Your family business is doing well – so well in fact that you have made a significant amount of money and are concerned about how to preserve it for the next generation.  Maybe as the current CEO you know due to a health issue that you may be gone before your children are old enough to be taught financial responsibility, and you want to ensure someone is looking after their interests to adulthood.  Or perhaps you wish to protect your hard-earned family business profits from the lengthy probate process and reduce estate taxes.  And in a lifetime of your family name being publicly exposed through the business, you’d like to have the cloak of privacy over some of your financial decisions with your children.  For these and many other reasons, establishing a trust fund for the minors in your family may be a viable and worthwhile option.

What is a Trust for a Minor?
A trust (also called trust fund) is a legal entity that “holds” the property and/or assets for the person who created the trust (known as the grantor, donor or settler).  The person (or institution) that manages the trust is known as the trustee, and for this case the child or children who will eventually receive the money in the trust is the beneficiary.  You may wish to establish a trust for your child or children for any or all of the reasons listed above.

The Best Ideas to Help You “Trust” Your Children
There are many reasons to start and manage a trust for your younger family members, and following are the suggestions to think about both before you make that decision, and after the trust is in place.

1. Don’t go it alone. Trusts are legal and financial structures that also vary in requirements and restrictions from state to state.  Your best bet is to work with an attorney who specializes in estate and trust issues and is familiar with the regional regulations.

2. Decide flexibility of the trust. A trust created after the grantor’s death (usually through a will) is always irrevocable – it cannot be changed.  If the trust is made while the grantor is alive it is considered living (inter vivos), and can be set to be irrevocable or revocable.  There is flexibility in a revocable trust, but tax shelter benefits aren’t the same.  To decide, see tip #1.

3. Spell out your investment wishes. The grantor has power over how the assets in the trust are invested, and can and should spell this out to exercise all rights.  Perhaps you have always believed in steady and conservative investing – if you leave this decision to the trustee, the funds may be put into high-risk investments and lose value.

4. Know when and how you will “show your child the money.” The grantor can set up the trust to give some money to the beneficiary before they reach legal age for the full trust, set up a cost of living adjustment, or allow for benefits.  The Section 2503(b) Trust is designed to provide for annually dispersed income at a minimum to the child (while still a minor), either directly to the beneficiary or into a custodial account if the child is too young to handle.  The Section 2503 Trust states that all principal and income from the trust be used for the beneficiary until he or she reaches age, then the beneficiary must receive all remaining funds and is allowed to decide if he or she wishes to extend the trust into adulthood.

5. Protect against a poor performing trustee. Including a trustee removal clause allows your child to replace the trustee if dissatisfied with the service provided.  To protect your beneficiary child from making his/her own mistake, the grantor can specify that a new trustee be selected from a good bank trust department or other such safeguard.  You may even designate another family member as trustee – just be aware of your family dynamic to ensure everyone is working toward the same positive purpose.

6. Avoid trust scams and frauds. If the grantor works with a proper attorney and/or trusted financial advisor, this is easier to do.  But if the grantor has never had to do this before, a few things to be aware of are:

• High-pressure and high-speed sales pitches;
• A trust claiming to be endorsed by AARP – they do NOT endorse living trust products;
• Local probate laws – check with the local Clerk or Register of Wills

7. Learn all your options, including for your special needs child.  There is indeed a Special Needs Trust (or supplemental care trust) that allows the grantor to provide savings to the child without jeopardizing his/her ability to receive government benefits.

8. Cross the t’s and dot the i’s.  The steps for a trust are involved and sometimes complex and exacting – the grantor should be in contact with his/her attorney and pay attention to all the paperwork, because not properly transferring assets into the trust may cause it to be null and void.

The rewards of a family business are many, and we all want those rewards to continue into the next generation just like the business itself – the Greater Washington DC Family Business Alliance helps these businesses stay on top of these important decisions and provides ideas and resources.

One of the biggest challenges faced by the senior generations of long-time family owned businesses is deciding how they will transition their business to the next generation, and how to do it successfully.

In today’s competitive business market, families wishing to sustain their organizations over many generations must invest considerable time and energy into developing the next generation.  Careful preparation of young leaders will help ensure the success and vitality of the family enterprise.  It’s important to nurture and mentor the “next gen,” providing the proper training and support long before they take over the reins.  Cultivating their capabilities and transferring your knowledge of the business is crucial for keeping operations running smoothly and successfully.

When planning to transition to the next generation, here are some simple questions to consider:

• Do they have the proper education and skills required?
• Will they be ready to oversee business operations?
• Do they demonstration leadership qualities?
• Are they genuinely interested in the business?

If you’ve answered yes to these questions, that’s a good sign. However, if you are unsure, then it’s time take action.  You’re responsible for passing the torch and all that comes along with it.  If your successors are ill-prepared, then they may be doing the family and the business a disservice.

Following are some proactive tips to help the next generation carry on the family business’ success:

Engage Early. It’s never too early to talk with your children about what their wishes are for being involved in the business.  Help them plan for their future.  You want what’s right for them, and what’s right for the business.

Discuss Their Role. An unclear definition of business successors’ roles can lead to muddled expectations and the development of various styles of leadership within the business.   You’ll want to communicate the anticipated job responsibilities and ensure that the upcoming generation is comfortable with these.

Offer Real-World Experience.  The next gen must understand how to balance the responsibilities and opportunities of the family’s legacy.  This requires not only the right knowledge and skills, but also real-world experience in the field.  Involve them in the family business planning, goals and day-to-day operations, and allow them to take part in specific functions that are important to overall business strategy.

Encourage Leadership Development. While mentoring and providing real-life experience is crucial to the next gens’ development, you’ll also want to impart key leadership skills.  Not everyone who holds a management position within a family business is a born leader, however, leadership can be learned and enhanced through continuing education, increasing communications skills, and setting professional and personal goals to develop business talent.

Seek Expert Advice. Talk with your CPA and/or financial advisor for advice on putting together a plan to prepare your successors for the transition to leadership.  It can be overwhelming to undergo this process alone, so go to your trusted sources and advisors to seek their recommendations.

It’s important to fully develop your leadership framework to reflect your business values and strategies.  Understanding the next gens’ core strengths and development needs are key for preparing them to transition to business leaders.  Engaging with them early on and determining if they have the passion and energy for the business will help you figure out who is best suited for leadership.  Both generations must work together to strike a balance between desires and expectations.  Creating a positive, encouraging environment to enable the next generation to achieve both personal and professional success will allow your business and your family to flourish.

The giant leap from first generation to second generation in a family business isn’t bridged merely by luck or time – it takes work, planning, and an understanding of entrepreneurship.  Keeping the entrepreneurial spirit alive first relies on understanding the characteristics of entrepreneurship, e.g., creativity, adaptability and self-determination.  Take a look at one of our previous posts, How Entrepreneurial is Your Family Business, to get a better idea of these characteristics.   Following are some “best practices” for helping to foster the entrepreneurial spirit, and providing your family business with both ideas and tools to survive and thrive for generations to come.

Teach Your Children Well – or Find Someone Else Who Will
Knowledge is power, and even though the term “self-made” is often used for the family business founder, there’s nothing wrong with helping the other family business members to understand entrepreneurship.  There are now courses and degrees in the art and science of entrepreneurship – these more formal sources of education are easily found online at the university level, and also at family business-specific organizations, such as the Family Firm Institute’s Global Education Network.  Preparing future generations before they are expected to make business-altering decisions may provide confidence as well as success.

The Best of Both Worlds – Individual Spirit Supported by the Group
Along the lines of the “self-made” definition, there seems to be some truth to the power of the properly motivated individual to create and achieve – hence that first generation success.  The balance of also being part of a group that combines thoughts, ideas and support can grow that sense of entrepreneurship and achievement for the future.

Open Your Eyes to the World Outside of Your Business’ Four Walls
It’s natural for a family business to keep the figurative walls high and impenetrable for protection and a sense of unity.  But if you never look outside, you’ll never know what else is going on.  An internal culture within the business – especially if dominated by a single controlling leader – may inhibit innovation, exploration of competition and understanding of a changing market.  Having a company culture that is more external seems to be associated with entrepreneurship.

Loosen Up on the Reins, Let Someone Else Have a Turn
Picking up from the previous “best practice,” a single controlling leader also appears to have a negative correlation with innovation.  Centralized control induces rigidity, and typically allows for only one point of view.  Others both within and outside of the family need to be heard and encouraged to contribute, which is possible when the control is more decentralized.

Long-Term Risks Equal Long-Term Survival
No one is suggesting that the financial aspects of growing your family business should be ignored – of course this must always be a consideration.  But if your family business only looks at investments with an immediate payback – perhaps out of fear of taking a risk or losing future inheritance – then this focus on “financial controls” inhibits the entrepreneurial spirit of patience and strategy.  Therefore, a focus on “strategic controls” – which beyond financial metrics takes into consideration understanding the strategy, risks and tradeoffs – shows a stronger support of entrepreneurialism.

Fill, then Use, the Family Business Toolbox
We would be remiss if we didn’t include the family business governance structures and tools that the DCFBA mentions so often on this site to our list of best practices for encouraging entrepreneurship.  Family meetings, family agreements and family business policies can all be set up within your firm to better assist in the structure and planning of what you want the business to be, now and in the future.  They can provide the forum to discuss the other best practices listed above, and allow you to take part in your family business’ destiny, instead of reacting to it.

Despite the initial entrepreneurial spirit that has been the wellspring of so many family businesses, we can all use help in maintaining that level of excitement and innovation.  Treat your family business to the best ideas from those who came before – the Greater Washington DC Family Business Alliance was formed for just such a reason.

FEATURE ARTICLE: The Red Coats Family of Companies – Striking a Harmonious Balance

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Most of us have heard the term “shirtsleeves to shirtsleeves in three generations.”  This describes what many would say is the typical family business life cycle.  Statistics bear this out- according to the Family Firm Institute, Inc., only 12% of family businesses are family-owned into the third generation.  Most of us can also recite the various reasons for this, and conflict between family members is reason number one.

Conflict is a very broad issue that can encompass everyone from parents to siblings to in-laws.  The conflicts can be over money, status, position in the company or external matters such as substance abuse.  We have all probably been exposed to those circumstances where the conflict has so fractured the familial relationships that siblings and other family members no longer speak to each other.

As I’ve worked with family businesses over the years, there are two traits that I’ve seen over and over again that make for a successful family business – great communication and total transparency.  These two traits are essential for any successful business (or relationship, for that matter), but probably even more critical in the family business setting.  Great communication and total transparency can help a family business prevent and quickly resolve conflicts.  Let’s examine each trait briefly.

What is Great Communication?
Great communication may be defined as honest and open discussion between people who are willing to express both what they think and how they feel, listen to what is said, and be receptive to others’ thoughts and feelings.

In successful family enterprises, great communication manifests itself in both formal and informal avenues.  Formal communication occurs at board meetings, family councils, and general family meetings.  They often document how information is to be communicated in the formal setting.  Informally, great communication occurs between parents and children, siblings and cousins on a daily basis.

Just as it is necessary for a family business leader(s) to exhibit certain traits like integrity and dedication, it is also vitally important that he/she sets the stage for great communication by providing the appropriate mechanisms and by setting the example at both the formal and informal levels.

Transparency in the Family Business
There has been a movement towards greater transparency towards the general public when it comes to government, publicly traded companies and the not-for-profit sector.  While this is important, when I speak of total transparency in the family business setting, I am referring specifically to transparency among family members and key non-family individuals – not necessarily with the general public.  Total transparency in the family business means openness about operations, financial information, potential contingencies and litigation, future plans, performance of family members, decision making, and the list goes on.  However, I will make one exception – certain proprietary or sensitive information probably should not be in the hands of all involved family members.

It is unreasonable to expect that everyone will have full access to all information.  For example, the family member who is not involved in the business will obviously know less than the family member who sits on the board, and he/she will know less than the family member who is the CEO.  Total transparency means that individuals have the information in their hands that enables them to make informed decisions about themselves, their relationships with the family business, and their relationships with other family members.

Total transparency extends beyond the family business; in successful family businesses, the issues and problems, successes and failures, and desires and needs of family members are discussed openly and freely.  This sense of openness and honesty, coupled with great communication, provides the basis for strong human capital, which is necessary for the success of the enterprise.

It’s probably readily apparent that great communication does not exist without total transparency and vice versa.  Both have to start at the top and become a part of both the family and family business culture.  When these two qualities exist together within the family business, it creates a recipe for success for years to come.

Innovation is the key to driving business success. In today’s increasingly crowded business environment, it’s key to staying competitive.  Whether it involves developing cutting edge products and services, creating a new process, or simply remaining flexible to adjust to the changing needs of your client base, businesses must continue to innovate and evolve for their own survival.

One of the biggest challenges that family businesses face with regard to innovating is striking that healthy balance between the family’s business traditions and heritage, with the need to remain nimble and open to change in order to improve the business profitability and sustainability. Change can be uncomfortable, but it’s often necessary to meet the changing demands of the marketplace.

An example of a family business with a long, rich heritage that has survived and thrived through constant innovation and reinvention is Crane & Company.  Check out this video with Crane & Co. Chairman, Charlie Kittredge, as he discusses 200 years of family business success.

Ways Family Businesses Can Inspire and Embrace Innovation
Developing such an organizational culture can be a complex task, but here are four easy ways that your family business can inspire innovation:

1. Encourage New Ideas and Open Communication. If you want your employees to “think big,” you must create a supportive company culture that encourages communication, innovation and creativity. Family and non-family employees need to feel like they can share ideas without fear of failure or judgment.  You may be familiar with the saying, “There is no such thing as a bad idea.” That’s just it — there can be no innovation without first having an idea. What might be an idea of little potential one day could resurface as an idea with great potential in the future.  A supportive leadership team with an open-door policy that fosters cooperation, yet allows for individualism, is the catalyst for welcoming new innovation in the family business.

2. Designate an Innovation Team. Create a small team of “innovation ambassadors,” that rotates employees every three to six months. Select one person from each department or business unit to serve as an ambassador and field innovation ideas from all generations and ranks of employees involved in different aspects of the company.  In doing so, all operations, from recruiting and hiring to marketing and technology, are covered.

3. Meet and Brainstorm Regularly. Encourage communication by scheduling monthly staff meetings, and ask your employees to bring three thought-starter ideas on specific areas that could benefit the overall business. This could include improvements to your customer service model, ways to incorporate new technology, or using social media to drive sales.  Discuss and flesh out the ideas as a team. If your business has several divisions and it’s too cumbersome to meet all-together, hold individual meetings by unit. There’s nothing like a thought-provoking team conversation that spurs the imagination and gets the creative juices flowing.

4. Offer Employee Incentives/Rewards. If you want to encourage innovation, consider putting an employee rewards program in place. People like to feel appreciated and may be more inspired to contribute ideas if there is a particular incentive involved.  Rewarding great ideas is vital to the success and productivity of a business, and many companies are finding unique ways for rewarding their employees. To decide on the best approach, you need to have a deep understanding of your employees’ motivations. Maybe it’s not a cash bonus they would want, but rather, an extra day off, or a restaurant gift certificate or movie theater tickets.

Recognizing that innovation is critical to your business’ success is important, but encouraging an environment that supports ideas and involves all your employees is paramount. Discussing and brainstorming innovative ideas and approaches on a regular basis will help you stay focused, and allow for even more idea generation. Don’t forget where those innovative ideas came from – finding and implementing the right employee rewards program will bring more value to your business at the end of the day.

A well-crafted buy-sell agreement is essential for limiting liability and resolving a number of tax and business issues in closely-held or family enterprises, especially those with multiple owners and partners.  The agreement outlines the roles and rights of the parties involved, fostering smooth relations and the successful continuation of the business.  It also prevents an owner from selling his interests to an outsider without the consent of the other owners, and provides an equitable method of determining the value of each co-owner’s interest in the business.  Typically, a buy-sell agreement is prepared and signed before a business is started.  Without an agreement, the sudden unexpected exit of an owner could leave business partners with a host of problems, including business interruption, estate and income tax issues, and great financial risk.

Drafting and revising a buy-sell agreement entails proactive planning and thinking about potential future business situations that could arise.  Having an agreement in place is essential to ensuring successful business and personal relations, particularly during difficult times and unexpected scenarios.  Examples of triggering events for implementing a buy-sell agreement include:  the retirement, disability or death of an owner; an owner’s divorce or bankruptcy; or, his/her desire to sell the business interests to a third party.

Let’s take a closer look at some key considerations surrounding the structuring of a successful buy-sell agreement.  While each agreement is unique to the particular business and its owners, the following steps are important for effective planning and implementation:

1. Specify the type of agreement. There are three types of buy-sell agreements, and it’s important to select the appropriate one:

• A cross-purchase agreement is the simplest form of a buy-sell agreement and is typically used in a small business with only a few owners.  In this agreement, a withdrawing owner agrees to sell his/her interest to the remaining owners.
• An entity-purchase agreement is used for larger business enterprises, and in this situation the withdrawing owner agrees to sell his/her interest to the business entity, which then retires the ownership interest.
• A hybrid agreement is a combination of the cross-purchase and entity-purchase agreements in which the withdrawing owner must first offer his/her ownership interest to the business entity.  If the entity declines or is unable to make the purchase, then the shares must be offered to the owners.

2. Identify potential triggers. A buy-sell agreement should specify any triggers that will set it in motion.  For example, if an owner retires, you may not want him/her to continue to hold his/her shares.  Or if an owner gets divorced or declares bankruptcy, you’ll want to protect the business from the ex-spouse and the courts.

3. Determine valuation. It’s critical to establish the standard of value and the premise of business value in a buy-sell agreement, as well as the approaches and methods used to calculate the valuation results.  The following standards should be considered during the valuation process:  Fair Value, Fair Market Value and Investment Value.  In addition to these standards of value, other valuation methods, such as analyzing the book value or net asset value of the business, should be utilized.

4. Determine purchase price. The agreement must provide a way to determine the purchase price to be paid by the company or the other shareholders.  Future changes in the company’s financial position, such as earnings and cash flow generating capability, should be considered during this time, as well as any changes in the business market.  The valuation process is key in setting the purchase price.

5. Determine payment terms and funding. A buy-sell agreement should be fully funded.  Most agreements are funded with life insurance, but there are alternatives which can be used to create funds to purchase a business interest.  These include bank loans or installment payments.

There is no one-size-fits all — a buy-sell agreement needs to serve your individual needs, as well as those of your business, your partners and your loved ones.   Consult with your CPA and other trusted financial advisors who can guide you through the process of preparing an effective buy-sell agreement.  And, if you already have a buy-sell agreement, it’s important to review it with your financial advisor annually to ensure that all of its components are in line with your business plans and operations.

Be proactive to protect yourself, your family, and your business partners.  Delaying a buy-sell agreement could put your business at risk, so it’s best to be proactive — the continuity and future success of your business depends on it.

Every business experiences challenges now and then, but family owned and operated businesses can be particularly challenging to navigate successfully and smoothly. Working with family members can be a very enjoyable experience, but if management falls into some common mistakes, it could pose some specific business risks that, if not properly addressed and resolved, could result in negative consequences to your business and family dynamics, as well as your bottom line.

Here are five common missteps that can harm a family business, along with some advice on how to manage certain situations and keep your business and family relationships healthy.

1. Forgo the Family Feud. Arguments with family members when making key strategic business decisions can be dangerous to the health of the business. Conflicts often arise from the inability to separate business and personal lives, and usually it’s due to individuals’ egos and varied interests, as well as sibling rivalry. 

Remedy: No matter what the issue, it’s best to remind your family members of the common business goals, so that you can move past your disagreements and work together as one whole team.

2. Don’t Play Favorites. Overseeing family members can be a difficult matter. You may feel inclined to give them special treatment or company perks, but this is a big no-no.  It’s important not to show favoritism. All of your employees, family or not, should be treated equally across the company. 

Remedy: Make sure your reasons for hiring, promoting and terminating employment are based on actual job performance, not because of your relationship to the employee.

3. Manage Emotions and Expectations. While not an easy feat, especially if you are directly supervising family members, it is imperative to manage emotions and expectations.   While we understand that emotions will enter your decision-making processes, an emotionally charged environment can make day-to-day management operations challenging.

Remedy: Be compassionate and understanding toward others’ feelings, but share your point of view. Communicate your expectations and manage theirs to create a productive, team-oriented environment in which everyone has the company’s best interests in mind.

4. Communicate Effectively. While it’s easy to get in the habit of casually communicating information to your family employees, this can turn into a “he said, she said” scenario very quickly. The secrets to success are effective company-wide communication, so it is critical to have structure in place.

Remedy: Create a written internal protocol and hold regularly scheduled meetings to address and resolve any important operational business issues before they get out of hand.  Consider the need for periodic meetings of family members where everyone can share in communicating relevant information about the business.

5. Create a Succession Plan. The sustainable future of a business relies on having a carefully prepared succession plan. According to the Small Business Administration, 40 percent of U.S. businesses face the transfer of ownership issue at any given time, and less than one third of family businesses survive the transition from first to second generation ownership.  If you want to retire someday, or if something should happen where you cannot continue to run your company, it’s critical to have a succession plan so that the business can continue from generation to generation. 

Remedy: Create a succession plan before you need one, and review it on a regular basis to integrate changes regarding the business or individuals.

Keep in mind that your business is only as strong as your employees.  Dedicate yourself to maintaining a healthy work environment by effectively communicating company goals and plans. Strengthen your ties with your family members by treating them fairly and appropriately, and make sure they are on the same page as you are when it comes to making key decisions. This will put you on the right path to ensuring the future and vitality of the business.

There are a number of books written on succession planning and transitions in family businesses, and it is impossible to synthesize all of that information into a short blog.  So, keep in mind as you read this, that succession planning is a complex subject, and this is intended as a high level overview.  In subsequent posts we will discuss particular aspects in greater depth.   Following are 10 suggestions to ensure a smooth leadership transition for your family business:

1. Start early; this means when your children are young. Most business owners don’t plan for their transition to retirement.  Either they don’t feel the business can continue without them, or they believe in their immortality, or are afraid to face life without their most trusted possession, the business.   If you find yourself in that position, it’s never too early to start planning.  If you are young and your business is successful, consider gathering your key advisors and starting the planning process.  Remember that nothing is etched in stone – your plan can and should be fluid, and anticipate the unanticipated.

2. Figure out what you want and how to be secure in retirement. What you may want is to stay in the business until some circumstance prevents you from continuing.   That’s probably not good for the continuity of the business, and it may not be what your spouse wants.  So, we’ll presume that you, as the business owner, want something different.  First figure that out, and then decide how to get there.  Often, the issue is that as you and your spouse age, you realize that unless you continue in the business you can’t maintain the kind of lifestyle you both want.  To avoid this situation, even while you are toiling away running your business, you also need to pay attention to building the necessary wealth for the financial freedom you need when it’s time to move on.

3. Determine what your kids want. It’s not always what you think or want.  Let’s also not assume that the oldest son or daughter is the logical choice to take over running the business.  If you think of your family business as the means by which your family can achieve its dreams, then you’re on the right track.  Having discussions about your own dreams and thoughts about the business with all family members should start early.  At the same time, allow family members to discuss their dreams and desires as well.  Many of us don’t know what we want to do when we graduate from college, and the assumption that we want to join the family business, either right away or even at all is, at best, an incorrect assumption.  So, be patient and continue those discussions.

4. Communicate (be transparent). Great communication helps in any relationship, and we know that many families in business suffer from poor communication.  Effective communication also means not only letting others know what you think, but being able to listen to others and appreciate their views, thoughts and feelings.  I added this point after “Determine what your kids want” for a reason.  While communication is critical among employees, advisors and business associates, your most important discussions take place with the family.  Communicate often, and be transparent about your desires, needs and expectations, and those around you will likely do the same.

5. Set the business up for transition. A strategic plan that reflects the family’s values and mission are important to continuity.  Take the time to include key employees, advisors and family members in the process.  If you have a board of directors, family council or other advisory body, get their approval.  And, review it regularly, making changes as necessary.

If you are planning on selling your business in five to seven years, you need to ensure that you maximize the value for the eventual sale.  That same mindset is also true when transitioning to the younger generation, with a slight variation.  You want to position the business for continued success under new leadership.  So, you will need to maximize its position in the marketplace, flexibility, asset mix, etc.  In other words, maximize value.

6. Prepare your employees for transition. You probably have some employees who have been with you for a very long time and are loyal, dedicated and hardworking.  Some may even view themselves as your successor.  As you go through your strategic planning process it is important to ensure that they understand and buy into your vision and desires about the company.  The worst thing you can do is surprise them by announcing the heretofore unmentioned decision that your son or daughter is about to succeed you in the business.  If you are setting the business up for continued success, that surprise can go miles towards undoing all of that other good work and planning.

7. Choose and train your successor(s). Your successor may or may not be a family member.  Keep an open mind and pick the best person for the role.  Your successor may also not be limited to one person.  I mentioned a strategic plan earlier.  That plan will anticipate who will succeed you and when.  Your children may not be interested in succeeding you as the CEO, or they may not be capable.  If your best choice is a non-family member it does not mean that the business has to leave the family’s control.  If you have two children who are capable of running the business, how can you set it up for both of them to succeed?  When choosing the successor, be open to different options.

Once you’ve made your choice, then make sure that your successor is properly trained.  What type of degree should they have?  What type of experience outside of the family business is appropriate and necessary?  What type of experience in the business is necessary?  These are all great questions that should be considered and addressed as a part of the process.

8. Who will have ownership and why? This is a major question for the family with no easy answer.  Should ownership be split among all of the siblings, or, just those in the business?  Or only the eventual CEO/president?  If not done properly, this could create tremendous turmoil in the family, which will likely have a negative impact on the business.  Earlier I talked about great communication.  It’s important for everyone in the family to be transparent with each other about their expectations, needs and desires. This will go a long way towards ensuring a good outcome with ownership.

9. Consider a board with non-family members. While you may have run the company on your own for many years without the advice and consent of others, that may not work well with your successor.  Consider expanding your board of directors to include some non-family members.  Do it before you leave so that your successor grows into the concept and accepts it.  Include your key advisors and members of management in the process, as well as your successor.  Inclusion is the first step in the buy-in process.

Outsiders will bring in a different perspective and experience.  They also do not have the bias associated with being a family member, nor do they bring in the family clutter that often gets in the way of making decisions.  They will also most likely require greater accountability from the management team.  It is another piece to the puzzle that may provide the departing owner with more peace of mind as he/she exits.

10. When it’s time to leave – leave. For the sake of those you are leaving behind, when it’s time to go, give your successor the wherewithal to run the business.  Don’t give constant advice, don’t undercut his/her efforts, and don’t stick your nose in where you shouldn’t.  In other words, give the new leader a chance.  Be supportive of your successor.  Offer timely advice and mentor him/her, but let him/her run the business.

I read somewhere once that the best transition is one that nobody notices.  It’s even better if the departing owner can say goodbye and feel comfortable that he/she did everything  possible to ensure the future success and viability of the enterprise.  Contemplate what it takes to get to that level of comfort and then figure out how to do it.  That’s all part of your strategic plan.  Then you can ride off into the sunset – in peace.

To learn more about best practices for transitioning your family business, contact me at Brown@bbcpa.com or 301-272-6040.

What is a family constitution?  Simply put, it is a document that outlines how a family will govern itself.  Your family may have a “code of conduct” or “mission statement,” many of which do not address governance.  Or, your family may have never considered the idea.  If yours is a family of wealth or if the family business is integral to your family, you should consider the idea of a family constitution.  I use the term “constitution” because, just like the family business has a governance structure, so too should the family.

Assembling Your Family Constitution
A discussion of how to develop the constitution, what the process is, and who is included is too involved to discuss in a short blog.  Needless to say, though, the constitution should have a preamble which outlines the basic vision and goals, a second section devoted to the governance structure, a third outlining family member rights and, lastly, a method for amending it.  Sounds a lot like our U.S. Constitution, which has served us pretty well over the last 200+ years.  The governance section would outline who is a member of the family (and consequently who has a say or vote), what the ruling authority is, how family meetings will be handled and the relationship with the family business, among other things.  Family member rights might be a little more loosely defined, but should center around one’s ability to either be involved or not be involved in the governance and how he/she may or may not benefit from the family business or family wealth.

Why Create a Family Constitution?
The family constitution provides value in several ways.  All businesses plan for the future, whether it is through strategic plans, budgets and forecasting, etc. Similarly, families need to plan for the future and a family constitution provides the framework for this process.  Good planning and preparation usually begets good results.  All can agree that good communication is important in any relationship, and this is even more so in the family business setting.  The family constitution communicates very clearly to all members of the family how life will be conducted in the family business.  It shows and reminds all family members, young and old, the commitment that all have made to the success of the family and the family business.  Finally it adds structure to an environment that may otherwise have a void.  That structure will allow disagreements to be handled and decisions to be made in a way that should be fair and just.

Who Should be Involved?
One critical factor necessary to have a bona fide constitution is that the creators need to be as many members of the family as exist at that time that are capable of understanding the document, and the constitution needs to be ratified by most if not all of those family members.  Even in that circumstance there will probably be certain family members responsible for drafting and redrafting, and, perhaps, others who will be more forceful with their opinions, but everyone needs to feel included and that they had an opportunity to participate.

For those who are skeptical about family constitutions I would invite you to think about some circumstances involving your family business or family where important decisions had to be made, or disagreements occurred which were not resolved.  The negative impact in many cases was probably devastating.  Now think about how that event might have worked out if a document outlining how those circumstances were to be addressed had been in place at the time.  A constitution is well-worth the time and effort it will take for you to develop and can provide necessary guidance to drive effective decisions and constructive interactions.