Small Business, Large Returns for Financial Advisors

Here are 11 strategies to help you thrive.

Financial Planning magazine
By Ann Marsh
July 1, 2012

Advising clients about their small businesses is not for the control freak, the timid or the egocentric. But for planners who venture into this terrain, working with entrepreneurs may provide some of the most satisfying experiences - financially and emotionally - of their careers.

"When you graduate from just traditional planning, be prepared," warns Seth Streeter, co-founder of Mission Wealth Management in Santa Barbara, Calif., who likens the work to life coaching. With small business owners, "you are dealing with fertile minds that are going to paint with wild colors."

… FP spoke with planners around the country who've spent decades … dealing with clients whose wealth is tied up with the businesses they are building, inheriting or looking to sell - sometimes, all at once. We have distilled 11 strategies planners can use to thrive in often choppy waters.

Landing a Bigger Fish
… Cameron Thornton of Burbank, Calif., … met Mary DeMartinis about 13 years ago. She and her partner in their Los Angeles-based fresh food company, Okami, had received a $1 million offer to buy their company. If you've ever bought sushi from the refrigerated section at Trader Joe's, Walmart, Sam's Club or Costco, you've likely bought an Okami product. … After getting the acquisition offer, DeMartinis recalls, "I didn't have a concept of how you sell. We were trying to understand our value."

Thornton brought in a business consultant from the CPA and consulting firm Moss Adams to help value the company. Based on Moss Adams' input and Thornton's own analysis, he told DeMartinis and her partner that, if they invested more time to growing in their niche, they could create much more value. Rather than continuing to do everything themselves, he urged them to hire a sales director and manufacturing director.
The founders took that advice. In December … they sold the company to Fuji Food Products in Santa Fe Springs, Calif., a larger competitor. This time, the deal was in the double-digit millions.

"There's so much that we learned" from working with Thornton, DeMartinis says. … But knowing that he provided her with invaluable counsel that possibly no one else in her life … could have offered was the best reward, he says. "I do what I do for more than money. Hugs are an important part of it."

That is, when things go well. Tom Fowler of Fowler Financial Group in Bellevue, Wash., listed some of the innumerable pitfalls …, chief among them incomplete planning. Take the case of two clients who were co-founders of a perfume factory.

"The younger partner was the 'Nose,'" Fowler says, and the older partner was an investor. On the advice of Fowler and a team of advisors, the pair created a buy/sell agreement (see Step 6 below) to compel one of them to buy the other out if one of them died or left the company. The investor also bought a personal life insurance policy on the Nose.

Not long after, the Nose died, triggering a $1 million life insurance payment to the partner. When it came time to hand some of the money over to his late partner's widow, they discovered the Nose had neglected to sign the buy/sell documents. "The older person said, 'He never signed it and you don't get anything,' " Fowler recalls. "One of the land mines in planning is when they don't complete the planning process. ..."

Key Strategies
Advisors offer these key strategies for working with small business clients:

1. The Confidante
A key role that small business financial advisors play for their clients is that of a listener. … "I want to be your confidante," Edward Wacks, an Ameriprise advisor and CPA in Plantation, Fla., tells his clients. …
Wacks took time to listen intently to a client who owns a yacht-servicing company, Mendol USA in Dania Beach, Fla. In doing so, he realized the client needed better bankers. New bankers found by Wacks provided financing for a new warehouse, which helped the company expand its business substantially.

Many business owners don't have people with whom they can share their struggles or their dreams. Nick Niemann, an Omaha, Neb., lawyer with McGrath North and a member of the board of directors of the Nebraska chapter of the FPA, says he can't understand a business owner's needs without listening first. … Niemann, … has … written a book on the subject, The Next Move for Business Owners. He also offers a phased plan for working with business owners through his website, ownersnextmove.com.

As Thornton puts it: "The most important thing you can do is to establish an environment of safety and trust with this business owner that will allow him to be heard. Give them the gift of listening to what their ideal outcome would be."

2. Exit Strategy
Start by asking a business owner to describe her ideal exit strategy. … Many business owners are so caught up in day-to-day demands that they can't readily answer the question. … Fowler asks them, "Do you have a tax-favored plan to get your money out of your business?"

He tells them there are three main exit routes: selling, turning it over to family members or liquidating. Personal preferences, market forces and family dynamics will help determine the right choice. Another potential factor: tax laws in the state where the client ultimately wants to retire.

In several cases, Niemann has helped clients sell their companies but retain the office buildings or warehouses that housed the enterprises. By leasing that real estate back to the company, a founder can create a reliable stream of income for his retirement.

In Santa Barbara, Streeter has helped his client Andy Erickson, founder of nano-scale microscope maker MultiProbe, consider the opportunity costs of not starting several companies simultaneously. "I have more business ideas than one man can possibly pursue," Erickson says. He says Streeter helped him to understand that "it hampers my lifestyle to be tied down to just one business when I have so much else to contribute." To that end, Erickson recently started a new software company and is on the verge of launching a third business. He is taking money out of MultiProbe to fund both ventures.

"I don't think those things would have happened without Seth's input," Erickson says. "He has walked me through those strategic decisions."

3. Team Builder
Entrepreneurs must assemble a strong team of advisors. "In the past, too many advisors have just left this to the client, but the typical business owner is not in a position to assemble the right team," Niemann says. A team may include … a mergers-and-acquisition advisor, bankers and, in some cases, an organizational psychologist or a marriage and family therapist. … "I make sure the client understands what the other advisors are saying and I make sure the advisors understand what the client is saying," Fowler says.

"The best advisors aren't about themselves," Streeter adds. "You have to be selfless and truly have a mind-set of serving. Your higher goals are the goals of helping the clients achieve their objectives using their natural talents. If you've done that, then you should be fulfilled."

4. Choose the Quarterback
… After gathering advisors together, Thornton says he states his intention to create "a safe environment where everyone can be honest about the value they can bring to the process." His goal is to encourage everyone on the team to speak up if any of them lack particular skills needed to take the client's company to the next level. …

5. The Intermediary
Sometimes a client needs a planner to deal with others on the team directly. In 2008, the business of one of Wacks' clients hit a rough patch and the client worried his bank would pull his line of credit. "I said, 'Let's go in and talk to the banker,' " Wacks recalls. "The banker said, 'I really respect that you came in to discuss the note six months before it's due. That means a lot to us.' " Soon after, the bank renewed the loan. If not, the client told him, he would have gone out of business.

6. Use Buy/Sell Agreements
This critical tool for companies with co-founders is a binding agreement stipulating that, if one party leaves the business, the other must sell to the other party, and the other party must buy it at a price and on terms that have been predetermined. Without a fully executed agreement in place, the death or departure of one partner can spell disaster for the late partner's family or for the surviving partner.

7. Cover the Bases With Insurance
Life and disability insurance play crucial roles in the continuation of small businesses. If a founder dies with most of his net worth wrapped up in his company, estate taxes can gobble up half the value of a company and force its sale. "The IRS only wants one thing and that is cash and, so, if a business owner has not planned for this, he basically has a forced sale" upon his death, says Mark Weber, a business succession consultant with the SilverStone Group in Omaha, Neb. …

Fowler worked with a client who ran his family's casket manufacturing company. The client's broker told him, "You are crazy to buy life insurance. ..." Fowler prevailed. Four months after the life insurance policy was issued, the business owner was diagnosed with a terminal brain tumor. Later, the company's CFO told Fowler that, without the insurance payout, the company would have gone out of business.




Fowlers: four generations (Photo credit: KF-in-Georgia)

8. Treat the Kids Fairly, But Not Equally
Even in a large family, often just one adult is capable of taking over the family business. In some cases, planners have helped a single family member buy out the founding parent using a note to be repaid with cash flow from the company. … Sometimes, feuding families will do better to sell or liquidate a business and distribute profits rather than try to execute a succession plan that may be doomed to failure.

9. Be Prepared to Be Ignored
Karl Frank, owner of A&I Financial Services in Englewood, Colo., says business owner clients are unpredictable.




NOT ALL BUSINESS OWNERS TURNED OFF THEIR ADVERTISING SIGNS DURING THE ENERGY CRISIS IN THE PACIFIC NORTHWEST IN THE... - NARA - 555438 (Photo credit: Wikipedia)

"You've got to be flexible. You're going to put a plan into cement, but a client will call you on Monday and say, 'I decided to buy that vacation home in Hawaii.' You either have to say, 'No, you're not, and here's why,' or 'I'm not surprised that you did that.' They are going to make mistakes on you."

10. Expect Referrals
Planners who develop the skill sets to work with business-owner clients will receive referrals from other planners who need help.




English: Zumbro Falls, MN, September 28, 2010 -- Business owners clean debris from their businesses after the town was by flood waters from the Zumbo river. FEMA and the Minnesota Emergency Management Agency was in town conducting damage assessments which will allow the Governor to determine if the state is eligible for federal assistance. Photo by Patsy Lynch/FEMA (Photo credit: Wikipedia)

11. Be Comfortable With Messiness
"I'm not afraid to ask questions," Thornton says, "and I'm not afraid to listen until there's a level of clarity so that something that initially appeared to be messy is crystal clear."

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Expertise in aviation components applied to distribution to expand opportunities

Memphis Business Journal
Date: Friday, April 13, 2012, 5:00am CDT

Andy Ashby

Staff writer- Memphis Business Journal

Alan Howell | MBJ Marcellus Montalvo and Mario Ordonez of InterSky Precision Instruments perform tests on electronic components used in the aviation industry.

InterSky Precision Instruments Inc. is expanding its horizon to expand its business.

Memphis Skyline HDR [Reinhard] (Photo credit: Exothermic)

The 32-year-old company, which has made its name in aviation component maintenance, sees growth possibilities using the same skills but in different industries.

It’s part of the company’s versatility.

InterSky mainly repairs cockpit instrumentation for commercial, corporate and government aircraft, but also fixes aircraft lighting, probes and accessories such as fans or motors. It also calibrates equipment.

Originally launched in North Hollywood, Calif., the business migrated to Memphis to be a supplier to FedEx Corp. 13 years ago.




FedEx A310 and A300 cargo aircraft fly daily from Memphis and Indianapolis to GSO. (Photo credit: Wikipedia)

FedEx was developing its supplier diversity program and since InterSky is a 100 percent Hispanic-owned business, the company thought it would give Memphis a shot.

“There was no promise of business, there was just a handshake and (founder) Hernan (Montalvo) took a shot on his own dime,” Marcellus Montalvo, president, says.

When the company moved to Memphis, the Tunica casino building boom was happening and it was hard to find contractors to build out InterSky’s office space.

Montalvo’s uncle and a friend flew to Memphis to teach the 12 families who moved here for the company how to do the construction work on the FAA-approved facility.

“Everyone literally learned on the fly,” Montalvo says. “That’s the roots of the company.”

While InterSky handles repairs for companies such as Boeing, FedEx, and the U.S. Air Force, it has been looking to expand its business model.

“The aviation business is very capital intensive, especially for a small business,” David Hughes, vice president of government services, says.

For example, the company’s inventory has a commercial value of more than $30 million.

They took their problem-solving prowess and decided to go beyond aviation.

Its core competency is fixing electronic equipment such as microcircuitry boards, which run everything from slot machines to public utilities. So InterSky applied that expertise to help Fred’s Inc.




PCB with testpads (Photo credit: Wikipedia)

The Memphis-based discount retailer has a major distribution center in Memphis with an automated system that has more than 4,000 small, printed circuit boards. The system was giving Fred’s problems, but the company didn’t have schematics to guide repairs.

“We basically reverse-engineered our repair capabilities just from the broken boards we were looking at,” Montalvo says.

InterSky’s employees learned how the system worked, then figured out the problems.

InterSky has also expanded existing relationships for growth opportunities. The Great Recession impacted many of InterSky’s partners.

InterSky responded by partnering with companies with complementary parts and services. When talking with a manufacturer, for instance, they asked to add maintenance components.

“We’re looking for companies where we can say ‘We can add to what you’re already doing,’” Montalvo says. “That’s so we can service a broader customer base through partnerships.”

Southern California Aviation LLC has been working with InterSky for just over a year.
The company, which stores and maintains mainly commercial aircraft, sends equipment to InterSky for repair and recertification.

“Compared to other vendors I’ve dealt with, their open line of communication is 100 percent,” Lisa Mullaney, purchasing manager, says. “I’ll send something and as soon as it gets there, they let me know. As soon as he knows what’s wrong with it, he’s sending a formal estimate.”

InterSky is apparently following the old business maxim of “under promise and over deliver,” as Mullaney often gets equipment back faster than InterSky’s employees say they would.

“I’ve found I haven’t had to follow up with them, as they’re very proactive,” she says. “Some vendors it’ll go a week or two and I’ll have to call them.”

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Your Family Matters: The Importance of Succession Planning in Family Held Businesses

 Corporate Finance Associates Newsletter 2Q 2012

By David Sinyard, Managing Partner
Atlanta Office, Corporate Finance Associates

Developing a succession plan may be the most important business plan a company owner will ever make - it secures their family's future long after they are gone. Yet, the vast majority of family owned businesses do not have a succession plan in place and statistics show that nearly three quarters of family owned businesses do not survive the transition from founder to second generation. Given the importance of such a plan, understanding the obstacles that stand in the way of a successful business succession is the first step to putting a plan in place.

Most family business owners fully intend to keep the business within the family's control, but choices made by the founder can derail such a plan from coming together. One common reason for inactivity is that the founder fears losing control of the business. … Research demonstrates that founders tend to remain at the helm on average between 25 and 30 years. This length of tenure has an effect on how second generation family members view their opportunities.

Choosing a successor from the next generation when there are multiple children presents another challenge. How do make everyone feel as if they have been fairly treated, fairly considered? The natural inclination is to avoid conflict, yet this step often pits one child against another, at least in the mind of the founder.
Equally important, how do you insure that the successor has the skill, experience and leadership qualities needed to carry the company through to the next generation?

…The financial security of the founder is a fundamental concern. …[How] is long term security insured? Often, the founder finances the sale to the successor via a promissory note. Does this really give him any freedom? Are there other choices?



English: Belongs to The Organic Business Guide. (Photo credit: Wikipedia)



…[With] no plan in place, the death or disability of the founder can be disastrous. Unplanned estate taxes or unexpected health care costs can place an inordinate financial burden on a company, severely retarding its short term and long term prospects.

The purpose of a succession plan is to clearly identify a successor, define key leadership and management roles for both family and non-family personnel and formally outline the goals of the business. In addition, it will provide a financial blueprint for transferring ownership. Ideally, a succession plan is simply part of a company's overall strategic business plan.

Components of an effective succession plan include:

• Defining Goals & Objectives - provides the basis for the entire succession plan
• Family Involvement in Decision Making Process - defines a process for open communication and dispute resolution
• Identify the Successor - specifies who will take over ownership of the company and how they will be groomed
• Estate Planning - in the event of illness or death, provides a process for handling inheritance and income streams for both active and non-active family members with specific attention paid to taxation
• Contingency Planning - lists a series of "what ifs" and anticipated actions
• Comprehensive Organization Chart - updates the organizational structure of the company with line of succession and includes potential roles for the retiring founder, shareholders and key advisors like accountants, lawyers and lending partners
• Business Valuation - required as a baseline for determining
• Exit Strategy - explores ownership transfer options including timing and the potential sale or partial sale to a non-family third party

Once a formal succession plan has been created, it must also be reviewed on a regular basis to make sure the plan is amended to account for any changes of circumstance. An annual review may be sufficient.
Given their entrepreneurial traits, founders give much of their energy, time, and emotional well-being to the startup and growing phases of their businesses. Founders hold an influential role over the succession planning process and the decisions of the succession plan lay primarily with them. Without their willingness to embrace a formally constructed succession plan, it will likely not exist and a business without a succession plan is somewhat like an individual without a will. In the unlikely event that disaster strikes, there is no emergency plan, no predetermined leader. Effective succession plans provide a guiding light in times of transition or trouble.

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Managing Conflict in a Family-Owned Business (Part 2 of 2)

CEG Worldwide, LLC

By Tom Hubler (Part 2 of 2)

The structure of the matter (second in a series)

Key Takeaways

• The B.O.S.S. concept formalizes how we generate what’s right for the Business, for Others, for our Self and for Stakeholders.
• The approach helps develop collaboration, team skills and common success.
• Regular family meetings keep issues from growing into problems.
• A family code of conduct helps prepare and formalize key ground rules to keep everyone on track as individuals, as a family and as a business.

Part 1 of Managing Conflict in a Family-Owned Business discusses how important it is to raise issues, prepare succession plans and create a common family vision. This form and structure help unite family members in a superordinate goal.

Here I introduce other specific methods to bring structure to family-business issues and to prevent conflict.

Who’s the B.O.S.S.?
The B.O.S.S. concept is a way to remember what the family wants to generate for the...
Business
Others (and what they want)
Self (what you want for yourself)
Stakeholder (including others who share in the business)

…To manage issues and prevent problems, the family carefully considers what must be done to take care of the “B” (Business). Most family businesses recognize this intuitively. It’s just common sense.

What may be less intuitive is recognizing that in order to prevent issues from becoming problems, you must identify what the “O” (Others) wants. … Every family member must understand that they have a commitment to each other’s success. … In this way, kything prayers and the “O” in B.O.S.S. mean the same thing.




Cover via Amazon

Being aware of others unleashes energy because there is psychological engagement within the family. It is strikingly portrayed by author Mihaly Csikszentmihalyi. I summarized his concept with a few quotes taken from his book Finding Flow:

• “An optimal family system is complex in that it encourages the unique individual development of its members while uniting them in a web of effective ties.”
• “A group of people is kept together by two kinds of energy—material energy provided by food, warmth, physical care and money, and the psychic energy of people investing attention in each other’s goals.”
• “When people pay attention to each other or to the same activity together, the chances of finding flow, binding the family, increase.”
• “Only when there is harmony between the goals of the participants, when everyone is investing psychic energy into a joint goal, does being together become enjoyable.”



The Good Work Team: William Damon, Mihaly Csikszentmihalyi and Howard Gardner (Photo credit: Wikipedia)

Csikszentmihalyi emphasizes the importance of putting psychic energy into families. …The point is that good things happen when people are committed to each other’s success.

The first “S” (Self) in B.O.S.S. represents what you want for yourself. With the family as a team, individuals think about what they want for themselves in concert with what others want for themselves and aligned with what they all want for each other. This puts power into the common family vision because family members reinforce the common good. Each trusts that by contributing during their turn, they are appreciated and the trust is returned when others respond as their turns come.

The second “S” stands for the stakeholders. These stakeholders may be nonfamily employees, other family members not engaged in the business, vendors, suppliers and customers. B.O.S.S. thinking helps create win-win rather than win-lose decisions. It helps promote the common good to help the family and their business become vision driven rather than problem focused.

Develop collaborative team skills
An excellent way to prevent conflict is to strengthen family communications using Collaborative Team Skills. This highly successful program created by Sherod Miller helps families successfully manage their differences.
The program helps people learn how to express feelings and wants. When these deep needs go unexpressed, communication breaks down…. I consider listening skills to be the most important way to promote understanding within the family.

Proper listening requires knowing how to respond to different communication styles, map an issue and actively problem solve. Conflict often arises because people don’t listen carefully, or they respond poorly. ...

Hold regular family meetings
In his book Family Business (3rd Edition), Ernesto Poza promotes family meetings. He states that when family businesses have regular family meetings, they become more successful. …

Successful family-owned businesses typically hold three types of meetings:

1. Shareholder and owner meetings that include only those members
2. Meetings designed for employees and family-member stakeholders
3. Family-only meetings that bring together the entire family, including spouses and those not active in the business

Each type of meeting has its own dynamic, purpose and value. Family meetings, in particular, help manage the boundary between family and business. This is where so many potential conflicts can be discussed and resolved. Family meetings build the emotional equity of the family (the psychic energy of Finding Flow) while simultaneously building the equity of the business.

Here are a few of the many ways to build emotional equity in the family:

• Establish and celebrate family rituals and traditions
• Regularly spend informal time with each other outside of the business
• Involve adult children and grandchildren in family-oriented services and philanthropic projects

Prepare a family code of conduct



Code of Conduct (Photo credit: jronaldlee)

Issues raised and resolved in family meetings can be restated as part of a family participation plan or code of conduct. …

Too many family-owned businesses regularly play the game of business without having or regularly reviewing their own sets of ground rules. Or they assume the rules are unchanged and fail to keep them current.

I use this outline with my clients to guide them to their own family participation plans or codes of conduct:

• Eligibility
• Entry
• Summer employment
• Intern programs
• Nonfamily executives
• Full-time employees
• Career planning
• Application process
• Coaching
• Poor performance and termination
• Conduct and protocol
• Compensation

Discomfort around touchy issues is natural in every family and family business. Holding regular family meetings and producing a family participation plan or code of conduct can prevent many of these issues from becoming problems. My mantra for clients is: “It’s always easier to prevent a problem than to try to fix one.” Conflicts become painful only if ignored.

About the Author
Tom Hubler (tomh@thehublergroup.com) is president of Hubler for Business Families (hublerfamilybusiness.com) and an adjunct professor at the University of St. Thomas.

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Managing Conflict in a Family-Owned Business (Part 1 of 2) - CEG Worldwide, LLC

CEG Worldwide, LLC

By Tom Hubler (Part 1 of 2)

What advisors frequently overlook can land their clients—and themselves—in hot water (first in a series)

Key Takeaways

• Most families avoid talking about death and money, yet that's exactly what is needed for good business succession and personal estate planning.
• Families avoid discussions because they fear it will create family disharmony, when just the opposite is true.
• Families should develop together a common vision and prayers for each other that reinforce the needs of individual members reflecting their common good.
• Optimize your global tax portfolio/position by understanding where the income gets taxed, and then analyze the after-tax income.

Death, money and sex. In our culture these are the three most difficult things for families to talk about. … Virtually everyone avoids talking about death, money and sex in their families. Do you?



nothıng takes placε but thε placε . . (Photo credit: jef safi)

Unfortunately, when a family-owned business is having a conflict, it is likely that two of these topics must be talked about—death and money. That's because conflict in a successful family business commonly occurs when it's time for succession planning—when the family must decide who will continue the business and how. Many families make the mistake of just assuming who it is that will take over the company and that succession will happen when the time is right. That's where the problems begin.

Estate planners tell us succession is a highly unpleasant subject for families. It requires them to think about death in the family, life without a loved one, taking or transferring assets, and changing responsibilities. For a family business, the discussion seems especially filled with potential landmines.

Family businesses avoid succession planning
Succession planning is not only an issue for the owner-entrepreneur, it's also an issue for the entire family. Many families unconsciously conspire to avoid talking about ownership and management-succession planning. …




Pugh's Garden Centre A family-owned business at Morganstown, near Radyr. The wooded edge of Garth Hill can be seen beyond. (Photo credit: Wikipedia)

My clients will say, “It's too early; we have years to think about this.” Or “I don't have time right now.” Or my favorite, “We don't need all that structure and formality because we love each other.”

Actually, it is because you love each other that you need all that structure and formality. It helps you avoid the emotional tripwires and makes the rational path more visible. However, that path must include more than just plans for ownership and the estate.

As I stated in a previous article, it is futile to produce a succession plan by focusing on just the ownership (and estate) plan. A smart succession plan must also consider the owner-entrepreneur's overall intention. It must reflect a core purpose that includes legacy and family intentions as well as the business purpose.

Legacy is more than an entrepreneur's wish for “how I want to be remembered.” A sense of legacy drives the entrepreneur to develop a succession plan. Concern for a legacy creates the motivation.

Start by discussing legacy



Motorhomes lined up for sale This family owned business developed from a haulage firm. They now sell new and used motorhomes. (Photo credit: Wikipedia)

… There are two aspects to legacy: your gift to the future and how you want to be remembered. The first aspect, discussed by Laura Nash in the Harvard Business Review article “Just Enough,” defines “your gift to the future” as a means by which “you help others find future success.”

The second aspect—how you want to be remembered—is my definition. It focuses more personally on how an individual wants to be remembered and is highly emotional because virtually everyone in their 60s and 70s wonders at some point whether their lives have meant something. …

A technical planner can ask:

• “How do you want to be remembered?”
• “What is your gift to the future?”
• “How can I help you achieve those goals?”

Ask legacy questions like these so that owner-entrepreneurs will engage in succession planning. This helps avoid a lot of unnecessary conflict that could surface later.

Conflict accumulates when differences are not discussed

Conflict in family-owned businesses can also increase because family members simply try to avoid it. When I taught the Family Business Management class at the University of St. Thomas, I regularly brought up the famous Hubler Speck of Dust Theory to explain what I often saw happening in family-owned businesses.

 

Nursery Center has been a family owned and operated business since 1990. Website: nursery-center.com (Photo credit: Wikipedia)

In my Speck of Dust Theory, an issue or irritation triggers differences in the family-owned business. Family members say to themselves, “If I bring that issue up, it will upset the entire family and ruin our 4th of July picnic at the lake.” That speck of dust—that issue—is not discussed.

Sometime later, another issue surfaces. The conflict isn't mentioned because it could spoil Thanksgiving or Christmas, or an upcoming wedding, birthday or graduation. Irritation accumulates into ever-greater annoyance because no one is willing to bring up an issue. The family creates the very disharmony they are trying to avoid by failing to talk about their differences.

Speck-of-dust issues can grow into a ton of discord. Yet these issues are normal and should be aired. (See my partial list of potential issues.) Every family and family-owned business has issues. They become problems only when they are avoided and not discussed.

How to prevent and manage problems in family-owned businesses

The best way to avoid conflict is to keep issues from becoming problems in the first place. To do this the family should create a common vision that unites everyone at a superordinate level. …

Typically, one would urge compromise … Yet when individuals are asked to compromise, they generally feel like they are conceding or giving in. Instead, the family should be encouraged to understand that this is a negotiation that involves cooperation. Everyone is working together for the common good of the family and the business…



individual -v- group (Photo credit: Sean MacEntee)

Individuals recognize that it is unrealistic for each person to get 100 percent of what he or she wants. Instead, each family member is contributing to reflect what's best for the family vision. … Each understands that “just as I contribute, other members of the family will do the same when their turn comes.” And the others' turns always come.

Develop a family vision
To begin, the family creates a list of values that everyone can embrace. These high-level principles are discussed and developed into a brief paragraph that truly reflects what the family believes about themselves and their values. …

I also encourage families to adopt or develop their own family prayers. Here is a typical example:

Family prayer for loving kindness
May our family be filled with loving kindness.
May we be well.
May our family be peaceful and at ease.
May our family be happy.




NEOSHO, MO- JUNE 17: A Twister Safe sign for a small family business that specializes in constructing safe rooms stands June 17, 2011 in Neosho, Missouri. A surge of interest in safe rooms has been seen since an F5 tornado tore through Joplin, Missouri in May. (Image credit: Getty Images via @daylife)

As family members cooperate to develop their family vision statements and prayers, I encourage individuals to prepare their own personal value statements. …

The prayer and vision statements should be clear and brief enough to be recited daily. Because they are developed through family cooperation, these statements resonate across the family and truly reflect the interests of everyone.

Finally, I encourage family members to think about each other daily through brief kything prayers. Kythes are the vision statements of family members. They are put in the third person and reflect what that person wants, needs or values….

Conclusion
By encouraging your family business clients to talk openly and strategically about death and succession, you can help them preserve substantial wealth and family harmony—and solidify your role as a trusted advisor and confidant.

About the Author
Tom Hubler (tomh@thehublergroup.com) is president of Hubler for Business Families (hublerfamilybusiness.com) and an adjunct professor at the University of St. Thomas.

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The Role of the Board in Family Business Succession

How to help smooth leadership transitions

Trusts & Estates Magazine
By David Thayne Leibell, partner at Wiggin and Dana LLP in Greenwich, CT




Board of Directors (Photo credit: Wikipedia)

A relatively unexplored area of family business research is the role that an active, independent board of directors can play in perpetuating the family business from one generation to the next. A recently published book, Building A Successful Family Business Board[1], seeks to close that research gap. In fact, according to the book’s authors, an active, independent board can serve as an objective steward, overseeing the creation and execution of a leadership succession plan that works for both the business and the family.

Definitions

The authors state that an “active board” refers to a board that meets three or more times a year. An “independent board” is one with three or more independent directors; which is the minimum number that the authors believe is necessary to have a meaningful impact on governance. An “independent director” is an individual who has no ties to the business, other than being a director. The definition of an independent director doesn’t include employees, shareholders or outside advisors to the business or the family.

The Problem



Mawarid Board of Directors (Photo credit: Wikipedia)

Even in the healthiest of families, the leadership succession process is often a difficult task that, for a variety of valid reasons, the family chooses to avoid. The authors cite a 2007-08 survey of family businesses by Price Waterhouse Coopers, which found that while one-quarter of the businesses surveyed were due to change leadership hands in the next five years, roughly half of the family business that participated in the study had no succession plan in place. According to the authors, an active board with independent directors should avoid this problem by requiring the development of a succession plan as a natural part of family business governance.

Family Business Boards



2011 Board of Directors Retreat (Photo credit: sfbike)

In connection with writing the book, the authors conducted a study of 360 family businesses regarding the state of their boards. Although every business must legally name a board of directors, the majority of family businesses surveyed had boards in name only. Only 48 percent of respondents had boards that met more than twice a year. According to the authors, boards that meet less than three times a year provide little effective support of management or the shareholders. Of the active boards, only 25 percent featured two or more independent directors, and only 21 percent had more than three independent directors, the number that the authors feel is necessary for independent directors to have sufficient voice to influence family board members in an effective manner. Surprisingly, even for businesses with sales greater than $100 million, only 58 percent had active boards, and only 33 percent had three or more independent directors.
It’s the authors’ view that independent directors are the richest resource available to family-owned companies. The survey results bear this out. Respondents with independent directors on their boards reported a much higher level of board effectiveness (83 percent) than respondents with no independent representation (54 percent). Not surprisingly, board effectiveness increases with the amount of independent representation. Respondents with a majority of independent directors on the board reported 93 percent board effectiveness.

General Benefits

The authors explain that active independent boards: (1) provide in-house experience, empathy and expertise; (2) encourage self-discipline and accountability; (3) act as a sounding board for family and management; (4) provide honest, objective opinions; (5) encourage strategic planning; (6) provide insight into key people; (7) ask challenging, proactive questions; (8) provide confidential and empathetic counsel; (9) engender creative thinking and decision making; and (10) encourage better corporate relations with constituents ranging from employees and suppliers to customers.

Succession Planning

Many, if not most, family business leaders have a difficult time handing over the leadership reigns. As such, many family business leaders delay or avoid succession planning, which can have devastating consequences, not only for the business, but also the family. According to the authors, active, independent boards can be invaluable to the succession process by: (1) ensuring that a succession plan is in place well in advance of the time it is needed; (2) helping the current leader examine various options; (3) ensuring the successor is being adequately prepared; and (4) helping plan for, and complete the process. No other resource provides as comprehensive a source of support to help the company and family achieve continuity as the business passes from one generation to the next.

Endnote

1. Jennifer M. Pendergast, John L. Ward and Stephanie Brun de Pontet, Building A Successful Family Business Board, Palgrave Macmillan (Jan. 2011).

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Ready to Sell Your Business and Retire?

WSJ.com:

By VERONICA DAGHER

The wealth of many boomers is tied up in businesses they own. And that can be a problem when it comes time to retire.

Advance planning for the sale of a business is more important than ever, ... Even when families transfer ownership to the next generation without a sale, the tax consequences can be huge without proper planning.

Too many owners aren't prepared for the day when they'll need to cash out. Some haven't done their homework to figure out what the business is really worth. Others undermine their company's value with their inability to let go.

Below, financial advisers and exit-planning specialists weigh in on some of the most common mistakes business owners make when they're ready to retire, and how those mistakes can be avoided:

Gary Hovland

The Mistake: Creating a Business That's Too Dependent on the Owner

One of Paul Pagnato's boomer clients spent decades building his company. When he decided to retire, he was not only chief executive, he was handling all key decisions in marketing, sales and client service, despite having hired executives to handle those functions.

WASHINGTON, DC - FEBRUARY 21: Chairman, President, and CEO of the Boeing Company W. James McNerney, Jr . (Image credit: Getty Images via @daylife)

"He was the business," says Mr. Pagnato, a Washington, D.C.-based adviser who works exclusively with entrepreneurs. But Mr. Pagnato says having a business too dependent on the owner or a handful of major customers can dramatically hinder the company's sale price, as buyers are likely to perceive more risk. Indeed, Mr. Pagnato's client ended up selling his business for less than he originally planned and was required to stay on longer to insure a smooth transition.

The Fix: Mr. Pagnato says it's important to delegate responsibility well before the sale to help insure a smoother transition and diversify the company's customer base.

The Mistake: Ignoring the Tax Benefits of Planning Ahead

Enlarge Image

Adam von Poblitz had a client whose 10-year-old business was valued at $20 million two years ago. The owner had always planned to transfer an interest to her son, says the New York City-based estate-planning attorney. But the client procrastinated. Today, the client is ready to transfer a 50% interest in the company to her son, but the company is now valued at $40 million. As a result, she will pay gift tax on a much larger taxable gift.

The Fix: Had the client transferred the half interest two years ago, she would have paid gift tax on only $10 million rather than on $20 million, thus avoiding the tax on the post-gift appreciation attributable to her son's half interest.

Mr. von Poblitz says that if an owner anticipates transferring ownership in the next five years, it may make sense doing it sooner at a lower valuation.

The Mistake: Incorrectly Valuing the Business

Unfinished Business Is it a folly? or has someone run out of money or fallen foul of the planning people? (Photo credit: Wikipedia)

Richard Jackim worked with a client who was the founder of a small but successful consulting firm. The client calculated he'd need to sell his business for $6.25 million to maintain his lifestyle in retirement, says the Chicago-based exit-planning adviser, and figured his business would be worth that much. He was wildly optimistic, however. All too often, owners base retirement plans on faulty valuations, causing drastic overhauls in retirement plans, not to mention blows to self-esteem, says Mr. Jackim.

The Fix: Well in advance of retiring, business owners should get a realistic appraisal of their business, to see if it will fetch what they'll need to retire. If it won't, the owner needs to adjust his or her retirement plans, or come up with a financial strategy to boost their income.

Mr. Jackim says a mergers-and-acquisition adviser can help determine what a business actually might sell for.

Also essential: understanding if there is a market for the company, how liquid the market is for lending and equity, what buyers are paying for similar companies and how they are structuring the deals.

The Mistake: Rushing to Accept a Rich Number

Understanding Financial Leverage (Photo credit: Wikipedia)

Sellers often jump at what appears to be the highest bidder, ignoring other bids, says Fentress Seagroves, an Atlanta-based transaction-services principal. ... The seller doesn't take into account the due diligence that the buyer is undertaking, and how that could change the final number. The seller also ignores other crucial elements of the bid, such as how employees will be treated, or how the buyer will finance the deal. In the end, the seller may have ignored what would have been truly the best deal.

The Fix: Don't fixate on what is superficially the richest offer, Mr. Seagroves says. ...Try to anticipate how the due diligence the buyer is undertaking could change his or her offer at the close. Consider all aspects of the transaction, not just the nominal price.

The Mistake: Hiring Your Brother-in-Law to Do the Deal

Thomas Bonney had a client whose legal counsel's expertise was in general legal matters for small businesses. The lawyer also happened to be the husband of the company's controller, says the Philadelphia-based exit-planning adviser. The lawyer's lack of expertise with merger-and-acquisition transactions and lack of understanding about the time-sensitive nature of the deal resulted in the family's missing the opportunity to sell the business in a strong deal market.

The Fix: Too many family businesses keep everything in the family—including legal services. That can be ... foolhardy when looking to sell. Mr. Bonney advises clients who are considering selling their business to interview three to five separate firms early in the process. He says they should ask the lawyers how they would structure the deal, how they can help with negotiations and ultimately, make a quick close. This process will not only allow the owner to see how an attorney works with them, but they will also have an opportunity to get some good ideas on both legal and personal issues—such as what should a compensation package look like for a family member who wants to continue to work in the business.

The Mistake: Underestimating the Emotional Impact of Selling a Business

John Leonetti, a certified business-exit consultant based in Canton, Mass., has seen all manner of crises erupt when a business owner prepares to sell, causing disastrous moves that wound up hurting the sale and the seller's personal life. ...

Because owners' sense of self and purpose is often wrapped up in their business, letting go is often more difficult then they realize and sometimes causes them to act irrationally, he says.

The Fix: Mr. Leonetti says owners can make their exit easier by mapping out their post-exit lifestyle before the sale. He advises clients to get a calendar and fill in how they are going to spend each day for the six to 12 months after the deal goes through. He's also seen clients do consulting work or start a scaled-down version of their former business, allowing them to stay in the business they love and adjust to a new schedule.

Ms. Dagher is a reporter for Dow Jones Newswires in New York.
She can be reached at veronica.dagher@dowjones.com.

A version of this article appeared April 30, 2012, on page R3 in some U.S. editions of The Wall Street Journal, with the headline: Preparing to Leave.

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