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Empowering Advisors to Enrich Family & Business for Generations

By Karl Bareither, CLU

Working with family-owned business can be a challenge. It is also very rewarding work. Helping plan for the successful transition of a family business and other wealth to future generations can have a very real impact on people’s lives. Careful planning involves more than simply appealing to greed, however. Creating a business plan for the sole purpose of avoiding death taxes, for example, sometimes backfires. Let me give you an example.

The perils of Short-sighted Planning

One of my clients, a widower named Richard, was a successful cotton farmer in Arizona. Being a frugal man, Richard, wanted to develop a plan for his estate that would ensure that little or nothing would be paid to the IRS at his death. You might say his goal became an obsession – eliminate death taxes at all costs. His only son, Andy, who was actively involved in the farm operation, was married to his childhood sweetheart, Jane. Andy and Jane had three beautiful children. To achieve his no-tax goal, Richard began gifting of his business holdings and some other personal assets to Andy, his only intended heir.

Unfortunately, one day Andy was killed in a hunting accident. His will provided that all of his assets were to go to Jane. This meant that Jane now owned the farm and most of the other assets Richard had gifted to Andy. Since Richard had always had a good relationship with Jane and his grandchildren, this initially presented no problem. Jane later remarried, however, and her new husband, Adam, and Richard did not get along from the beginning. In time, Adam managed to ruin the relationship Richard enjoyed with Jane and his grandchildren and even succeeded in running him off the farm. The business Richard had worked so hard to build had became another man’s property. Within a couple years, Richard died of a broken heart – alone and stripped of all the financial assets he spent his life creating.

Unfortunately, Richard’s desire to save taxes had led him to develop a short-sighted plan that eventually cost him far more than the taxes he might have otherwise paid. It was a case of one’s strength; in this case good, old fashioned frugality, becoming a weakness. I’ve seen this happen many times. The personality traits and habits that serve an individual well while developing a business work against him or her when the time comes to plan for the future.

Most new businesses are started by an entrepreneur with an idea and a penchant for risk-taking and hard work. The founder of the typical successful family business possesses a skill set and has personality traits that facilitate building something from the ground up. The problem is that these same attributes often work against the successful transfer of an operating business to the next generation. While the entrepreneur must be decisive, gutsy and sometimes even belligerent in the quest for success, an effective leadership transfer plan must be deliberate, well thought-out and carefully implemented. Unfortunately, some of the very traits that contributed to the success of the entrepreneur work against planning for the transfer of the business leadership.

To be truly successful, a wealth transfer plan must meet the needs of, not only the current owner, but also the future owner or owners of the business. However, if you ask most family business advisors who their client is, they’ll usually indicate it’s the current owner or majority stockholder. This focus on the business owner leads to problems like the one Richard faced. In my practice, I take a different view. I consider the entire family my client. The result of this new focus is surprising.

The Family as Client

Treating the entire adult family as my client changes everything. Because my objective is to create a plan that will transfer the family’s entire wealth — not just the business — to succeeding generations, I must create a plan that will reflect the needs, desires and expectations of the entire family.

To develop the information needed, I personally interview every member of the family — including spouses. I meet with every family member in a “safe” setting where they can be comfortable sharing open, honest answers to the questions posed. The questions asked are subjective in nature and deal with family relationship issues, communication problems affecting family members and expectations related to the future of the business and their perceived role in it. This information helps me understand the objectives of the entire family regarding transfer of wealth issues.

I encourage each family member to answer all the questions in the interview as thoroughly and honestly as he or she can. I ask that they share the positive as well as the negative. All interview responses will be held in strict confidence. No one, including the business owner, will know who said what during the individual family interviews.

The information I receive from the owner and other family members, plus consultation with the owner’s trusted advisors, allows me to develop a wealth transfer plan that will address the long-term goals and objectives of everyone in the family. A plan that meets everyone’s expectations for the future has a much better chance of success than a plan developed with input from the business owner only.

Treating the entire family as the client has another benefit as well. In the past, when the business owner died, became disabled or retired, I often found myself out of the loop. Other family members had developed relationships over time with different advisors, and since my client was now effectively out of the picture, the other advisors stepped in as the primary resources for the new owners. Now, because the entire family sees me as its advisor, I become the principle resource when the time for transition comes.

The Interviewing Process

As part of the interviewing process, I look for information related to hidden concerns about such things as gender bias, generation gaps, personality clashes and other family dynamics such as domineering personalities and rivalries. This information is important because any one of these issues has the potential to sidetrack an otherwise perfectly good wealth transfer plan. Identifying them early and addressing them directly greatly improves the chances of success for the new wealth transfer plan. My own personal goal is to help enrich both the family and the business as we plan for future generations.

An example of the value in interviewing the entire family is the story of Peter; a very successful dairy farmer. Peter was an old-fashioned success story. He had migrated to this country as a young man with no assets and limited formal education. He found dairy farming to his liking and over a span of many years built up a multi-million dollar dairy. As Peter got older he decided to begin the process of bringing his son, Tony, into the business, with the goal of eventually turning it over to him.

During my first private meeting with Tony and his wife, Patty, I discovered their interests were not to continue the large family dairy. Their hearts desire was to start their own small dairy in another state— which they eventually did. Although Peter was disappointed by this news, it was information that was critical in the designing of a wealth transfer plan. If Tony, the obvious heir, did not want the business, other arrangements would have to be made for leadership succession. Without this knowledge, Peter would probably have developed a plan with Tony as his successor. This plan would have had virtually no chance of success. In the long run, the family and business would both have suffered. This critical information came to light only because I considered Tony and his wife my clients, as well as Peter, and interviewed them about their own needs and expectations for the business. As it turns out, the youngest daughter will become the eventual family business owner. Without interviewing every family member, that possibility would never have been considered.

The Family Retreat

Once the new plan is developed, I present it to the entire family at a family retreat. The retreat is conducted at a neutral site, such as a hotel or resort, where there will be no distractions. Every adult family member and spouse is invited and expected to attend.

The retreat experience is always interesting. Many business owners have told me that this was the first time they ever heard their children speak openly about the business and their expectations. Often, the children’s comments trigger deep emotions in themselves and others in the family. In many cases, the retreat is the first time the family has openly discussed business and financial matters. I believe this process enriches both the family and the business for generations to come. While the planning helps preserve the business and other family wealth, the planning process enhances family relationships by opening the door to better inter-family communication.

Objectives & Questions

There are a number of objectives I keep in mind while conducting the family retreat. My goals are to:

Create an atmosphere for open and honest communication

Revisit the needs and expectations family members have of the business.

Demonstrate that the new wealth transfer plan will resolve current family tensions and set the stage for future family harmony

Present the new wealth transfer plan in a way that demonstrates how it addresses family needs and expectations.

Obtain agreement from the family members to implement the new plan.

I begin by asking these three questions of each family member in turn.

What do you expect from the retreat?
What do you admire most about the family and the business?
What would you like to see changed?

By responding to each of these non-threatening, open-ended questions, family members have the opportunity to “get their voice into the room” and overcome any initial shyness or fear. This technique assures that everyone gets actively involved. It also gives each individual a chance to voice their degree of satisfaction with the status quo and/or their hopes for change.

I continue by reviewing the existing legal documents and financial statements for the owner and the business. These are summarized in a report I have created using special software developed for this purpose. The goal of this phase is to help the family members understand the plan that is currently in place for the transfer of the family’s wealth. An understanding of the current plan forms the basis for evaluating the new plan.

Of course the overriding objective of the retreat is to have all the family members leave with an understanding of how the proposed new plan works and how it will preserve and protect the family’s personal and business wealth. During the presentation of the new plan, I always stress its benefits to the family as a whole. Assuming I’ve done my homework properly, the new plan will secure the long-range future of the business by preserving and transferring the family’s wealth. While everyone may not get everything they originally wanted, once family members understand that the new wealth transfer plan is best for both the family and the business, they accept the new reality.

As you can probably imagine, I’ve experienced a variety of human behaviors during family retreats. However, the bonding of family members continues to delight me. The willingness of family members to share of themselves and help develop quality relationships, enhance family communications and improve their understanding of the business is truly amazing.

During the family retreat, various alternatives for passing on the family wealth are discussed and a consensus is formed. Questions about the various options available are discussed openly and each family member’s questions are answered and their concerns addressed. Plan implementation is accomplished with the help of the owner’s business advisors. Once in place, it is periodically reviewed to keep it up to date as conditions surrounding it change.

I firmly believe that the successful transition of business ownership and transfer of family wealth is a family affair. Making plans in secret — to be revealed at the reading of the will or testamentary trust — is a recipe for disaster for both the family and the business.

The FBR Model

The entire process that I’ve developed consists of nine steps and three phases (see FBR Model diagram). I call it the FBR Model. The family interviews and family retreat are the primary features that distinguish my process from the work of most other family business advisors. Using the FBR Model changes the focus from a traditional transaction to a logical, orderly process approach with the emphasis on building long-term, meaningful relationships rather than closing sales.

I charge a fee for my services and provide a money back guarantee if the client is not totally satisfied with the results. Fees range from $9,000 to $30,000 per case, depending on the number of family members, size, value and complexity of the business. Planning fees are important because they offset the additional time invested in working through the FBR Process with the entire family. They also assure clients of an objective point of view because clients understand that I am not compensated by commissions alone. To date, total fees collected are in excess of $1.4 million dollars.

Most of my clients come through my working with trade associations providing such services as presenting educational seminars. In other cases, I have volunteered to serve as membership chairman for an association. As I contact members and potential members about the benefits of association membership, I ask to return at another time to discuss my wealth transfer planning work. This approach has kept me busy over the years and helped me reach life membership in MDRT and the Top of the Table.

Working with families is a tremendously rewarding experience. Not only has it been financial rewarding, it has permitted me to develop much deeper and more satisfying relationships with my client families. Needless to say, this has led to new business and referrals to many new clients. If you are looking for a way to add more meaning and challenge to your work as a family business advisor, I urge you to adopt the FBR Model.

Empower Advisors

Currently I’m working to empower family business advisors who are interested in doing this kind of work. My book, Becoming a Wealth Transfer Specialist describes my approach and the FBR Model in detail. A second book, Planning a Family and Business Legacy, describes the process for business owners and their families in terms that help them understand how this approach can enrich both family and business lives. We offer licensing opportunities for proven software and tools. Training opportunities are also available to develop skills and techniques necessary to use the FBR Process in the family business market. By changing your approach to working with family businesses, you’ll not only be rewarded financially, but you’ll also experience the personal satisfaction of knowing that you are helping to preserve family businesses while enriching family lives in the process.

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