Tuesday, March 29, 2016

5 key issues in family business succession planning

A recent article on Forbes.com identifies five key issues that a family business lawyer should consider when discussing succession planning with clients who are transitioning a family business to a new generation.  The issues listed in the article are:

  1. Generational transition. Only a third of all family businesses successfully make the transition to the second generation.
  2. Alignment of family interests. Alignment of interests between current owners and others becomes more pronounced as members retire and turn over the reins to the new generation, while at the same time looking to the company for their retirement income.
  3. Balancing of financial returns. Creating buyout agreements is challenging. When the retiring generation looks to the value of their interest, they sometimes tend to look to a balance sheet number. In fact, the true value of a business should probably be based on an earnings capitalization model, a concept unfamiliar to many smaller family companies.
  4. Interfamily disputes. The interest of one family member may not be aligned with another family member. These situations can become even more difficult where there is, for example, a divorce of a family owner or a death and the surviving spouse is holding stock (and voting rights) but is not involved in the business.
  5. Estate and inheritance issues. These include taxes and probate delays upon the death of a family owner.
Of course, every family business is different and every family is different.  In relatively small family-owned businesses, for example, the current $5 million unified estate and gift tax exemption may take estate taxes completely out of the equation.  

Succession planning for family-owned businesses is an area where professional advice from an experienced family business attorney is critical.  Crafting a workable solution with the family can avoid or at least minimize the discord that often comes after the death of the principal owner and can help assure that the transition of the business to the succeeding generation is as smooth as possible.

Monday, March 21, 2016

Attorney is most important outside adviser to many family businesses.

Family businesses frequently look to outside advisors to fill important needs in running their businesses.  According to a recent article in Forbes, the most important advisor named by 16% of family businesses was their attorney, second only to the business' accountant (named as the most important by 2 out of 5 businesses).

According to the Forbes article:
Successful middle-market family business relies on a number of different professional to deal with a usually broad and diverse array of business and family-related matters. While they many times engage quite a number of different professionals, when they are looking for advice that addresses important issues impacting the family and the business (especially the business) the advisor identified most often relied upon are the firms’ accountants.
In an international survey of 336 C-level executives managing their family firms, slightly more than two out of five of them reported that their accountants were identified as their most important type of advisor. About 16% cited their attorneys. One in 10 identified their bankers or other business owners filling the role. Around 6% said it was their business coach or their family business consultant. Less than 5% of those surveyed cited management consultants, or financial advisors/wealth managers, or other professionals.
The article notes that the relationship is typically a personal one with the individual professional providing the service, not the firm he is with.  When asked, 30% of the businesses interviewed said that when the individual professional changed firms, the businesses follows.

For middle-market family businesses, when looking for a business attorney, it is important to keep in mind that while good technical skills are important, the ability to build a long-term trusting relationship is critical.

“Good advisors are not only highly technically proficient, they build strong relationships with key personnel at the family business. These relationships are based on integrity and trust as well as a deep understanding of their requirements and preferences,” says John Bowen of AESNation. “The relationship is usually with the professional, not his or her firm. So, it’s only to be expected when that professional changes affiliations, they bring their clients along.”