Running a business can be very challenging, but imagine intertwining your personal and professional life every day all day long. This is the reality of a family business.Family-owned businesses face a unique set of issues and challenges that result from the familial relationships and their implications on the business. From succession planning, marriages and divorces and dealing with the day-to-day family dynamics combined with non-family member employees, the family business is an especially complex situation. Consider the conflicts that can arise due to employment qualifications for family member and non-family member employees. How do you handle salary and compensation for family member and non-family member employees? What if the second generation has ideas to take the company to the next level, yet the founder feels apprehensive because of the complexities that will arise as the company is expanded? What if an underperforming employee happens to be a family member? All of these situations can become very messy.
While the complexity is evident, there are also a few major advantages to having a family business: Typically, family members are invested and feel ownership (even if they do not have any yet), and you can always count on family to work through the hard times. With all the pros, cons, and complexities, family business planning is essential and requires a unique set of skills.
CASUAL BUSINESS
According to the U.S. Census Bureau, almost 90 percent of companies are family owned or controlled and they account for half of the U.S. employment as well as half of the gross national product. Family businesses are a large part of our economy, but despite their prevalence, the planning required for family-run businesses is often overlooked. The lack of planning can be explained by the often casual nature and atmosphere of family-run businesses. This casual attitude is one of the most common reasons business owners fail to document the terms of agreements, policies and procedures. For example, an owner may have promised the business to the oldest daughter, but if the owner dies and all three of the children have equal shares, there could be trouble if the succession plan was not documented. Having a casual attitude in your business is not negative, but you should be careful not to allow that casual attitude to keep you from completing proper business and succession planning. These family and business conflicts can tear a family apart and destroy even the most stable and successful businesses.
GENERATION TRANSITIONS
One of the chief concerns facing family business owners is how to effect an orderly passing from the first generation to the second generation of ownership. This is a valid concern since an estimated 70 percent of family-owned businesses do not survive the transition from founder to second generation. Luckily, with some planning, the transition can be smooth and successful.
It takes time to consider all of the details around the business and the family. How does the founder cash out yet not leave the second generation or the business burdened with debt? How does one value the company fairly? How should income, estate and gift taxes be handled? How does the founder provide for children fairly and equally whether they are involved with the business or not?
PLANNING FOR PEACE
A comprehensive plan should encompass each facet of your family and business situation. Effective planning starts with open and honest communication between the founder and other involved family members. These discussions can be difficult, but by bringing in professionals to educate, facilitate and moderate, you can have effective discussions with less strife. Some questions to ask yourself ahead of these conversations are:
• What are the goals I have for my company and my family?
• What opportunities do I want to capture?
• What roadblocks do I want to avoid?
Most business owners want to control everything they touch, but this is a time and area to delegate. You can maintain control in your vision for your business, but delegate the planning to a team of professionals. A financial planner, CPA, and attorney round out the group who can help you think through, strategize and formulate your plan.
Lastly, do not forget to stay on top of the plan. Life and business change very quickly, and when you mix family and business, those changes occur exponentially faster, so keep your planning up to date by reviewing your plan annually with your team of advisers.
WJ Rossioffers securities through Valmark Securities, Inc. (Member of FINRA/SIPC). He also offers advisory Services through Koss Olinger Consulting, LLC, an SEC Registered Investment Advisor. Valmark Securities, Inc. is separate from Koss Olinger Consulting. Koss Olinger is located at 2700-A NW 43rd Street, Gainesville, FL 32606. The material contained in the herein is for informational purposes only and is not intended to provide specific advice or recommendations for any individual nor does it take into account the particular investment objectives, financial situation or needs of individual investors. The information provided has been derived from sources believed to be reliable, but is not guaranteed as to accuracy and does not purport to be a complete analysis of the material discussed, nor does it constitute an offer or a solicitation of an offer to buy any securities, products or services mentioned. The opinions expressed do not necessarily reflect those of author and are subject to change without notice.
WJ ROSSI is a partner with Koss Olinger, a Gainesville-based wealth management firm that has been helping business owners succeed for 46 years. WJ sits on Koss Olinger’s Investment Advisory Committee and is key in the firm’s investment management, estate planning and income distribution strategies. He can be reached at [email protected] or 352-373-3337.