familyownedbusinessblog

Trust: The Glue That Holds Things Together

Trust is the most important ingredient in a successful family business. It is trust, not love, that allows individual family members to work together. It is the presence of trust that allows  non-family employees to work successfully in a family business. It is the absence of trust that underlies the suspicion and resentment of family members not involved in the business toward those family members who are involved. 

Trust can be lost easily and regained only slowly. Trust is that set of behaviors that states that the welfare of all is being served not just of one. Family businesses that are most successful achieve a culture of trust which requires that individuals are trustworthy.

Trust is achieved by following these rules:

1.  Keep promises.

2.  Frequent communication.

3.  Honest communication.

4.  Remaining calm when others are not.

5.  Maintaining a transparent work environment.

6.  Act swiftly and correctly when something goes wrong.

7.  Accepting responsibility when something goes wrong.

There may be other rules of the trust game. These are the ones I've observed over the years as essential to establishing and maintaining trust.

Landmines: Influences on Owners of Family Owned Businesses

Landmines are explosive devices usually concealed or camouflaged which when detonated will cause great harm. There are 4 types of landmines that will have the ability to cause great harm to succession planning In family-owned businesses.

The first of these are the ethical issues arising out of the attorney-client relationship. When a lawyer has multiple clients, there is great potential of a conflict of interest.  Even when the lawyer is representing only the company, frequently there is a perception of a conflict because the corporate attorney is working through one of the family members (usually the President).

The second of these are the client-centered issues arising out of the complex web of relationships within the client's family and business. These issues can be identified when observing how family members use the close family ties to effect the course of the business or the planning. For example, an adult child being offered an executive level position within the family business even though that child lacks the skills, knowledge or experience to successfully meet the challenge of the position.

The third type of landmine is attorney centered and arises out of the skill set of the attorney and the attorney's own web of family relationships. From time to time a corporate attorney will be called upon by the family to draft the complex estate plan without the experience or skill necessary for the level of need. Even when the competent lawyer is drafting the estate plan, care must be taken by that attorney to guard against having the client's web of relationships trigger a response in the attorney that causes the attorney to lose sight of the client's goals and needs; and

Then there are the technical issues arising out of the laws of contracts, wills, trusts and taxes. The best laid plans of man may be derailed by the need to adhere to certain requirements of contract such as employment agreements. Other legal requirements surface in succession planning that involve gift, estate and income taxation that make some plans more tax efficient than others.

Maneuvering through the fields of these landmines is the role of the attorney, accountant, consultant and others who focus their practice on taking families successfully through these fields.

Key to Successful Succession Planning

The key to a successful succession plan is the ability of the business to produce income and to provide value for the family after death of the owner. Following are a set of questions that are helpful in determining the answers to these two questions:

1. Will the business continue to provide sufficient income for the surviving spouse and children?
2. Is the business prosperous enough to afford professional management (including successors) and still make distributions to the family members?
3. If the owner is incapacitated, is there adequate disability insurance to meet the immediate needs of the business and the owner's family?
4. If the business needs to be sold to third parties, should that be done during the owner's lifetime or after the owner's death?
5. Is there a successor to the ownership and management within the family circle?

The next most important key to successful succession is the level of trust within a family. If the level of trust is high, succession planning is most likely possible given that the business is viable and profitable. If the level of trust is low, steps should be taken to build a healthy trusting relationship among family members before, during and after the succession planning process.  The answer to the following question will determine the level of trust within the system: Do the stakeholders act in a manner consistent with the best interest of all stakeholders and not act only in one's self-interest?  The degree to which any stakeholders acts selflessly, is the degree to which that stakeholder is trusted. 

If there is sufficient income and value together with a qualified successor and high trust among family members, the succession of ownership and management should be successful. If any of the ingredients is missing, more work must be done. There are many good consultants and advisers who can help.

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.

FFI-Goodman Study on Longevity in Family Firms

A group of researchers associated with Family Firm Institute (www.ffi.org) are revisting the assumptions regarding survival of family-owned business. The unchallenged statistical standard is that 30% of firms survive through the 1st generation, 13% through the 2nd and only 3% through the 3rd. Little is known about the accuacy of these figures. That is about to change. To accomplish the task at hand, the researchers need help from family-owned business. They are asking for the highest ranking member within the business to complete a survey. That survey is located at www.LongevityStudy.org. 

Please feel free to pass this website along to other families. If you have any questions please contact Kay Abramowitz at Ater Wynne.

Family-owned business defined

According to Family Firm Institute (www.ffi.org) family-owned businesses are the dominant form of business organization worldwide and play a leading role in the social and economic wealth creation wherever they are located. That's why we at Ater Wynne have launched this new blog designed to help this crucial segment of the economy succeed.

So what is a “family-owned” business? There are several definitions out there but my working definition is a business in which one or more related family members substantially influence the business decisions. My definition is similar to the definition found in Consulting to Family Businesses. There the authors, Jane Hilburt-Davis and Gibb Dyer, define a family business as 'an organization where ownership and/or management decisions are influenced by a family (or families)'. 

These broad definitions allow for the inclusion of businesses that might otherwise be excluded from the attention of advisers and policy makers when advising and applying best practices.