Protecting The Family Business

Few segments of American business occupy as lofty a perch in folklore as the family business — the ideal of entrepreneurship and self-determination. Likewise, few businesses face the barriers that a family business, because of its very nature, must overcome.

Of course, family business owners must deal with the everyday nuts and bolts of running a company, just as any business owner does. The family-run company faces additional obstacles, though, not the least being the blurred line between business and personal lives. How these special entrepreneurs meet their unique challenges can often determine the success and longevity of their businesses.

Only 45 percent of family businesses survive to the second generation; just five percent make it to the third. These statistics, in part, can be attributed to a lack of planning, to a belief that a family business is preordained to survive until it dies a natural death. As many family entrepreneurs learn the hard way, that’s not true.

Family business owners, like any entrepreneur, must plan for the future. Death is inevitable, retirement is probable and disability is likely. To protect a business, owners must protect themselves against the financial catastrophe these occurrences can bring on. But a family business is complicated by additional factors, including family relationships and a sometimes blind relief that every family member feels the same way about the business as the founder does. A family business must prepare not only for eventualities — death, retirement and business continuation — but also for events that cannot be foreseen.

This one example sums up virtually every pitfall that a family business can experience. The owner, a 55-year-old man, had insurance to protect him and his business in the event of premature death or disability. His plan stipulated his three sons were to equally inherit his business after both he and their mother passed on. But he still made virtually every mistake in the book.

First, the plan was ten years old. Since then the business has doubled in size, the insurance designed to help meet estate taxes on the passing of the business was inadequate. American business is littered with the remains of businesses killed off because of outdated plans and insufficient funds to meet estate taxes.
Second, the owner always “knew” his three sons would take over the business, but he never asked. In fact, one had no interest in or knowledge of the business. Lack of communication can deal a death blow to any business.

Third, the owner ruled the business with an iron hand. He planned to pass the business to his sons within 10 years, but refused to give them the responsibility or control they needed now. Lack of preparation doesn’t bode well for any business.

None of these circumstances came to bear, however, because the owner became a widow, then remarried. His new wife was the primary heir of his estate. A year later, the owner died suddenly. The stepmother was now the owner of a business she didn’t want. It wasn’t long before the business was sold to outsiders.
No planning, no communication, the end of a family business.

What this business owner and many other family entrepreneurs fail to recognize is that growing a business that will continue from one generation to the next is similar to raising a family. Nurturing and a willingness to let heirs step out on their own are essential to success.

Family businesses survive and prosper when they follow the same rules as a non-family business.
Communicate:  Blood may be thicker than water, but that doesn’t guarantee conformity of needs and desires. Select the successors to the business based on qualifications and desire. Heirs who want no part of the business can be rewarded in kind with the help of insurance as part of an estate trust.

Plan:
Early and often. Needs change. Business grows. Personal circumstances cannot be predicted in advance. The best plan addresses today’s needs, not yesterday’s.

Prepare:
A commitment to pass the business to children isn’t enough; a family business owner must prepare his successors. That means gradually giving up control and allowing for differences in style or opinion.

Separate:
Business is business and family is family and never should the twain meet. Make the time for each — and keep them separate.

Finally, family business owners need the advice of a qualified financial advisor, one who can see through the fog when the owner is too close to see clearly. No one can predict the future, but everyone can plan for its possibilities.