Power and Resources: Managing Owner Risk, Legacy and Value

By Aron R. Pervin, CMC, ICD.D, TEP

PDF Version

Table of Contents

• Foreword
• Definitions
• Planning for Clantinuity
• Four Deadly Sins
  • Does this mean restrictive wills and marriage contracts?
• What's Really Needed: An Integrated Professional Approach
  • Management Succession and Accession
  • Choosing a Successor
  • Passing On Essential Information
  • The Ownership Transition
  • Estate Planning
  • Planning for Liquidity
  • Disposition of Owning Family's Assets
  • Are You Doing The Right Thing? Three Ways To Know
• Planning Your Exit Strategy: Fantasy or Reality?
  • Exit Strategy: The Practical Picture
  • What's Next? It's Hard To Plan When It's Not In Your Vocabulary
  • Estate Planning and Business Succession Checklist
• The Other Clantinuity Team Members
• Conclusion
  • How To Make The Transition Work: Plans and Structures
• About the Author

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Foreword

There is nothing more powerful than a family! History and literature confirm this over and over again. It is very satisfying to be able to report on the following observation and possible shift in the business family world:

Experience and research, coupled with in depth discussions with my colleagues and Fellows [FFI and CMC], over the last 20 years, and more specifically over the last five years, overwhelmingly confirm that family business consulting situations that utilize a multi-disciplinary competency-based approach appear to build and sustain client confidence and skills, and foster positive and progressive momentum for change over the long haul.

An analysis of the findings also suggests that this integrated results-oriented approach provides the most value when the practitioner and client family business agree to build a trusting partnership of learning, experimenting and achieving highly leveraged results.

Interestingly, the study identified some information that on first inspection appeared controversial, that is, that a multi-disciplinary "team" approach might not be significantly better or more advantageous. In fact, upon further investigation, two findings emerged that deserve mention. First, this approach was most challenging and least attractive when working with founders at the exit strategy stage of his or her career and was more attractive and viewed as more beneficial at the second to third generation transition stage, and beyond. Second, at times, a team that is not organized or collaborative can undermine the intention and spirit of the continuity and legacy preservation process, thereby demonstrating that more consultants or practitioners may not be significantly better or more experienced at achieving the requisite results required and requested/demanded by the client family business members.

Simply, an appropriate number of consultants, coupled with greater competency in specific areas of business, law, behaviour and finance, is directly correlated to successful project outcomes, client satisfaction and positive memorable results.

As I reflect on these findings, it appears to me that some thinking and writing takes awhile to incubate. To explain, in the mid-1980's, my colleagues and I began to publish articles on this collaborative and integrated method of service delivery.

By the early 1990's, I had lost interest in being a speaker at seminars planned by others, and began to organize and Chair family business conferences that fostered and promoted this multi-disciplinary approach. At the same time, my colleagues at the Family Firm Institute [FFI] and I began to develop a competency-based body of knowledge.

By the late 1990's, my colleagues and I, internationally as Fellows from the Family Firm Institute [FFI], had further developed this progressive thinking and FFI had codified it into a Body of Knowledge document and learning programs.^[2] In fact, many of us were actually employing the process with clients wherever possible [although not as frequently as we might wish] and other learning programs that complemented and expanded on this approach began to emerge.^[3]

It is my intention to encourage and perform collaborative, competency-based, multi-disciplinary service-delivery for all family business consulting client engagements, especially when working with business families at the second, third and fourth generation of ownership and management, that is, when working on clantinuity plans with business and/or enterprise clans.

With that in mind, this booklet can be of benefit to both the practitioner and the family business member as a starting point to commence the continuity dialogue using a multi-disciplinary platform.

Aron Pervin
Toronto, January 2007

Definitions

Clan (klan) n.

1. A social group of people united by kinship and descent, which is defined by actual, alleged or perceived unilineal descent from a common ancestor.
2. A large group of relatives, friends or associates.

Clantinuity (klan't(-nu'i-te) n.

1. a. An integrated and sustainable multi-generational business family transition process.
   b. A long term plan involving numerous minority owners who share a common clan connection and stress mutual obligations, values and duties.
2. Uninterrupted connections, succession, duration, union or continuation with and without essential change.

Planning for Clantinuity^[4]

When you strip everything else away, some core long-term decisions in a family-owned business, especially at the second generation and beyond stage, are those relating to power, resources and risk. The central issues become:

1. Who has or should have the power, authority and control of the resources today?
2. What can be done to ensure the appropriate return on present resources, minimize risk and protect them into the future?
3. How to ensure the proper distribution of power and transfer of resources to the next generation?
4. When do we start planning for these transitions of management, ownership and leadership?
5. Why is the business being offered to the next generation rather than a portion of the money received from its sale?

Too frequently, the accidental partners or owner(s) in a family business do not realize the critical importance of these questions. The manner in which they are handled will affect not only the business's present situation, but also its very existence and survival into the future, carrying implications for the security of the family and its legacy as well. As a result, the owner(s) or accidental partners who make an oversimplified response risk disastrous consequences. Interestingly, some second-generation accidental partnerships inappropriately consider that the success of their management and ownership transition can be duplicated at the third generation stage with little modification to its historical process. This approach is seldom successful. By this time, the sibling and cousin constellation reflects family members and owners who are participating in the business and many who are not in the business as well as a diversity of personalities, values and priorities, that may have similar or divergent perceptions on the level of risk, need for owner value and the legacy being handed down regarding the family and the enterprise. Experience confirms that business families who have active and knowledgeable directors on their Board receive excellent support and guidance in this complex decision process.

Four Deadly Sins

Type of response	Action
Avoidance or denial	At worst, no personal financial, estate, or succession plan or will. At best, a simple will leaving everything to the spouse, saddling him or her with the responsibility of dealing with the difficult questions of leadership succession and share distribution.
	The most elegant avoidance is to hire the "best" advisors and do nothing, while always using the professional as the excuse [read: weapon] for the inactivity and lack of change.
Family First!	The business belongs to all the family. The cash and cash flow is the owner's personal bank account and sharing is likely problematic. Divide common shares equally among family members regardless of interest in the business or competencies and without considering the uncertainties of life. Choosing this direction often lays the foundation for an unstable, emotion-laden accidental partnership.
	In fact, this approach often proves that equal is not always fair and can result in sticky situations such as:
	gifts to children who marry and subsequently divorce; share ownership by children and in-laws who are not in the business, nor interested in it; share ownership by next generation family members who confuse an inherited legacy with management competency and business acumen; and, equal gifts to children [G2] who have an unequal number of grandchildren [G3] leading, for example, to a situation where three grandchildren who are active in the business collectively own the same number of shares as one cousin who is inactive.
Business First!	Minimize taxes without regard to the effect on the future worth of the business. This can lead to common share ownership by potentially hostile shareholders or unforeseen inequities in the distribution of wealth and control. How will the financial resources be managed? How will the operators ensure that the business has money for re-investment and exiting shareholders? How will family owners not employed by the enterprise have enough money to live? The family legacy could become vulnerable.
Owner First!	This approach gets tricky if confusion between the role and role assignments of ownership and family participation get confused. Salary and perquisites of the job received for employment must be separate from monies received as an owner [and never blended]. It's not always healthy when owners live on their owner distribution and have no other source of revenue. Experience confirms that the predictable tension of family participation can be absent in this scenario if the driving force by competent people is long-term sustainable owner value, ensuring the business is in good hands and preserving the enterprise. Then, this approach often leads to organized and well-governed family owners and enterprise.

Therefore, the owner's and his or her family, have an obligation to each other to work through the insidious 'sins' and secure the major asset of the estate. It is often critical to provide for the continuance or sale of the business in order to maintain and preserve owner value and family relationships.

Does this mean restrictive wills and marriage contracts?

Protecting the value of the business as an asset emphatically does not mean that power and inheritance need to be controlled forever through highly technical wills and marriage contracts. On the contrary, recent commentaries suggest that these documents may not be in the best long-term interests of the business family.

Lawyer Henry Krasnow^[5], from Chicago, argues in an article in Family Business Review (Vol. XI, 3) that marriage contracts and domestic agreements are sometimes inappropriately forced upon young newlyweds where a shareholder agreement could act just as well to protect the family shares from an inappropriate transfer. He also notes that financial professionals sometimes structure tax savings in the estate plan in such a manner that it destroys effective management.

Krasnow proposes that accidental partners in a family business not feel locked into bestowing share ownership on all family members, especially if they are not working in the firm and derive little or no benefit from the ownership of the shares. He strongly suggests in these multi-family ownership situations that a liquidity agreement be crafted, allowing minority shareholders to sell their shares back to the company and be paid in a way that does not make the company vulnerable. In some situations, an internal, private market is established with appropriate rules governing allowable share transfers.

In summary, it is beneficial to view tax savings as a business decision and not a personal mission to pay minimal taxes. Business continuity, liquidity and the survival of the enterprise as a going concern is the actual goal [possibly] whether the enterprise is sold or part of the legacy. The emotional impact of any decision on the estate plan is an area often overlooked by the technical advisors, but experience confirms that this missing analysis can challenge family relationships, even the healthy ones. Finally, to integrate this thinking, it appears that the business family needs open and transparent dialogue on these matters and competent family participants in the business who have the requisite skills to lead the enterprise and the ability to foster satisfying family relationships.

What's Really Needed: An Integrated Professional Approach

Therefore, the accidental partners or owner(s) should make management and leadership succession, ownership succession and estate planning his or her personal responsibility, and secure professional assistance in these areas from his or her professional advisors and members of their Board. Moreover, these plans should be based on a sound strategy and direction. They should be reviewed on a regular basis, and integrated and aligned within the changing needs of the accidental partnership because business circumstances, individual priorities and tax laws also change constantly.

But first, the accidental partners and the business family must know what they want all these plans to accomplish and construct an intentional legacy statement describing the ultimate outcome. The owner(s) or accidental partners must think strategically about the disposition of power and resources in the company, equating secure transfer of power and control of resources with the protection of the present and future value of the business, and its legacy to the family.

• Power: Do owners place control of the business in the hands of those committed to and interested in its business continuity, ongoing performance and preserving and improving a respectful family relationship?
• Risk: Have the owners examined and documented the technical considerations as diligently as the emotional and relationship situations? Is the enterprise a going concern and in good hands and not vulnerable? Are the personal values and operating philosophy of the next generation aligned with the goals and values of the family? Is a constitution in place that describes the psychological contract and obligations of family ownership?
• Resources: Does management, whether family members or not, consciously recognize that it must grow the value of the business and create new wealth? Do leaders use the resources of the business to develop (not necessarily fulfill) the different interests and values of family members without inappropriately dividing control or dissipating the company's ability to generate more wealth?

Management Succession and Accession

Management succession or accession planning is one of the fundamental roles of the family participant in the family business. If the identity of the successor is not apparent, the leader has to take the time to think about the key skills, competencies and characteristics essential to managing the company and observe the potential candidates to see who best fits the bill - or who could best fit the bill given the proper training and development.

Choosing A Successor

The leader has several options when it comes to naming a successor. They include choosing among family members (the next generation), forming a management committee made up of family members and key company executives, setting up a transition team of family members and trusted outsiders and selecting a key employee or an outsider to run the business.

The right choice depends upon the circumstances: the nature of the business, its life-cycle stage, qualifications of family members, the expectations and capabilities of senior executives and the values and culture of the family are just a few.

It is true, however, that even though business families are creating increasingly complex accidental partnerships and business structures, a single successor usually minimizes the conflicts, confusion and consternation that can arise under the direction of multiple leaders, as long as the next-generation members agree on the identity of that successor - a first among equals situation^[6].

Passing On Essential Information

The leader must also begin to think about the key information crucial to the future of the company. It's usually done both informally in conversation over a period of time and in more formal written summaries.

Areas that could be covered include:

• Financial profile: The owner's personal assessment of the firm's present status and a projection of its financial future supported with financial statements, profit-and-loss statements, cash flow charts, budgets, variance analysis, and tax returns for the past five years; banking information such as the names of the company's bank managers, lines of credit, current bank accounts and average balances; and insurance information. The financial information should tell a story about the owner's lifestyle, including the amount of annual reinvestment [and the amount of harvesting], which can be examined by looking at the normalized earnings when adjusted for lifestyle.
• Administration profile: Information on partnership agreements, corporate records, buy-sell agreements, patents, licences, royalty agreements, vacation policy, retirement plans, employment and labour agreements, pending lawsuits, and copies of all existing contracts and leases should be available. Names and addresses of lawyers, accountants, insurance professionals, consultants, and any other outside professionals retained by the company must also be included. Family policies such as a family participation policy, code of conduct, roles and role assignments for owners and the like would be helpful. These documents should be aligned with the personal wills and power of attorney and the like of the owners and beneficial owners.
• Operations and technical data: A business plan that outlines the strategic initiatives and matches the expectations and priorities of the owners and family is extremely beneficial. An inventory of major equipment, manufacturing specifications, process and scheduling procedures, quality control measures, and standards used to gauge performance is handy. Also important is a brief appraisal of the efficiency of plants and equipment currently used.
• Marketing and Sales summary: Lists of products and/or services and their selling points, market positions, major clients, present and proposed advertising programs, and profiles of competitors would be of benefit. This information should be part of the three year rolling business plan.
• Purchasing summary: Suppliers, contracts, an outline of basic procedures for buying, inventory status, and shortages and any cost accounting information.
• Systems summary: Organization charts, corporate charts, governance structures, use of the Board of Directors, procedure manuals, employee handbooks, standard operating procedures, job descriptions, statements of company mission, standard controls, business plans and management reports.

The Ownership Transition

Ownership transition is the flip side of the management succession or accession process. While the management transition concerns who will run the company, the ownership transition concerns the transfer of power.

Multiple classes of share and shareholder agreements can be used to match the specific objectives and capabilities of family members to their ownership rights and prerogatives. Here are some specific techniques:

• Separating ownership from management interest. Children and other heirs who do not work in the business need not be involved in most management decisions. They are given a different class of share that entitles them to dividends but not to voting rights, except under specific owner circumstances such as a proposed sale of the company. This would be described in a shareholder agreement or shareholder memorandum.
• Directing or restricting subsequent share transactions. The estate plan can include provisions to deal with family members who wish to sell his or her shares. The board of directors (or family leader) may require the mandatory buyout of the shareholder's interest, probably through share redemption when a triggering event occurs. In many financial families, where the majority of owners are not employed in the enterprise, an internal market of minority shareholders is established to facilitate independence and a prudent exit strategy, and there is often an annual sale/purchase event.
• Limiting outside investors' purchases of shares. Family businesses usually limit the opportunity for outside investors to own an interest in the company. They do this with a buy-sell agreement that defines the allowable transfer of shares^[8] and often provides the company and/or the family the right of first refusal before any share is sold. This becomes a bit tricky when an in-law becomes the driver of the business growth and the profits are directly related to his or her leadership and business intelligence.
• Limiting the opportunity for shares to fall into hostile family hands. Accidental partners can preclude the need for a marriage contract with a shareholder agreement that contains a clear limitation of allowable share transfers. The company may decide to carry insurance that is used as the funding vehicle to buy back shares upon the death or disability of a significant shareholder. This minimizes liquidity needs and fairly compensates spouses and other heirs. In situations where this mechanism is inappropriate, a marriage contract that focuses only on the family business shares is critical.

Incidentally, many businesses also guard against indirect ownership of shares by establishing a shareholder provision that allows only group ownership by employees in their pension plans, profit-sharing arrangements or employee share ownership plans. Employees who leave the company or its benefit plans must redeem their shares. In the end, a holistic approach is often the way to organize this situation.

Estate Planning

Planning for ownership succession concerns control over the transfer and distribution of power. The primary focus of estate planning is to control the transfer and distribution of resources.

A well-defined estate plan carries out all of the owner's objectives while minimizing taxes generated by the transfer and preserving as much of the estate as possible in the hands of the heirs. As a related issue, the owner should also engage in personal financial planning to protect present and future needs.

Planning For Liquidity

Usually, a large majority of each family business owner's assets is made up of the business itself. This lack of liquidity makes each clan member in the accidental partnership entirely dependent upon the success of the business. Should the business encounter financial troubles, the owner's personal financial affairs are also likely to run into difficulty.

To counteract this potential problem, the owner may decide to enter into a long-range program to withdraw cash from the business. This is done primarily to invest in other assets, have money outside the business and diversify the investment portfolio.

By doing so, the owner:

• guards against liquidity problems and perhaps even creates an emergency fund for the business in hard times,
• reduces tax liabilities by purchasing advantageous investment vehicles, and/or
• grows the nest-egg through wise investments.

Owners should also be alert to find ways to minimize income tax. Many of the techniques available to more liquid individuals may not be appropriate for business owners.

But there are two methods that often apply:

• hiring younger children as full- or part-time employees, and
• deferred compensation arrangements.

Disposition Of Owning Family's Assets

The assets of the owning business families may take a number of forms. These include:

• closely held business shares
• real estate or other assets connected to business
• investment real estate
• stocks and bonds
• liquid assets
• partnerships
• personal home
• life insurance
• qualified plans and other retirement accounts.

For most business owning families, the business accounts for the bulk of these assets - and the leader, whatever the generation at the helm, usually holds an emotional attachment to it that he or she does not have for the other assets. As a personal and a financial legacy, the transfer therefore takes on special importance.

There are a variety of methods for transferring business assets. These include:

• wills and trusts under a master and integrated estate plan,
• other trusts, such as family, children's and/or testamentary trusts,
• buy-sell, stock restriction, and redemption agreements, and/or
• life insurance (ownership and beneficiary designation).

Are You Doing The Right Thing? Three Ways To Know

Regardless of which techniques and tools are used in estate planning, three factors should guide your owner value thinking and management of risk: continuity of the business, liquidity and associate relationships.

• Business Continuity: There should be a clear blueprint [a shareholder agreement] in case of the separation [forced or choice], retirement, disability or death of any shareholder, whether a minority or significant owner. This includes foreseeable expenditures such as taxes on the estate. In some situations, insuring for the value of the preference shares, rather than just for the tax, is a prudent option. Some people use permanent insurance policies. The most critical step in preserving the assets of the principals is to avoid the forced sale of the company. Without planning, the decision to sell the business interest may not be voluntary and terms of the buy-sell agreement may not be relevant.
• Business Liquidity: The departure, through whatever means, of a principal in a small, family-owned business can create sudden demands for cash to pay income taxes, family support or retirement income. Effective planning requires estimates of the family's future needs, the means to provide for them, and the necessary liquidity to pay personal taxes.
• Associate Business Relationships: Evaluating the financial needs of the family is the most important part of estate planning for a family business. Consider the financial health of each family member. Plan "what-if' scenarios for birth, death, divorce and other contingencies.

A review of personal plans, promises, legal arrangements, and written or verbal agreements with children, relatives, partners, employees, or other stockholders is mandatory. Commitments to anyone involved in a management or ownership transition or clantinuity plan should be recorded in writing. All decisions should be reviewed with the following as an outcome: the business is not vulnerable, the owners maintain and preserve the value of the asset, the family relationship is improved and individual options are available. Simply, as often stated by Bonnie Brown Hartley, "practice dying until you get it right!^[10]

Planning Your Exit Strategy: Fantasy or Reality?

Exit Strategy: The Practical Picture

In the ideal exit strategy, elders remain independent. Their income and savings are secure. Their activities and performance, while meaningful, do not determine their future comforts. They pursue their interests without having to earn a living.

Family business owners in "retirement" must draw the line between their interests and their earnings. Withdrawing from active participation in the business should eventually lead to relinquishing voting shares. Keep in mind that these shares were probably created largely for tax reasons that no longer apply. Everyone - but especially ex-entrepreneurs - needs to feel they are contributing in a meaningful way. But all too often, exiting owners [especially founders and the entrepreneurial types] like to remain "involved" and use ownership positions to create a role for themselves that is best left to those making the crucial day-to-day decisions.^[11]

My advice is to find other interests.

Before they leave, departing owners should complete a plan that describes his or her intentions for the management, ownership, leadership, governance, power and resources of the firm and family. As already described, a personal financial plan coupled with an estate plan is a good starting point and must complement the management continuity and business growth plans. Often, the personal financial plan, estate plan and continuity plan are completed without the benefit of the other plans and - with even greater detrimental effect - in isolation from all the other family members.

What's Next? It's Hard To Plan When It's Not In Your Vocabulary

My experience indicates that retirement is an inappropriate term for entrepreneurs working in the family business. I don't mean to say that all family leaders work until they drop, or that they always insist on interfering in the business in their later years. What I mean is that someone who has spent their life building a thriving, important business that has raised families and paid for the education of children must replace this meaningful contribution with another worthwhile task. Otherwise, the creative soul of the entrepreneur remains unhappy and unfulfilled.

This transition to a new role can occur only when the outgoing leader is comfortable [read: the business is in good hands] that the incoming leaders of the family business are competently addressing the most critical problems facing the company. Only then when it appears that the business is in good hands, does the leader have any chance of allowing other interests to occupy the day.

This is why a management continuity plan and a business growth plan are as important as estate planning in preparation for the next phase of life. Finally, a plan that allows for sufficient money to live from the time of exit until death is important for reasons of self-worth and family relationship. Parents may become dependent on their adult children, but plans should be drafted that avoid this situation where possible. Experience confirms that a trusted, family business savvy, and credible Board of Advisors can be very helpful here and positively influence a successful transition plan.

Estate Planning and Business Succession Checklist

Answer the questions that follow. If you have not addressed these issues, or if you have difficulty or are uncertain in answering, contact your advisors and ask for assistance.

1. Are any children involved in the business? If so, are they treated any differently than your other children in regard to control or ownership of the business upon your death or disability?
2. What role and role assignment has or will the surviving spouse play in its management? What about children in the business? Children out of the business?
3. Who will take over management of the company at your death?
4. Can some of the shares of the company be given to children during the owner's lifetime?
5. Who will acquire control of the voting shares at the owner's death?
6. What if the owner would like to liquidate assets before death if there is no spouse or child interested in taking over the business? In liquidating the business, will its value be diminished, thus providing less cash for retirement or the security of family members?
7. Has planning provided for the voting of company shares in the event of disability?
8. Is there concern about sons-in-law or daughters-in-law acquiring an interest or control in your business?
9. Would it be advantageous to pass future appreciation in the company to children so as to reduce future tax liability?
10. If the company repurchases stock from the estate to provide liquidity to it, have potential adverse income tax problems been considered?
11. If a partner predeceases you, is it clear what happens to his/her portion of the company? Could there be a problem if your former partner's heirs do not agree with your business philosophies?
12. Does the company's buy/sell agreement, if any, conform to your overall estate plan and protect your family's needs?
13. Does your company's pension or profit-sharing plan maximize the amount of money that you may shelter for your retirement?

Checklist, PDF Version (20 Kb)

The Other Clantinuity Team Members^[12]

The idea that clantinuity planning is a process that builds on credibility and not an event is now common wisdom. It's a process whose multidisciplinary nature ideally requires numerous expert advisors. Not every family business can afford to embrace this concept. But, in many cases, the single lens that one advisor provides to the clantinuity process often skirts many of the other issues that other specialists might resolve.

Invariably, whenever I am working in a team environment with other technical specialists, we need to work with one another for a period of time before we function ideally as a team. In any multi-advisor situation, each professional who is advising the family business at the technical, human or governance level should identify areas where their expertise is useful and explain how their expertise could be complemented by other professionals. The business family members may then choose how to proceed.

So, if the owners and accidental partners are going to look at, and manage, the clantinuity process, here are some possible members of the team [in alphabetical order] and their probable roles.^[13]

• Accountant: Generally, accountants provide business, financial and management advice and, at times, help with the training of worthy successors. As a group, they deal with tax planning, preparation of returns and all other aspects of financial management and reporting including the design of new systems and the interpretation of financial statements. They often work closely with their clients in bank reporting and help with business transfer, succession, estate, personal financial, retirement, and family legacy planning. They may also assist with compensation situations. The accountant is typically the closest advisor to the owner and his or her family.
• Banker: Bankers make loans, set up operating lines of credit and assist where appropriate regarding demands for liquidity. At times, bankers will also assist in the financial learning process for next-generation participants and sometimes prompt timely discussion about business succession, family estate planning and wealth management.
• Coach: Coaches, or more accurately executive coaches, provide an ongoing partnership designed to help clients produce fulfilling results in their personal and professional lives. Coaches help people improve their performances and enhance the quality of their lives. Coaches are trained to listen, to observe and to customize their approach to individual client needs. They seek to elicit solutions and strategies from the client; they believe the client is naturally creative and resourceful. The coach's job is to provide support to enhance the skills, resources, and creativity that the client already has.
• Doctor: Medical doctors are often overlooked in this respect. Keep in mind that family members' health is an important facet of being able to face facts and make decisions. Often, doctors are the appropriate referral when unexplained depression or anxiety is observed, weight changes are noticed, substance abuse is suspected and/or other stress episodes appear to undermine general health.
• Family Business Advisor: These advisors help family businesses negotiate transitions through continuity planning, perpetuating the business family and family ownership. They typically apply a more relationship-based consultative process to the client engagement, whatever his or her profession of origin. They often help manage the accidental partnership, especially at the sibling and/or sibling and cousin stage, and establish family and corporate governance systems, processes and structures. They help the family business and its members at many stages in its/their life cycle and develop results-based outcomes within the business family's capacity for change. For instance, they may assist with owners' exit strategies and entry strategies for the new family leaders. In most cases, they help organize, negotiate, mediate and improve family dialogue and meetings, encouraging family unity, communication and co-operation. They also help prepare successors for common family business challenges such as family compensation and liquidity issues. In many situations, they mobilize the family to embrace ongoing learning, documenting a constitution, business, family and owner planning, professionalizing and organizing the firm and the ownership situations, helping to build independent outside boards and private philanthropy. These practitioners typically work with business families who want to get better at what they already do well.
• Family Therapist: Family therapists help family members who are unable to coexist and function together. Sometimes in families personal problems or interpersonal family conflicts impede or block the family from achieving their goals. Early identification and remediation of these mental health concerns whether personal and interpersonal problems or conflicts increase the probability of business family success. Often these personal problems and family issues are best dealt with in the safety and confidentiality of the clinical relationship. Not everything personal is family business! Counsellors can also help improve family communications and listening skills thereby assisting the family with their business transitions.
• Financial Advisor: These consultants work with family members and address the liquidity needs of the accidental partners and the capital needs of the firm. At times, they work to restructure ownership. They may also help identify the appropriate investment strategies and educate the business family about financial management and corporate finance.
• Human Resource and/or Organizational Consultant: Human resource consultants are often organizational development specialists with some executive search skills. They help build teams, create a cohesive working environment, improve communication and help the family ensure that their values are indeed what is driving the business and its culture. Like family business consultants, they manage the accidental partnership. Some human resource consultants may also help identify and recruit key non-family managers and directors, including hired hands who are brought in on a short-term basis as interim CEOs. As well, some of these specialists design compensation and performance management systems, help in designing career learning paths and assist in aligning all the various members of the company to create a professional and team-oriented company.
• Industrial Psychologist: Industrial psychologists are helpful in testing potential successor candidates and in developing appropriate career and learning programs for next-generation family leaders.
• Insurance Professional: Insurance professionals help the shareholders protect themselves against large, unpredictable demands for cash to pay income taxes or to confer financial security at death or disability. Insurance is one of the most useful methods to ensure that a business is not dependent upon the health of a shareholder.
• Investment Banker: These individuals deal with mergers and acquisitions as well as valuing assets and businesses. They may also help in dealing with outside investment and designing shareholder redemption programs.
• Lawyer: Lawyers help determine the form of business ownership and capital structure, and may help negotiate contracts and other shareholder documents. They often assist in governance issues and review board-level transactions. Like the accountant, they sometimes assist in the development of next-generation leaders. At times, they assist in litigious situations either between family members or on behalf of the family business. They prepare estate plans, wills and trust documents and review them regularly. They prepare marriage, employment and other appropriate agreements and provide counsel as needed when new family members enter into the business. The lawyer is typically one of the closest advisors to the owner and his or her family [along with the accountant].
• Psychiatrist/Psychologist: Psychiatrists and psychologists may be able to help individuals who are suffering from psychological tension, such as anxiety or depression, and other difficulties brought on due to unsatisfying, conflicted relationships. Some families have a history of challenging oppressive situations that require specialized attention. Don't try to address issues such as alcoholism or abusive behaviours on your own [remember how powerful a family can be!]. Some practitioners specialize in understanding wealth and managing money. Psychiatrists and psychologists, like doctors, are often overlooked, as the business family member appears uninterested. Keep in mind that family members' mental health is an important facet of being able to face facts and make decisions.
• Trust Officer: These individuals administer trusts and manage the trust assets for the beneficiaries. Depending on the circumstances, these individuals are at times acting as wealth-preservation advisors and help the business family to review their estate, gift and investment planning decisions as well as the performance of a business that might also be held by the trust.
• Valuator: It's important to know the true value of the business at times, especially during the transition period or when setting up certain types of stock programs. A valuator places a true market value on the business in order to establish a buying or selling price. A professional valuation is justifiable to taxation officials so that estate planning can take place with confidence.
• Wealth Advisor: Financial families are those who share exceptional wealth; the individual members are not necessarily employees in any of the enterprises owned by the family. The wealth advisor may assist in placing the funds on behalf of the client but typically help the family members better understand the issues of wealth management, understand their family values and its effect on investment choices and guide their selection of the strategic investment advisors. In some instances the wealth advisor will establish a family office.

Conclusion

Estate and succession planning involve some of the most technically complex and complicated questions that the owner of a family-owned business, and his or her family, is likely to confront. There are rarely simple solutions.

This booklet merely provides an overview and an indication of some of the available options. Some business family members have used it as the foundation to commence the sensitive dialogue of change. As noted earlier, because of the complexities and the varying circumstances of each family business, family members should seek specialized assistance in making these kinds of decisions. As well, the formation of any team to assist the business family should have appropriate team members who add value, collaborate and provide a blend of skills that match the needs, values and desired results of the business family client.

There is room for plenty of flexibility in the structuring of estate and succession plans. Astute tax professionals and business consultants can help the business owner design a program and manage the inherent relationship risks, by approaching what is right [read: appropriate] for the business, the family and everyone involved.

How To Make The Transition Work: Plans and Structures

• The Participation Plan: Who will be the next family participant(s)? How will they be prepared for succession and accession? Are all family participants managers?
• The Ownership Plan: How will the family transfer stock? Who will be the next owner(s)? Is an ESOP part of the plan? Do you have to work in the business to be an owner? How can minority shareholders sell his or her shares and not make the enterprise vulnerable?
• The Family Plan: How will the active and inactive family owners, shareholders and stakeholders co-exist? Does the business family have a shared future, and if so, what are the guidelines, bylaws and creed for co-existence? How will the family develop its common culture, shared values and trust? How will it encourage sacrifice and mutual respect?
• The Business Plan: How does the organization envision the future? What is the direction? How can it enact its mission and deliver service? How can it improve productivity and profits? Does it need to establish a more professional culture and way of work and, if so, how?
• The Governance Plan: What is the best organizational design for the family, firm and shareholders in order to institute and foster accountability, clear roles, communication and boundary management for effective decision making?
• The Risk Plan: How much money can you leave on the table if any one of your strategic initiatives fails? How can you protect the business and the family's wealth from a hostile shareholder? When are contracts and memorandums critical and prudent? How do you decide whether a tax saving decision will adversely affect business performance? How do you instil fairness into the decision process that avoids debilitating emotions that undermine relationships?
• The Intentional Legacy Plan: Does the family intend to pass the business to future generations? What does the business mean to family members? Is the family's wealth and legacy inextricably tied to the business, and is this reflected in the family's preparations for clantinuity and succession?
• The Estate Plan: What will the next generation inherit? How can the family plan for tax implications and fund shareholder requirements in this regard?
• The Retirement Plan: How will the present owner(s) "let go" and what financial support is available for retirement (personal financial plan)? What new and meaningful role will the retiring owner(s) adopt? How does this affect the business's daily operation? Are retirees dependent upon the future success of the business (self worth)?
• The Learning Plan: What skills and talents are mandatory in the family, ownership group and in the firm?
• The Constitutional Plan: Generally, to empathetically and skilfully examine and challenge every sacred cow and offer an alternate approach for debate. The outcome is a document that states the principles, values, priorities and expectations of the business family and serves as a practical code of conduct and guide for family relationships and interaction.

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About the Author

Aron Pervin, CMC, ICD.D, TEP specializes in the resolution of complex family enterprise and ownership situations, and business family interaction. He is the Canadian leader and international pioneer in the field of family business management, organization and governance, and business family relationships.

Aron works with business founders at the retirement stage of a career and typically consults to successful second, third and fourth generation business families that require and demand results and not recommendations®. Aron has established and served on family and industry association boards and is consulted regularly by the media for his views on family business issues.

ALL ARTICLES © PERVIN FAMILY BUSINESS ADVISORS INC.

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