familyownedbusinessblog

What Is The Best Approach For Raising Capital?

When a family-owned firm needs capital to help grow the business, there are many creative options available, in addition to getting a loan from your friendly local bank. The SBA’s publication “Challenges in Managing a Family Business” includes a partial list:

“! Taking or refinancing a mortgage using the company's assets as collateral.
! Asking suppliers to extend credit on purchases.
! Factoring (selling) the company's receivables.
! Inventory financing.
! Borrowing from friends on a personal note basis.
! Borrowing the cash surrender value of life insurance policies owned by relatives.
! Obtaining a long-term loan from an insurance company.
! Working with a lender and the U.S. Small Business Administration (SBA) to get a business loan.
! Financing with a Small Business Investment Company licensed by SBA.
! Selling a portion of the stock for cash to the company's employees.
! Selling some of the stock for cash to another company. In a merger, you can use the credit of the larger company.
! Contacting a regional investment banker who may privately find a lender, using some of the company's stock as collateral.
! Contacting a national investment banker who will underwrite some of the company's stock. This is called going public.”

It is of course important to keep in mind that not all of these options are good choices for every family business. Setting aside purely operational issues, a family owned business needs to consider how these financing options might improve (or upset) the firm’s current ownership, management and family relationships. Some of the many questions to consider:

• If employees own a portion of the company, do they share the family’s long-term goals and plans for the business? Or is the business “just a job” for the employees?
• If a non-family member owns a substantial portion of the company, would this enhance the family’s relationship with the business? Or would later generations feel that the legacy has been sold off to an outsider?
• If the company has a bank loan, do the bank’s financial reporting requirements provide an framework of good business practices? Or does the financial partner interfere with the operating flexibility that can be a unique strength of a family owned business?
• Do all of the family members reach the same answers to these questions? Or are there differences of opinion that need to be understood?

There are no “right” answers to these questions. Because each family is different, each family-owned business is different. The best approach to raising capital is the approach that respects these special considerations, instead of focusing merely on comparing financial terms.

The Caterpillar's Question: Who Are You?

When the caterpillar asked Alice “Who are you?”, she replied “I hardly know, sir, just at present.”  The caterpillar’s simple question is not easy to answer, particularly for many family businesses.  Even if the founder has a clear sense of purpose, family businesses grow, the work changes, and the next generations can easily lose sight of the history and even core values of the business.  Many family businesses, even highly successful enterprises, do not have a tradition of recording, preserving, or even sharing the family history or the history of the business.

For a family business to succeed over several generations, the founder – and next generation leaders – must be intentional about building trust, knowledge and cultural tradition among the children, grandchildren, and extended family. There is real value to a shared family history.

As counsel to family businesses, Ater Wynne helps our clients understand the importance of tradition and history - good and bad - to the success of the business.  We know that "not all the law is in the books."  Our job, as professional counselors, is to work with our clients - often multiple generations - so that there is a shared answer to the caterpillar's question and thus a common sense of purpose for the business. This kind of understanding can lead to effective transfers of leadership, sensible liquidity events,and meaningful strategies for those family members who will not continue as active participants in the business.

Estate Planning For Family Business Owners; First Understand

Before the owner of a family business can sign the estate planning documents, the estate plan must be drafted. Before it is drafted, it must be designed. Before it is designed, the estate planner must first understand the family and the business. That understanding begins with knowing the goals and objective of the people (stakeholders) within the three sub-systems: family, business and management. The Venn Diagram displayed above is a representation of these sub-systems. One circle represents the family; one the ownership of the business; and, one the management of the business.  Knowing where the stakeholders fall within the sub-systems leads to understanding the interplay between and among the sub-systems.

Once the estate planner understands this interplay, the planner can begin to consider the design of a plan that conforms the goals, objectives and needs of those in the sub-systems. The steps the planner will take will include identifying the stakeholders (including the in-laws); determine the needs of each stakeholder (as a group and individually); identify the assets both business and non-business; obtain values of the assets; and, determine with certainty who has title to the assets.

When one of the assets is the family owned business, the planner must determine whether the goal is succession planning (keeping the business in the family) or an exist strategy (liquidating or selling to third parties). The determination requires an analysis of the viability and sustainability of the company and the financial needs of the owner/client. Once the goal for the business is known, the owner must begin to prepare the stakeholders and the business for the succession or for a sale.  But the process is not quite over. Before drafting the plan, the planner and the owner should consider alternative and substitute plans in the event that the designed plan is interrupted by events outside the control of either the planner or the owner/client.   

Why A Business Owner Should Adopt a Durable Power of Attorney

Every business owner (the "principal") should empower someone (an "agent") to act for that owner when that owner cannot because of the owner's incapacity, incompetence or unavailability. Typically the business owner will authorize the agent to buy or sell an ownership interest; initiate, continue or settle litigation; continue or negotiate a contract; change the name or organizational structure of the entity. An agent may be empowered to take other actions specifically related to the owner's business interests. This is especially true of owners of small businesses and professional practices.

If a power of attorney is durable, it survives the incompetence and disability of the principal. This very important attribute allows the agent to take action as directed by the principal even when the principal can no longer act due to incompetence. The owner's competence is essential to the owner's ability to undertake any of the actions listed in the first paragraph. The risk of the owner's incompetence is managed by a duly executed and valid power of attorney. A "valid" power of attorney refers to whether the owner was competent at the time the owner as principal executed the power of attorney.  Since the owner must be competent to execute a power of attorney, the best time for the owner to adopt a power of attorney is when the owner is compectent to act. In other words, if there is no power of attorney when one is needed, it is too late. 

5 Tips to Start Your Estate Planning

Estate planning can be a complicated process that takes significant time and energy - especially for members of family owned businesses.  However, a good plan can be achieved with some preplanning before entering the process with your professional advisors. 

1.    Identify your goals and objectives.  The design of your plan will key off of the goals and objectives that are most important to you.  Do you want to avoid probate?  What is your legacy for your loved ones?  Do you have charitable intentions?

2.    Consider the needs of your beneficiaries. Will your spouse or partner have sufficient funds to maintain your current lifestyle?  Do you have minor children?  Are there sufficient funds for college?  Do you have a special needs beneficiary?  Will your family business provide sufficient income for your beneficiaries? 

3.    Prepare a list of all of your assets and the approximate value.  It is surprising how many clients do not know what assets they own.  Estate planning requires an analysis of what types of assets are owned, who owns the assets, and what is the value.  Are the assets owned by the individual or by the business? 

4.    Consider whom you would select to serve as a fiduciary.  Your spouse, children or other family members may not be an appropriate choice.  You may want to consider using a corporate fiduciary that will have sufficient skills and experience to deal with the administration issues created by a death.  When a business is part of an estate, the administration can be even more complicated.

5.    Review your established plan.  If you already have an estate plan, how has your life changed since you did the the original plan?  Have you married? divorced?  had a family?  How has the business changed?

Estate and succession planning for family business owners is a process and a journey.  Your estate and succession plan is never completed. Just like your business plan, it needs to be reviewed periodically!

The Family-Owned Business Blog is a resource for stakeholders of family-owned businesses and their advisers. This blog will explore best practices for success at the intersection of family, management and ownership in these businesses. The lawyers of the Family-Owned Business Practice Group of Ater Wynne host the blog. Visit www.aterwynne.com.

This site is provided for informational purposes only and does not constitute legal advice, nor does it form the basis for an attorney-client relationship.

The Family-Owned Business Blog is a resource for stakeholders of family-owned businesses and their advisers. This blog will explore best practices for success at the intersection of family, management and ownership in these businesses. The lawyers of the Family-Owned Business Practice Group of Ater Wynne host the blog. Visit www.aterwynne.com.

This site is provided for informational purposes only and does not constitute legal advice, nor does it form the basis for an attorney-client relationship.

The Family-Owned Business Blog is a resource for stakeholders of family-owned businesses and their advisers. This blog will explore best practices for success at the intersection of family, management and ownership in these businesses. The lawyers of the Family-Owned Business Practice Group of Ater Wynne host the blog. Visit www.aterwynne.com.

This site is provided for informational purposes only and does not constitute legal advice, nor does it form the basis for an attorney-client relationship.

Survival rate.

Family-owned businesses in the United States comprise 80% to 90% of all business.  Of these businesses more than 30% of all family-owned businesses survive into the second generation. Twelve percent will still be viable into the third generation, with 3% of all family businesses operating at the fourth-generation level and beyond. (Joseph Astrachan, Ph.D., editor, Family Business Review).

This survival rate is due to lack of planning . Of CEOs due to retire within five years aged 61 or older, 55% have not yet chosen their successor. And only 19% of family business owners have any estate planning other than a will (Raymond Institute/MassMutual, American Family Business Survey, 2003). It’s no wonder the survival rate of family businesses is not great. What is going on? Time and intention. It takes time and intention to identify and groom a successor. It takes time and intention to prepare the company, the family and the other stakeholders for the transition to the new CEO. It takes time and intention to adopt an estate plan that ensures succession. The time needed is a minimum of 5 years and better to have 10 years. The intention comes from a desire to keep the business in the family.