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Working with Family-owned Businesses By Karl Bareither, CLU Working with family-owned business is rewarding in terms of income and personal satisfaction. Planning for the successful transition of a family business and other wealth to future generations offers sales opportunities as well as the chance to have a real impact on people's lives. However, planning is often complicated by family issues like jealousy, sibling rivalry and gender prejudice. The need for power and control by the business founder is often a problem. One case in particular stands out in my mind. The Intolerant Parent The Brown family had experienced three generations of alcohol abuse. However, the current generation, owners of a family business, had decided to give up alcohol after many years of abuse, and had succeeded in doing so. Joe and Mary Brown were also determined that no family members would be permitted to use alcohol on the site of the family business or in the private residence of any family member. One day Joe found evidence of alcohol use by his son, John, and John's new bride, Sherrie, who both worked in the family business. Disappointed, Joe thereafter distrusted his son and, to ensure his son was not using alcohol, he required John to submit to periodic, unannounced urine testing at a local clinic. Needless to say, this did little to promote trust within the family. When I interviewed John as part of the process for developing a business succession plan, I asked about his vocational desires. John told me he always wanted to become a heavy equipment operator. Unfortunately, the Brown family business had little need for that kind of skill. Eventually, his father's lack of trust, and John's desire for a different kind of work, led him to leave the family business. John followed his real dream and ultimately did become a heavy equipment operator. Of course, this did little to help the relationship between the two men. Mary, John's mother, attempted to play the role of peacekeeper between husband and son but was not successful in the end. Joe and John became increasingly estranged over time. As in many families, Joe was able to exercise control over John and Sherrie at first because he had economic power over them. Eventually, however, Joe's need to control John destroyed their father-son relationship. In the process, it also destroyed their business relationship. In good faith, Joe and Mary had believed that John and Sherrie could learn from their experience with alcohol and not make some of the same mistakes they had made. They were wrong. As much as they would like, parents cannot protect their children from the challenges of life. In this case, Joe's intolerance for his son's lifestyle choices not only destroyed their relationship, it also destroyed any hope of keeping the business in the family. The stress contributed to the eventual destruction of John's marriage to Sherrie. The result was a sad ending for the business and two families as well. Most new businesses are started by an entrepreneur with an idea and a penchant for risk-taking, hard work and control. The founder of the typical successful family business possesses a skill set and has personality traits that facilitate building something from scratch. 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 will usually indicate that it is the current owner or majority stockholder. This focus on the business owner means that many family dynamics are never considered during the planning process. That neglect may eventually doom the transition plan. In my practice, I take a different view. I consider the entire family my client. The result of this 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 I need about the family as well as the family business, I personally interview every member of the family - including spouses. I meet with family members 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. It was during such an interview that I learned about John's desires to be an equipment operator. This is the kind of information that helps me develop a plan that gives the business the best chance of surviving. Unfortunately, In this case, Joe's intolerance was too great an obstacle to overcome. Had he been more willing to accept his son as he was, perhaps John would have foregone his desire to be an equipment operator and become more interested in operating the family business. In most cases, interviewing the entire family leads to insights that guide the development of a plan that will largely meet everyone's expectations. To accomplish that, 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 are held in strict confidence. No one, including the business owner, will know who said what during the individual family interviews unless an interviewee chooses to disclose it. 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 alone. 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 once my client was 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 automatically 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 like gender bias, generation gaps and personality clashes. Other family dynamics, such as domineering personalities and rivalries, are also examined. Anything that has the potential to sidetrack an otherwise perfectly good wealth transfer plan must be identified and taken into consideration. Identifying these concerns early and addressing them directly, greatly improves the chances of success for the new wealth transfer plan. Throughout the process, my personal goal is to help enrich both the family and the business as we plan for future generations. In one case, a family came to me with a common wealth transfer planning problem. Their's was a blended family, each had children from a previous marriage, and their wish was to keep the business in the family, while treating all the children in the family fairly. To that end, both had executed a will leaving one fifth of their estate to each of their children - clearly a disastrous plan from the perspective of preserving the business. As it turned out, one of the sons was active in the business and expected to one day be sole owner. His siblings and stepsiblings generally agreed with the idea - a fact I uncovered by interviewing all of them. The parents had assumed that the non-active children would resent not inheriting a share of the business interest. In fact, the non-active children had no interest in being part owners of the business and would rather inherit other family assets. The solution, in this case, was to structure the wealth transfer plan in a way that gave the business to the active son and divided the other family assets among the non-active children. In the end, everyone was satisfied with the plan and all were pleased that the business would pass to the one individual who was really the best choice for successor owner. The original plan to divide the business equally between the five children would have practically guaranteed the demise of the business. Family relationships might well have been destroyed by bickering over the business operation as well. The owner died shortly after development of the plan and it was implemented as originally envisioned. To this day, the son successfully operates the business and enjoys a good relationship with his stepmother and siblings. All of this resulted from the fact that everyone in the family was asked to share their innermost thoughts about the family business and their role in it - something the parents had simply never done. The Family Retreat The second unique feature of the planning process is involving the entire family in the presentation of the new plan. Once a new plan is developed, I share it with 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 the family retreat 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 I keep in mind a number of objectives when conducting the family retreat. My goals are to:
I begin by asking each family member, in turn, to respond to the following question: "What are your expectations of this retreat?" This non-threatening question allows everyone to participate and overcome any initial reluctance to speak in front of the group. Responses are generally non-controversial and predictable. The second question requires a more in-depth response: "What do you admire most about your family and the family business?" This question elicits mostly positive responses and, indeed, often results in heartfelt endorsements of many of the advantages of being a member of a business-owning family. Incredibly, this exercise is often the first time the business owners have heard family members speak positively about the business and its impact on the family. The third question gets at the heart of the reason for the family retreat: "What changes would you like to see?" This question can result in some negative feedback as family members relate their concerns and doubts about their future and the future of the business. Of course, I know in advance, what these concerns will be because of the in-depth interviews. Before the retreat begins, I know I have developed a plan that will meet the needs of all or most of the family members assembled because I know what they all want. Depending upon the size of the family gathering, the three questions may take hours or days to complete. Responses are captured on flip-chart pages and posted on the walls for all to see. I then facilitate a discussion of all the input until the family arrives at a thorough understanding of each member's hopes and expectations for the future. It is then just a matter of explaining the new plan in a way that helps everyone understand how it meets their individual needs. The retreat ends with the acceptance of the new plan and a commitment to implement it. 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 that 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. In addition to fees, this approach has 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. This book is written in a way that helps them understand how this approach can enrich both family and business. Licensing opportunities for proven software and tools are available. Training opportunities are also available to develop skills and techniques necessary to use the FBR Process in the family business market. Consider adopting the FBR Process to your work with family businesses. By changing your approach, you'll be rewarded financially and experience the personal satisfaction of knowing that you are helping to preserve family businesses while enriching family lives in the process. The FBR Model
Karl R. Bareither Biography Karl Bareither is founder and president of FBR System, Inc., a fee-based family business planning firm, that uses a holistic process approach that empowers advisors to enrich families and businesses for generations. His approach is based on information developed from a survey of his clients. The survey revealed that, for many business-owning families, lack of inter-family communication was the cause of both poor family relationships and inadequate business planning. When planning for the future of the business, it was determined that relying on input solely from an owner is not sufficient to avoid misinformation and distrust. Shifting focus to the entire family led to the development of an approach designed to meet the goals of all family members. Over time this new model has evolved into a comprehensive planning process that focuses on renewing the quality of life for business owners and family members alike. In the course of his work, Bareither has developed new skills blending improving family communications into wealth transfer planning. He has become a family business wealth planning specialist, facilitator, and mediator. Working with family businesses, Bareither has also developed tools that enabled him to move beyond tax, legal, and financial planning. These proven tools have been brought together into a comprehensive process called the (FBR) Model. Since 1995 Karl has been teaching other financial services professionals how to use this system to revive the human voice in a technical world. Advisors are taught how to blend technical expertise with a unique process approach that enhances business success and family harmony. He has written two books. Becoming a Wealth Transfer Specialist was written for family business advisors. Planning a Family and Business Legacy was written for family business owners and their families. Both books describe the FBR system and recount many of Karl's experiences working with businesses and families. Bareither holds degrees in business and communication from Northern State University, South Dakota. He graduated from Purdue University's Estate Planning Program and has earned the Chartered Life Underwriter (CLU) designation. He is a life member of MDRT and the Top of the Table. He has also served as training director and regional sales director for a major financial service company. Bareither has been involved in many professional organizations including estate planning councils, AALU and The Family Firm Institute. He is an instrument-rated pilot with a multi-engine rating, enjoys reading, and studies Eastern Philosophy with Western eyes, plays tennis, and travels in his motor home. He and his wife, Lillian resides in California. They are parents of three children and grandparents of four. Phone: 805 595 2089 Click Here to Read More Articles |
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