familyownedbusinessblog

The Legacy Family ... A Family for the Generations

I attended this presentation by Dr. Lee Hausner at the Annual FFI Conference.  She has co-authored with Douglas K. Freeman, J.D., L.LM, their latest book, "Legacy Families...The Definitive Guide to Creating a Successful Multi-generational Family".

Dr. Hausner defines a Legacy Family as one which is in the 4th or 5th Generation and has shared assets.  She has found that these families have four characteristics:

1. Capacity: they have the capacity to add value to our society;
2. Competency: they have the necessary skills and education;
3. Connection: they have a connection to their ancestors, current and future descendants; and
4. Compassion: they are generous of their time, talent and treasure.

Generally, the Legacy Family has four balanced "capital deposit accounts":

1. Human Capital: this is general parenting and grandparenting skills, communication skills, values, morals, ethics, collaborative decision making, conflict resolution skills, leadership training and team building.
2. Intellectual Capital: education, career choices, mentoring/coaching, governance - how rules are made for future generations, rights and responsibilities of fiduciary and beneficiary roles.
3. Financial Capital: earn money, manage and invest assets, wealth transfer strategies, family business, financial parenting, understand the psychology of money.
4. Social Capital: philanthropy, donor-advised funds, family foundation.

The family should be engaging in activities that build each of the 4 capital accounts so that they maintain balance.  The following are suggesions that families can input to help keep balance in their capital accounts:

• Effective communication among the family and the stakeholders;
• Adopted a process for collaborative decision-making;
• Develop conflict resolution skills;
  • An example was the creation of a board to resolve conflicts among family members.  Each party chooses someone and then those selected choose a third member.  That panel then hears from both parties and submits proposed resolutions.
• Shared values: articulate the behaviors that are acceptable;
• Diversity: acceptance of non-bloodline family members and partner choices for family members;
• Manage expectations: clarity of expectations from future generations; clarity of financial support that will be provided to future generation;
• Financial competency;
• Generational leadership and governance;
  • Rotate the chairmanship of family meetings among all generations, including children, have an agenda, everyone participates
• Focused achievement: model of "work" ethic, focused on doing something everyday
  • Dr. Hausner suggested that even if the parent plays golf everyday, that the person leaves the house dressed for work, hides the golf clubs in the trunk and goes to the course at the same time everyday to demonstrate to young children the "work ethic" of doing something productive everyday.
• Accountability: specific behaviors that can be counted and measured,
  • Being "nicer" to my siblings is not something that can be counted and measured, but I will have lunch with my sibling once a month and we will not talk about business is something that can be measured.
• Heritage and Traditions: choose dates for family meetings that are not holidays, be sensitive to diversity (eg: in-laws being able to see their families of origins on holidays).

 We as advisors can use these suggestions and work with our clients to help them keep balance in their capital accounts.

Family Stories Important to Tell

At the Oregon FFI Study Group, family members from three successful family businesses each of which had been in the family over 100 years discussed the importance of know the history of the family business. As each representative member introduce the business, they spoke of the founder, their great-great grandfather. Each knew when and where that founder was born, traveled to the US or traveled within the US finally arriving in Oregon. Each knew how the founder got started in the current businesses and how each succeeding generation passed the business onto the next generation.

During the discussion following the introductions, one of the family members made the observation that part of the success of these businesses was due to the connection each of them had to the founder of the businesses.  In turn each member agreed how important that story was to them and feared that their grandchildren would not know that story.

These stories are important. It is who we were and who we are. Capturing these stories and passing them onto the next generation and the next is important work. It may be that it is the work of the current generation to capture these stories orally and in writing as they hand over the business to their successor.  These should be seen as a gift one generation gives to another...the story of who we were and who we are. it will be for the next generation to be who they become. Their story will then be told by their children but always in context of who we were.

Words of Wisdom

On Friday, May 7, 2010, the Oregon FFI Study Group met at the offices of Ater Wynne, LLP, in Portland, Oregon.  There we met with a family member from each of three family-owned business each of which had been in the family for over 100 years.  While each family business differed in their governance structure and size, there were important similarities.

First, the current generation in management of the family business had worked outside of the family business as adults where they were able to find success and build confidence. And, each speaker thought this was a significant element in the success of business currently. Their insight is supported by the best practices espoused by consultants in the field of family-business advising and succession planning.

Second, each representative discussed the importance of a trusting relationship between the family members. Two of the families felt that to continue that trust it was important to only have those working actively in the business be the owners of the business.  The third family has built trust through professionalizing management and adopting governance structures that include family members.  In both cases, the family has found a mechanism for allowing non-interested and non-involved family members to withdraw from any participation or ownership in the family enterprise. There has been sufficient resources in the family to equalize the value of business with other assets so that fairness in the estate plan is achieved.  Treating children equally is such an important consideration for parents who are owners of businesses or business interests that a way must be found to equalize the the wealth among the next generation.  In these 100 year old family businesses, the generations have found a way to do this.

Third, each of these businesses have a generation in management and control that is able to clearly articulate what is expected of the next generation and what the next generation can expect. There is no guessing. There are clearly defined rules regarding entry into the ownership of the businesses and management in the businesses. While each of these businesses differ as to the expectations, there is no doubt within each business what is expected and what is to be anticipated.

And lastly, the current generation sought the assistance of professionals skilled in family business succession planning to assist them in gaining an understanding of succession and articulating the expectations for and of the next generation. 

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.