prepared to step aside.
- True or False: Care must be taken during succession planning to ensure that the decision-making process deals exclusively with the difficult business issues at hand and is not clouded by emotional family concerns.
Answers
- False: A well prepared will is certainly a critical part of every estate plan, and it can certainly be one of the tools an owner uses to do basic equity across his or her entire family. In the vast majority of cases, however, a succession plan should be considered a lifetime plan. It needs to be done while the owner is still around to counsel, guide and as necessary make "course corrections." If left to the death setting to be finally put in place by a will, most succession plans will lose their business and emotional vitality while "waiting for Mom (or Dad) to step aside." If history is any teacher, we should also know that a period of intense grief is the least favorable time to make critical family and business decisions that can and probably will impact on everyone involved.
- False: Like wills, good buy-sell agreements are more akin to life insurance than operable plans. They provide a process for ownership transition that works reasonably well between non-related partners, and they can provide an emergency mechanism for families in business together should tragedy cut short an owner's life or working years. They seldom, however, are drafted to speak to the changing dynamics of a family enterprise, particularly the mentoring and selection process for a successor that is so crucial; and the need to finance the exit strategy of the owning generation with business generated income. This last consideration is frequently a blend of business financing and gifting decisions; such a blend is seldom seen in conventional buy-sell documents.
- False: "Fair Market Value," is the biggest trap in family business succession. Value is what that mythical 3rd party buyer will pay for your entire enterprise; it has little or nothing to say about what the owner's needs (financially or emotionally), and even less to say about what the business itself can afford to pay. Most if not all successful intra-family transitions involve an essential compromise for the owner that goes something like this: "Yes, I want my business to be carried on by the next generation and as a consequence, I am willing to take less for my ownership interest in the business than I would be if I were to sell the business to a stranger. I know my children do not have independent wealth and that means that I must look to what my business can afford as a benchmark of what is financially possible." Note, however, that that mythical value figure does still have relevance in your planning. The difference between what that 3rd party would have paid you and what you ultimately get from the business, will be considered by the Government to be a "gift" to the new shareholders.
- False: Tax considerations may be the easiest thing for you and your advisors to talk about and, yes, it is important that the Government not extract a larger portion of the transition price than is necessary, but lead with tax considerations at your peril. The tax law can not tell you (1) what is in the best interests of your business; (2) what you and your spouse "need" from the business; or (3) how to do equity between and amongst the next generation. Those are the critical questions and as a consequence should be the critical priorities. Taxes certainly should be on your list as a way of assessing the "cost" of any given succession plan, but make taxes your 4th priority not your 1st.
- False: Nothing could be further from the truth. All of your children literally grew up on the family business. Unless your business if very unusual, it was the predominate topic of conversation at meals; it generated the most troubled and the most exciting times during their childhood; and each child in his or her own way "worked" in the family business. Whether they ever "own" a portion of the business or work there in furtherance of their "careers," they care desperately about what happens to the family business. Very pragmatically, during succession planning they can also frequently offer a more objective view of the needs of the business and the family then can "involved" family members, and they certainly care about whether brother "John" or sister "Susan" is successful in carrying on this fundamental family tradition (the successful ownership and management of the Family enterprise).
- False: That may have been true in the first generation, but it is seldom true in the 2nd and beyond. One of the essential prerequisites to a successful family business succession plan is for the family to recognize and acknowledge the important distinctions between "ownership" and "management." While Dad (or Mom or both) may have "called all the shots" and treated the corporate checkbook like their own, that normally will not work in successor generations. This is particularly true when their will be multiple shareholders with differing or even no management responsibilities. To successfully take the step from being an "entrepreneurial" organization to a "managerial" one, the next generations must understand and put these important distinctions into practice. It is sometimes said that, "A family business beyond the first generation must act more like a publicly traded company, than a publicly traded company must." It is no fun being the successor president with sibling/shareholders who want to second guess every management decision; and likewise it is no fun to be an outside shareholder with no access to basic policy decisions or financial information on what is probably your single largest investment. Family members must understand their differing roles. With that understanding will come the support necessary for management to run a successful enterprise and outside shareholders to feel like they have an "appropriate" voice is the fundamental direction of the firm.
- False: It is true that there is nothing quite so private in our legal traditions as a will, but to carry this old (and some would say outmoded) tradition into family business succession planning is to deny your advisors the essential information they need to do the job you have asked of them. "Family matters" are more often than not the critical matters in devising a succession plan that works for the entire family. The process for selecting a successor; developing good communication within the succeeding generation; and providing Mom and Dad with the support they need to see the transition through to completion will all be dependent on an open and respectful succession process that is cognizant and sensitive to these "family matters." Take your time to pick advisors that you trust and ones that have some real experience in helping families make this transition, but do not hide the essential facts from the very people you expect to guide you through this process. In a similar vein, this process needs to be a family undertaking whether or not your children or their spouses are working in the family business. Remember, your goal is the successful transition of your business into the next generation and the perpetuation of a happy family; the two are seldom separable.
- False: If you have picked advisors with this viewpoint, you have picked the wrong advisors. True family business professionals have a process orientation, rather than one driven by a product orientation or the narrow role of the "expert" draftsman or tax planner. Such a process must facilitate good communication between and amongst all of the key business and family constituents; it must bring together the management, financial, and legal tools necessary to do the job; and perhaps most importantly, it must have the capacity to serve as the forum for a compassionate but objective appraisal of what is "doable." There are simply no quick fixes in this arena. With a solid consultative process, however, to guide you and advisors who understand the importance of letting you work through that process in an orderly fashion, the blend of planning techniques that will work for your business and your family will emerge. Implementation is the easy part, sorting through the options and conflicting considerations each offers is the part that requires patience, openness and a commitment to see the process brought to a successful conclusion.
- False: In most situations, if you wait that long, you will have waited until it is too late. How to pick a successor; how to train that person; how to create a career path from warehouse worker to president. These are just a sample of the questions an owner must face when first confronted with the possibility that one (or to make matter even more "fun," more than one) of his/her children may have an interest in making the family business their life's work. Add to this the fact that the senior owner/manager is probably the single best salesman; the person who knows the fabricating process inside and out; and the one individual who has all of the critical contacts with the banker, the lawyer, the accountant, and the community at large. When thought about in these terms, who would wait until the last minute to begin such a process or ask the single most important person to the business to simply disappear one day. There is a great deal of what can be very rewarding teaching, planning, and even introspection that goes into this process. Start early and "enjoy the journey."
- False: Separating family and business concerns has been tried for years by countless families in business together, and it has never worked. Inherent in the family business setting is the fact that what you are working with are two very distinct and different systems that are tied together at multiple levels from financial to emotional. Try as you may you will not separate them. What you can accomplish, however, is to operate a business and engender family relationships that are in balance with one another. The family system will bring the values, stability and communication styles that can supply the purpose and commitment to the enterprise. The business system on the other hand, can supply the financial resources, community connections and creative processes to give the enterprise vitality and power. The two systems are very different, but when brought into balance with one another they can create a very special venture; the successful family firm.
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