By Don Wilkinson, CEO, Family Office Consulting
Unlike other affluent people who come by great wealth by inheritance, professional careers or situational events (i.e. marrying in), the family business owner is routinely involved in building the business throughout his or her career without much time to stop and focus on family wealth building and legacy. That's why increasingly family business owners are seeking out the services of family offices.
The main goal of the family office is to grow and protect assets for the future family office. It may not be a household word for the successful family business owner, until it finally dawns on him or her that something needs to be done to preserve the business and begin to pass it on to the next generation.
Keeping The Business "In The Family"
Many of the largest companies in the United States are family owned. Many of these CEO business owners enjoy the necessary wealth to establish a family office ($100-250 million minimum in investible assets for a single family office and $25 million in assets for a multifamily office). So why is the family office necessary? Mostly because the family business owner often neglects the importance of succession planning until it is too late. Too late means death/serious illness of the principal, short sale, unplanned closing of the business, or an inheritance with a probable and messy conclusion among surviving family members
If a first generation business has been a success, the original business owner has probably had to pour most of his or her time, energy, and money into it for what would seem to be a lifetime. The owner sees the company as an extension of his person and it may be hard to imagine life without it. In some cases, his or her entire family may have depended on the business, discussed it endlessly, and used it as an education and a proving ground for the children.
The typical successful business owner is determined to find a process of continuing the business beyond his or her life span in order to build a legacy for the generations of family to come. He is not one who relishes selling the business on a quick cash buyout. That's why the family office is the practical next step solution.
Keep in mind that time and time again the wealth of successful FBOs is reduced to nothing more than distribution—an inheritance. The result is a fleeting one-time occurrence that can disrupt or even destroy the business, create divisions in the family and scatter the assets. It could well turn out more advantageous for the business owner to follow the family business model if he or she harbors intentions of preserving the business for future generations with the ultimate goal of preserving long-term wealth and keep it in the family.
It should be emphasized that like a publicly-owned firm, the business owner has the usual weight of responsibility of running a business (inventory control, pricing, labor issues, marketing, etc) to achieve profitability in good times and bad. However, what is different for the FBO is the injection (or rejection) of family members into the business climate.
Whereas public companies can narrow their focus in expanding production, cutting costs, etc, the private business owner must consider similar decisions but with bonus decisions usually made in the best interest of the family. Failure to separate family issues from business issues can threaten family harmony. The installation of a family office is a major step for this important separation. It's usually best for a non-family person be chosen to manage the family office to keep day-to-day and major decisions as impartial as possible. The CEO reports directly to the family business owners.
If the business is to be continued for the benefit of future generations strategic planning must begin usually a minimum of two years out. Incidentally, the vast majority of business owners have never developed a strategic business plan using an outside firm. Since this phase of the business lifecycle is the second most important phase ever besides start-up, it's in the interest of the business owner to finally begin this important step for a future comfortable retirement.
Enter The Wealth Optimization Advisor
It is essential that an outside firm be brought in to facilitate the building of the family office concept for the business owner. This individual's responsibility is to move the family towards establishing a family office. He or she will be an overseer of the project. The firm will provide the information such as budgets, start up costs and have access to the resources necessary to bring the family office to a reality usually start to finish within one year.
The hiring of an independent strategic business firm is essential. The main goal is to bring the family members together to work more harmoniously for better results and profitability. When this goal is achieved, the business owner can finally let go and be ready to pass to the next generation. Most business owners don't want to return because they want to focus on a comfortable and fun retirement.
If everyone is on board with this approach, the implementation of the family office can go smoothly. The family office is involved in challenging intergeneration transfers, estate planning, succession planning and shareholder liquidity requirements. In addition, during this planning process, expectations and responsibilities of the family members will begin to jell in order to clarify what family members want and need from the business and each other when the current generation is no longer in charge.
Case Study: Who Will Run The Business?
As an example, consider the Anderson family which has manufactured fire protection equipment for 30 years. The patriarch of the family saw an uncomfortable situation approaching as he reached retirement age. He wanted to hand off the business to one of his three grown sons. All three had been groomed to take over as they had all been involved in running most aspects of the business since high school. Now the father had to make a choice of which son would run the company.
This business owner, faced with a most difficult decision, decided to bring in an unbiased advisor who would coordinate the family's succession plan. The advisor soon told him that succession planning is more than simply selecting the next CEO. It is more about developing the talent, focus and resources for the business to continue to be successful under new management.
The family business owner became more educated about the family office concept and was now eager to pursue the development of his company succession plan by planning his departure within a two-year timeframe. A council was set up to provide clear communication of transpiring events between family members and long time employees. Non-employee family members were also included in the loop of information sharing. Even a web site was set up to inform all parties of latest developments.
The principal asked each of three sons to develop a long term strategic plan on how he would run the company if selected as CEO by his father. The advisor convinced the business owner that succession should be based on managerial ability rather than birthright.
The family office, chaired by the advisor, outsourced or hired in-house personnel such as CPAs, attorneys and wealth managers to fulfill objectives of the business strategic planning process developed earlier. This was necessary to improve profitability and reduce taxes during this transition phase.
During the phase one period of setting up a family office, a business owner such as Anderson, has access to the following services:
- Integrated tax and estate planning
- Total asset management for all family members
- Trusteeship
- Risk management
- Lifestyle services—i.e. turnkey vacations, family medical concierge
- Record-keeping and reporting
- Family continuity
- Family philanthropy
When this family office was up and running, all parties were privy to the information of the transfer of the business to the next generation. Finally the successor was named with harmony as everyone agreed that Anderson's middle son offered the best qualifications to fulfill the responsibility required for the next generation of management for the company. The company was now prepared for the final phase of the succession plan.
PHASE II--Family Foundation
The final phase of this business model is the establishment of a family foundation. Such a foundation is the final essence of the principal business owner's quest to insure continuity of his legacy for family members in generations to come. Setting up a family foundation for a business owner and his or her family is an ideal way to give funds to charitable causes while making those funds exempt from federal income tax.
The giving vehicle of a family foundation, which provides full family control, allows for extensive benefits to families who give over $25,000 a year to charity. The family foundation, having the same characteristics as a private foundation, is a foundation whose board consists of family members of the person(s) who originally funded the foundation. The board of a foundation has ultimate control over its actions. It can choose an asset manager, grant recipients, hire and fire staff, etc. Many families set up a foundation specifically to involve their family in their grant making. Foundation involvement can be an excellent way to educate younger family members about asset management, taxes, responsibility, and family values and most important, giving to charity.
Since a family foundation is a charitable organization, it is exempt from federal income tax on its income, although it must pay a 1-to-2 percent excise tax on its net investment income. The gifts made to establish a new foundation or grow an existing foundation can offer the family certain tax advantages: income, gift and estate tax deductions are available under the law.
Final Word On Succession Planning
In the final analysis, succession planning for the affluent business owner can be facilitated with the implementation of the family office and the family foundation.
For more information on this two-phase added concept tailored to successful family business owners, contact Don Wilkinson at Family Office Consulting at 800-288-7002. Link to our web site at http://www.famoffice.com.
