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Fairness and Equity Among Family Members

If you’re like many business owners, your business plays a large role in supporting your family’s lifestyle. As you plan for your business’ future, you may run into questions about how to treat family members fairly in your plans. This is especially crucial if you have children who work in the business and children who do not work in the business.

When planning for your business’ future success, you will likely need to address how you will eventually distribute your assets to children or close family members. As you address this issue, you may realize that what you consider fair is quite different from what your children and family consider fair. Consider the story of owner Bill Budster.

Bill Budster was 70 years old and ready to transfer his business. Two of his stepchildren, Beau and Donna, had worked in the business for 20 and 15 years, respectively. His other three biological children—George, Gary, and Heath—had successful careers outside of the business. Bill had always planned to transfer ownership to his stepchildren, but his plans ran into some problems.

Bill’s business was valued at $8 million, more than enough to provide his family members with financial security. Over the next four or five years, Bill wanted to split ownership in the business evenly between his stepchildren using a discounted value to account for the sweat equity they’d put in. Since they began working in the business, cash flow had risen steadily while they earned somewhat modest salaries, and Bill didn’t think it would be fair to make them pay full value.

But when Bill’s biological children learned about his plans, they argued. Bill had planned to provide $500,000 to each of his biological children upon his death, which he believed was more than fair. His children, on the other hand, wanted to know why each stepsibling would receive about eight times more than what each biological child would get, based on what the business was worth. They also wanted to know why their stepsiblings, who weren’t blood related, would reap financial benefits now, while they would have to wait until after Bill died to reap theirs.

Bill wasn’t sure what to do. When he asked his stepchildren whether they would be more interested in receiving cash after his death instead of business ownership, they declined. They’d worked hard in the business. Each had continuously turned down higher-paying offers to work in the business. They both had ownership mind-sets.

Despite weeks of discussions with his children, Bill realized that neither side would budge on what they wanted or considered fair. His stepchildren were upset that Bill had considered rescinding ownership after years of telling them he intended to transfer the business to them. His biological children felt that receiving cash after his death wasn’t enough and that they should receive equal value as their stepsiblings, at the same time.

Bill began to wonder whether he should simply sell the business to an outsider, but his stepchildren said they would not work in the business for anyone other than Bill or themselves. And if they left the business, Bill knew his cash flow and business value would crash. He felt stuck.

What Can Bill Do?

Bill’s biggest mistake was confusing equality for fairness. His biological children believed that fairness meant they would get equal shares of assets as their stepsiblings. His stepchildren believed that fairness meant recognizing their hard work and following through on his promises.

Rather than trying to negotiate with his children directly, Bill could have given them an objective rundown of his plans. He may have explained to everyone that the value of the business wasn’t liquid and that Beau and Donna would need to continue performing well to truly reap the benefits of ownership. He could have showed his biological children the tax consequences of ownership and the fact that Beau and Donna had effectively paid for their shares of ownership through working hard and foregoing other opportunities. In short, he could have communicated that his stepchildren’s shares of assets were loaded with risk, whereas his children’s portions of the family wealth were much less risky.

Likewise, Bill could have created incentive plans for his stepchildren in earlier years that recognized their contributions and rewarded them with ownership. Beau and Donna both said they would leave the company if they didn’t receive the ownership Bill promised them. This backed Bill into a corner, because if they ever left the business, his company wouldn’t see strong growth, which would make the business far less valuable, especially to any potential outside buyers.

When planning for your business’ future as it relates to your family, communication and fairness—not necessarily equality—are key. You don’t have to communicate and consider what’s fair alone. If you’d like to discuss how you can treat your family as fairly as possible as you plan for your business’ future, please contact us today.

The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

This is an opt-in newsletter published by Business Enterprise Institute, Inc., and presented to you by our firm.  We appreciate your interest.

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.

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2 Self-Made Problems That Can Harm Your Planning

Planning for your business’ future success is a long-term effort in problem solving. Usually, the problems you’ll try to solve result from the natural evolution of the business. For example, as your business has grown, you may have hired more employees or managers to keep pace. Problems like these are good problems to have.

But as many owners create road maps for future success, they can create problems for themselves. Self-made problems are much more difficult for owners to solve, mostly because they don’t see the problems as problems at all. Like a quietly growing mold, unidentified self-made problems can eat at the foundation of your plans for future success. Let’s look at two of the more common self-made problems and what the consequences of those problems can be.

Pride

As a successful business owner, you likely take pride in the business you’ve built. You’ve created the business from scratch or taken it to new levels. You’ve been the primary decision maker and driver of success. Your business supports families, employees, and maybe even communities. There’s a lot for you to be proud of, but that pride can also create problems when you begin planning.

For example, one of the most important factors of planning for future success includes having a next-level management team. These are the people who will eventually run the business in your stead. Many business owners understand this concept, but when it comes to delegating responsibilities to others, reluctance starts to set in.

Think about the last time you delegated an important task to someone else, something that had a noticeable impact on the business. Did you give up full control of the task, or did you still play a role in completing the task? Did someone have to get the OK from you before they finalized it? When things went differently than you expected, did you let the person in charge solve the problem, or did you swoop in to solve it? In short, can the business continue to hum if you ever wanted to take an extended vacation?

Many business owners can’t do that because they don’t have the confidence that others can do what they do. This usually means they can’t ever truly be away from the business. This can create cascading consequences: If you can’t ever take time to be away from the business, then the business relies on you. If the business relies on you, it’s much harder to build its value for future success. If you can’t adequately build business value, it becomes nearly impossible for you to ever leave it without jeopardizing your family’s lifestyle and the business’ existence.

There’s nothing wrong with being the expert. But planning for future success often means letting other people take on the kinds of big problems you’re used to solving. It’s easy to fall into the trap of thinking, “No one can do this as well as I can,” because to this point, that’s been true. However, carrying this mind-set indefinitely makes the business more and more reliant on you.

Resources

Sometimes, owners think that they don’t have the resources—specifically, time and money—to create road maps for future success. They might figure that if what they’ve been doing has worked to this point, why should they dedicate time and resources to fix what they don’t see as broken?

However, planning for future success isn’t necessarily a matter of fixing. It’s a matter of enhancing. If your business provides for you and your family today, it might not seem like you need to do much else to improve it. But one day, you might want to leave the business and never have to work again. Or you may want to grow it so that you’re a bigger player in your market. You know that growing your business from startup to success took time and resources. The same is true of turning a successful business into something that can support you even after you leave it.

If you don’t dedicate time and resources to do things like install next-level management; document your operating systems; and create a proven growth strategy; you may find that potential buyers, whether outside parties or insiders, won’t offer you the funds you’ll need to eventually leave your business on your terms. This can also lead to problems for your family and employees if you were to be suddenly forced from ownership—such as because of an unexpected death, illness, or divorce—especially if you rely on the business to maintain your lifestyle.

When planning for future success, a modicum of modesty—along with time and resources—can help you avoid these negative consequences. Please contact us today to find out how you can start the process of avoiding these self-made roadblocks in planning for future success.

The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

This is an opt-in newsletter published by Business Enterprise Institute, Inc., and presented to you by our firm.  We appreciate your interest.

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.

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Turning a Lifestyle Business Into a Business Enterprise

Many business owners start their companies as lifestyle businesses to support a certain kind of lifestyle that they want. Some found businesses because they have an urge to create and build. Others want to be their own bosses. Still others want to control their own destinies.

Whatever the reason, many businesses start as and evolve into lifestyle businesses. This is great for business owners, their families, and their businesses in general, but it can be a big challenge when you start to plan for the future of your business.

As you start thinking about planning for your business’ future, you might feel that you can plan while continuing to do business as usual. However, planning for the future success of your business rarely means you can continue doing business as usual. For example, many business owners don’t know what their businesses are truly worth. Not knowing what the business is worth might be a part of business as usual, but it makes planning for future success much more difficult.

Likewise, it may be business as usual for you to capitalize on certain benefits of ownership. Things like perks, bonuses, and even personal clout factor into the kind of lifestyle that you might expect for yourself and your family. As you begin to plan for your business’ future, you may find that those benefits could disappear if you leave the business, which can affect your lifestyle.

One way to address these issues is to turn your lifestyle business into a business enterprise.

When we use the term “business enterprise,” we mean that the business must have transferable value. It cannot simply act as a means to support your lifestyle, because it’s likely that the traits that support your lifestyle have less value to, say, a private equity group or strategic buyer. These traits might include things like your personal relationships with customers or suppliers who know and trust you; handshake agreements; or flexible payment terms for your favorite clients. Additionally, running a lifestyle business typically requires your constant presence to assure that the business actually does support your lifestyle.

Lifestyle businesses support you right now. Business enterprises can support you, your family, and often the business itself, both now and in the future.

If it Ain’t Broke, Why Fix It?

For many lifestyle business owners, the very idea of changing a business that brought them the wealth, success, and fulfillment they’re used to can be jarring. “This business has done great things for me, my family, and my community. Why should I want to change that?”

The answer is simple and a bit brutish: Potential buyers typically don’t care about the owner’s lifestyle.

The things that you might consider “good” aspects of a business—supporting yourself and your family, perhaps maintaining a culture—often don’t matter as much when an outside buyer does their due diligence. Where you see strength, they will find flaws. They may question practices that fail to maximize profits and cash flow, even if those practices line up with your values. These facts might cause you to resist transforming your lifestyle business into a business enterprise.

Many of the same factors apply if you ever consider transferring your ownership interest to an insider, like a manager or family member. Insiders look for the same kinds of factors that outside buyers do in a business. While a lifestyle business may adequately support you now, you should think about what happens when you eventually relinquish your ownership interest (whether by choice or otherwise).

Turning a lifestyle business into a business enterprise can be challenging, but there are certain things you can do to begin the transition.

  1. Find or train next-level management: Next-level management can be the catalyst to building on your current success. It’s often an attractive selling point because it shows that the business can run smoothly without you.
  2. Document systems and processes: When your employees know what they need to do to sustain company cash flow and how to do it, it becomes much easier for the business to run efficiently and effectively.
  3. Put yourself in a buyer’s shoes: Consider what you would look for if you were thinking about buying a business. If you discovered a business that supported its owner but also required the owner’s presence at all times, what do you think would happen if that owner wanted to leave the business after you bought it?

The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

This is an opt-in newsletter published by Business Enterprise Institute, Inc., and presented to you by our firm. We appreciate your interest.

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.

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The Essential Business Agreement: A Business-Continuity Agreement Among Owners

The Essential Business Agreement_ A Business-Continuity Agreement Among Owners

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