Ellen Frankenberg, Ph.D.
Many businesses are challenged today, largely because of global and economic conditions far beyond the control of any one entrepreneur. In turbulent times, it makes sense to focus on the decisions you can control, especially in response to three major trends impacting family firms today.
Buy out offers. Not only Santa Clause, but also the consolidators are coming to town. Investors who have soured on the stock market are cherry picking - looking for profitable, well-managed family firms to buy. Sometimes their timing is perfect, they offer a premium price, and you begin planning your trip around the world.
Sometimes all your advisors focus on the numbers alone - "You may never get another offer like this…" Sometimes family bickering, in spite of good efforts, reaches a point of "no return". Sometimes you can hear the death knell ringing for your products or services, and you need to get out while you can.
But selling "The Golden Goose" deserves a long, hard look. Flip Sheridan, one of my colleagues and former CEO of Hazco Services, a Dayton-based environment instrumentation and safety equipment rental company, sold his company in 1998 at a premium price. Today, Flip works with other business owners to help them calculate the "cost of independence" and develop alternative strategies to sustain and grow their businesses. Closely held companies remain an extraordinary investment that can provide the whole family with benefits that are tough to replace, and today they may provide much peace of mind than the stock market.
A $20 million offer may sound like a lot, but after paying taxes and splitting the proceeds seven ways, how long will it last? How will you fund health insurance? Automobiles? Travel? Where will you invest the proceeds more profitably? How will family relationships be affected by the sale? What will you enjoy doing more?
Globalization. I recently gave a seminar in which I asked the 20 family firms represented whether they were doing business internationally. About 2/3 of those Ohio valley firms indicated they were involved in some kind of global partnership. China seems to be the "most favored nation" at the present time.
How will these newly forged partnerships, with business leaders who not only speak different dialects of different languages, but also represent different cultures, and more specifically, different economies, different legal and political systems, impact family partnerships? What kinds of legal agreements need to be in place, especially for family owners, so that their control of their own enterprises will not be irreversibly diluted?
How can family firms best prepare to transmit ownership and leadership from one generation to the next, and sustain workable relationships with partners, not in the next city, but in the next hemisphere? How will family firms maintain adequate controls (one of their major reasons for remaining autonomous) as their partners around the world also transmit ownership and leadership from one generation to the next, in changing political climates?
Odie Kordons, another colleague of mine and an attorney with considerable international experience recommends establishing partnerships with other family businesses, so that at least the experience of family ownership provides some common ground.
Globalization will only continue to grow. Even the West Coast dock strike does not seem to have dampened its progress, even though "just in time delivery" may need to be modified a bit. Finding far-flung suppliers and customers may make good business sense; I only suggest that family business owners entering this brave new world analyze the implications of their decisions and get very competent advice to protect their most important asset - the "Golden Goose".
Pre-mature estate planning, driven primarily by tax considerations. Most very successful entrepreneurs who have developed hefty businesses end up facing a very different kind of problem: how to get rid of the money they worked so hard to make. Astute estate planners sometimes advise them to begin transmitting their major asset, their company's stock, early and often to their heirs, usually in increments of $11,000 per individual per year, to achieve tax advantages.
For some prolific families, this means that their five sons and daughters and their eleven grandchildren will, over time, hold increasing amounts of stock. It also means that the individual who eventually leads the company may hold 1/16 - or less - of its stock.
When ownership of a family business is transmitted before the succession plan is clear, the "Golden Goose" stands at risk. The future CEO will have to spend considerable time and energy unifying a majority, or worse, be constantly challenged by any coalition of disgruntled siblings or cousins.
Once a Succession Plan is carefully developed and announced, stock can be transmitted to (or purchased by) those heirs who qualify and make the commitment to work for the family company. Other assets can be developed for other heirs - life insurance, perhaps, or real estate, but those assets will never be exactly equal. Equal isn't always fair, especially when a family business is at stake.
Of course, you will need to consult your own professional advisors about a variety of strategies to transfer ownership. I am only suggesting that you consider the impact of any decision about transmitting the ownership of your family firm, not only from a tax planning perspective, but first of all, by asking what will be best for the business.
After all, "The Golden Goose" may feed the whole family for many generations to come. Protect it well.