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By Karl Bareither, CLU

Karl R. Bareither is president and founder of FBR System, Inc. of Avila Beach, California.  Karl began his career as a life insurance agent, but quickly developed an interest in helping business owning families plan for the future.  He was interviewed by Don Schwerzler, founder of Family Business Institute.

Don Schwerzler: Let’s begin by giving our readers a little background on how you got started working with family businesses.

Karl Bareither: I started my career selling life insurance in the usual manner by working primarily with individuals and families who needed my products and services. Over time, I gravitated to working with families that owned small businesses.  I found that market to be a fascinating blend of personal and financial needs.  I also felt the work was important.  Preserving a family business not only benefits the family by protecting its wealth, but it also saves jobs for family members and other employees.  In fact, since family businesses provide most of the jobs in the country, I guess you could say that preserving and protecting family businesses helps the national economy as well.

DS: I agree that preserving the family business is a worthy cause.  It’s the primary reason The Family Business Institute exists.  In your practice, how did you distinguish yourself from other family business advisors?

KB: In order to get to know successful family businesses I volunteered my time to several trade associations whose membership consisted of primarily capital intensive family businesses. I went to work and increased their membership. This provided me an opportunity to meet both current members and seek out new members.

DS: This was a unique way of meeting new prospective clients. How else did you distinguish yourself from others?

KB: I began charging planning fees for providing wealth transfer planning services. I determined that successful family businesses were interested in receiving objective advice and were willing to pay a fee to establish a workable plan.

I also discovered frequently business continuation planning failed because they didn’t make it to the second and third generations, in spite of planning.

DS: Why do you think that was the case?

KB: After thinking about it, I determined that the problem was not with the plan itself.  I knew that my knowledge of business and estate planning, along with the help I received from the family’s other trusted advisors, was sufficient to create a technically competent plan.  The problem had to be something other than the plan itself.

DS: How did you go about searching for the answer?

KB: In 1981, I hired a professional research organization to survey my family business clients.  I wanted to know how the individual family members felt about the planning I had done for them.  I knew they were satisfied with my work in a general way – after all, they had paid me a planning fee and purchased financial products I proposed.  I was more interested in finding out what they thought of the plan itself and how they perceived the planning process.

DS: And what did you find out?

KB: I was surprised to learn that many of the family members were unhappy with the planning process.  I had used the only approach I knew at the time.  I worked closely with the business owner, usually the entrepreneur who started the business, to determine what he or she wanted to accomplish in terms of estate and succession planning.  The plan was then developed with the wishes of only the entrepreneur – the boss – firmly in mind.  It seemed logical enough.  Identify the decision-maker, find out what he or she wants, and develop a plan that delivers the desired results.

DS: What’s wrong with that?  Many business owners would probably agree with that approach.

KB: I’m sure most would.  Unfortunately, the rest of the family would often have a different view.  The client survey revealed a number of important facts.  Chief among them was that the wishes of the entrepreneur are often at odds with those of other family members.  Many times, in fact, the plan deemed most logical by the current owner – leaving the family business to the oldest son, for example – isn’t even satisfactory to the heir who stands to benefit.  I remember one case I had where the current owners had a successful dairy operation.  Their two sons-in-law were active in the business and the plan was to one day leave it equally to the two families.  It turned out that the two men didn’t really like each other and really preferred to have their own separate businesses.  Eventually, that’s what happened.  Initially, it was a disappointment to the parents, but in the long run, it was best for both the family and the business.  The parents hired a manager to help them with the business and eventually sold it intact to a non-family buyer.

DS: Interesting.  So, in this case, the best solution was not to pass the business to the next generation.

KB: Right.  And the only reason that solution surfaced as the best alternative was because of the learnings that resulted from the client survey.  Individual family members told me in the survey that they felt they had been left out of the planning process.  Their feeling, needs and personal goals had not been considered.  I finally realized that by excluding the rest of the family, and concentrating only on the owners, I was setting the plan up to fail.  In order to assure the business continuation plan would work, it was clear to me that the entire family had to be involved in the process and everyone had to buy into the solution.  It was kind of an epiphany for me.  I suddenly felt I had discovered the root cause of many family business planning failures. 

In the case I just mentioned, the interviews uncovered the animosity between the sons-in-law and opened the door to the eventual solution.  Had the business been left to the families as planned, it would have ultimately been a disaster.  The business would probably not have survived and the wealth associated with it potentially lost to the family.

DS: So how do you go about involving the entire family?

KB: Well that was also a learning experience.  At first I tried assembling the entire family and doing a kind of group fact-finding.  That was a disaster.  No one would reveal their true feelings about the business and their role in it in front of others – especially the current owners, who are usually the parents.  The tension was so thick you could cut it with a knife!

DS: What did you do to resolve the tension and get everyone to open up?

KB: I decided to interview the family members individually.  The process has evolved some over time.  For example, spouses are usually interviewed together, but in cases of blended families, I often interview the spouses separately.  I’ve found that “his and her” children and separate property ownership often cause spouses to have slightly different agendas.  It’s usually better to talk about some of these things privately rather than in the presence of the other spouse.  I also find that interviewing separately works better when one of the spouses has a domineering personality.  Interviewing them together often results in the domineering spouse doing all the talking.

DS: Did you find that interviewing the family members individually solved the problem of the failed business plan?

KB: Not entirely.  I learned a lot about the family dynamics and what everyone wanted out of the business, but I still had to get all that input out on the table somehow, so it could be dealt with openly.  It was critical for all the family members to become aware of everyone else’s ideas and be given the opportunity to discuss them.  I decided the best way to get everything out in the open was to facilitate a family retreat.  I structured an informal family meeting, at a site away from the home and business, where everyone’s fears, hopes and dreams about the future and the future of the family business could be aired.

DS: How do you get everyone to open up at the family retreat?  Didn’t you find the same problem with reluctance to speak up in front of the group?

KB: Yes that can be a problem.  The key is to overcome the natural inhibition everyone initially feels by setting up a non-threatening environment that is conducive to open, honest sharing of feelings.  It’s imperative that everyone feels it is safe to open up.

DS: How do you accomplish that?

KB: Well, part of the secret is my own willingness to be open and honest.  I begin the retreat by explaining the importance of honesty and volunteer my own feelings about the process and my hopes for the success of the venture.  I freely compliment the family on their successes to date and express my confidence in their ability to come together to address the challenges facing them.  I then begin by asking each person in turn, to respond to this question, “What do you expect from the retreat?”  The responses are usually fairly predictable.  Most hope the retreat will be productive.  This is a relatively harmless question and gives everyone a chance to overcome his or her initial shyness about speaking up in front of the group. 

The second question is a bit meatier.  I ask each one, “What do you admire most about your family and business?”  This usually triggers a lot of very positive comments.  Many times, my clients tell me later, this is the first time they have ever heard their children express positive feelings about the family and business.  Often, the business has been a source of conflict between family members or a wedge between parent and child.  There is usually a lot to be thankful about, however, it’s just that no one has ever asked before. 

After this positive experience, I ask, “What would you like to see changed?”  This question usually opens the floodgates.  If I’ve done a good job with the individual interviews, I’ll know in advance what will come out of this exercise so I’m prepared to deal with it.  The responses and ensuing discussion eventually reveals all the innermost feelings of the family members.  This is where the rubber meets the road.

DS: Does this part of the retreat ever become emotional?

KB: Almost always.  In fact, I always have plenty of tissue available.  Emotions often run high.  It becomes something of a catharsis for the family.  Remember, the family members have probably never communicated openly and honestly about their feelings related to the family and business and their role in it.  A lot of history and extra baggage has to be examined and dealt with. 

After this open and honest discussion, I review the proposed new plan.  The plan has been developed based on the information gained during the individual interviews.  Of course, I have also consulted with the family’s other trusted advisors prior to creating the wealth transfer plan.  I go into the retreat with a high degree of confidence that the new plan will be accepted.  After all, it reflects the needs of everyone in the family.

DS: Is that the end of the process?

KB: It’s the end of the beginning.  I still have to implement the new plan and, of course, there is periodic follow-up.  I’ve learned over the years that this process leads to providing additional services and a lot of new business in the future.  The relationships I form with the individual family members usually results in my being considered the primary business advisor for the entire family.  When the day arrives that the plan must be put into effect, the second generation turns to me for ongoing advice.

DS: It seems that your process is very complete. You spend a lot of time accumulating information, developing a new plan and presenting it to the family. How can you justify all the additional effort required?

KB: Obviously, I couldn’t afford to invest that much time on each case if I was going to be paid only if I sold a financial product. With the increase in the scope of my work I now charge greater fees.

Before I even begin the interviewing process, I negotiate a fee for the entire planning process based upon the number of family members, size of business, and scope of work to be preformed. The agreement includes a money-back satisfaction guarantee. The fee and the guarantee protect the client because they assure objective advice with no risk. Since my compensation does not depend upon the sale of a product. The guarantee also gives me an additional incentive to do the job right. If a client balks at including all the family members, for example, I decline the case because I can’t be sure the solution will be acceptable in the end. I don’t want to invest a lot of time and energy on a case only to have to refund the money because the solution doesn’t fit.

I see the fee approach as protecting both the client family and me.

DS: What do you call your approach?

KB: FBR stands for “Family and Business Renewal.”  I call it that because I believe the process leads to the renewal of both the family and the business by establishing open and honest family communication.  Working through the process protects the family’s wealth by assuring the successful transition of business leadership and it enriches the quality family life in the process.  Ultimately, this is the key to successful planning.

DS: Thank you, Karl.

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