FAMILY
BUSINESS
SECRETS
Published by Katz Financial LLC at Smashwords
Written by Irving Katz, MBA
Copyright © 2010 by Irving Katz
Cover design by Brandon Newby
The stories illustrated in this book are real; however, the character and business names have been changed to protect the privacy of my clients.
All rights reserved. No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording or by any information storage and retrieval system, without the written permission of the publisher, except where permitted by law.
For information, address Katz Financial, LLC,
2372 Morse Avenue, Irvine, CA 92614.
All trademarks are owned by their respective owners.
ISBN 978-0-9829403-1-0
Printed in the United States of America
10 9 8 7 6 5 4 3 2
Dedication
Your Family Business Coach: Irving R. Katz
This book is dedicated to family business owners, their families and their advisors. Their innovation and hard work have made our economy the envy of the world.
Without my clients this book would not have been possible. Working with you continues to give me purpose and joy. It is why I get up every day, excited about the work we do together. You have been my students and my teachers. For that I am grateful.
I am thankful to my wife Kristine, and my family who have supported me in all my endeavors.
In this day when people are questioning the value of education, I know I am grateful to my many teachers and their educational institutions. The graduate education I got from Indiana University, Kelly School of Business and The American College made me want to know more. They taught me to pursue life-long learning and for that I am grateful.
Acknowledgements
My clients are referred to me because of horror stories they have heard or witnessed and want to prevent from happening to their company. They usually start by telling me some variation of the following scenario:
1. The death of a business owner or key employee has left the company without a leader.
2. Taxes have crippled the business’ ability to function. Estate taxes, due within nine months, force liquidation of the business.
3. Stroke or other debilitating illness has paralyzed the company.
4. Lawsuits threaten the livelihood of the business and the individual. This book is an introduction for those studying family business and outlines what it takes to successfully transition the business to future generations. It provides guidance that enables the family business to be passed to descendants—if that is the goal.
I hope to persuade business owners to allocate the time and resources to prepare future generations to take over the family business. This book is a practical resource for family businesses to set themselves up for sustained success, generation after generation.
Foreword
Reasons for Writing this Book
I have written this book because family business is in trouble and needs a crash course in survival. Every day I talk to family business owners who are working hard in their businesses: dealing with tactics, getting things done, and trying to cover all the bases. They take on too many responsibilities and waste time on activities they should delegate. Everyone else comes first, before themselves or their families’ future. Every day I talk to business owners who feel they are doing the best they can, but are not making progress.
The family business owner is like the person who goes into a swamp to drain it, and instead gets attacked by alligators in the water. Happy to have survived the alligator attack, that person has now forgotten their original job was to drain the swamp. They are just happy to be alive. The family business owner (the swamp drainer) goes to work every day and gets dragged into details (alligators) they should not be handling. They get things done, but never work on the strategic planning and actions needed to build a more profitable and efficient business.
These owners work in the business, but have not really taken the time to work on their business. There has been no strategic planning—no stepping back to consider the business as a whole and in which direction they want to steer it.
If family business owners start working on their businesses, we will all benefit. The purpose of this book is to educate owners of family businesses, their families, and their advisors that the time spent working on their business is time well spent. This guide is not only about the why, but also the how.
TABLE OF CONTENTS
Preface: Why I Wrote this Book
Case Study: A Family Business Obituary
Why You Need to Plan Now
Confronting Challenges Most Business Owners Face
Why Some Family Businesses Succeed
Why Some Family Businesses Do Not Succeed
Family Business: The Backbone of America
Family Businesses and the Economy .
Why Is It So Important for Family Businesses to Succeed
Large Companies That Started As a Family Business
Chapter 1: Is Your Business Stable Enough to Be Passed Down?
Self-Assessment: Overcoming Challenges
Case Study: Giving Up Your Toys .
Moving Forward: Action Items to Overcome Challenges . . .
Stay Cash Flow Positive .
Continue to Grow. ..
Master Leadership . .
Incentivize Key Talent.
Achieving Results: Give Employee Incentives .
Next Steps
Chapter 2: Do You Have a Written Strategic Plan?
Self-Assessment: Strategic Plans.
Case Study: Self Assessment Leads to Self Discovery
Moving Forward: Develop a SET™ Plan. .
Achieving Results: Create a Plan of Action. .
Next Steps. ..
Chapter 3: Setting a Foundation . . .
Self-Assessment: Does Your Business Have a Foundation? .
Case Study: Storytelling.. . . .
Moving Forward: Maintaining Company Protocol . .
Mission Statement .
Team Communication
Planning Family Meetings
Family Business Council
Family Well-Being
Insurance Coverage
Disability Insurance
Life Insurance
Buy-Sell Continuity Agreement
Employee Issues
Non-Compete Clause
Estate Planning
Leaving a Legacy
Achieving Results: Best Practices for Family Meetings
Next Steps
Chapter 4: How to Grow the Family Business
Self-Assessment: How Independent Is Your Business of You?
Case Study: Planning Will Prepare You for Life’s Surprises
Moving Forward: How to Grow the Business
Maintain the Core Business
Expand Your Product Line
Create New Customers for Your Existing Products
Create New Products for Existing Customers
Attract More Buyers from the Same Market As Your Current Buyers .
Diversify Your Sales Methods
Expand Geographically to New Cities, New States and New Countries
Achieving Results: Developing a Growth-Oriented Structure
Grow Through Innovation
Next Steps
Chapter 5: Early Preparation for the CEO’s Departure
Self-Assessment: Succession Planning
Case Study: Kids Fighting Over the Last Cookie
Moving Forward: Choosing a Successor
Start with Family
Evaluating a Potential Successor
Choosing Your Favorite Child . .
Achieving Results: Develop a Profile of Your Successor .
Training Your Successor ..
University Family Business Studies. ..
Provide Mentoring
Next Steps. . . . .
Chapter 6: Selecting and Training the Successor
Self-Assessment: Transitions.
Case Study: Wearing Different Hats
Moving Forward: Transitions
Delegation
Public Announcement
Achieving Results: Preparing Your Business for Transition
Next Steps. ..
Chapter 7: Can You Live on Your Budget?
Self-Assessment: Can You Live on Your Budget?
Case Study: Planning for Retirement Is Work!
Moving Forward: Ideas to Occupy Your Time
Travel
Hobbies
Volunteer
Entrepreneurship
Moving Forward: Protecting Your Assets Before the Transition
Achieving Results: Plan Your Happy Life
Next Steps
Chapter 8: Putting It All Together
Case Study: Planning Started and Not Finished Is Better than Planning
Never Started At All
Moving Forward: Don’t Leave Your SET™ on the Shelf
Next Steps
Achieving Results: A Review of the SET™ Plan
Endnotes
FAMILY
BUSINESS
SECRETS
How to keep Your Business Thriving from Generation to Generation
by Irving Katz, MBA
Family Business Coach
Published by
Katz Financial, LLC
PREFACE
Why I Wrote This Book
Importance of Family Businesses & Challenges to Survival
“Most new jobs won’t come from our biggest employers. They will come from our smallest. We’ve got to do everything we can to make entrepreneurial dreams a reality.”
Ross Perot, Texas Billionaire, Philanthropist, Business Man & Candidate for U.S. President
A Family Business Obituary - Case Study
In order to keep up with new technologies, a family-owned automobile parts manufacturing company transitioned to a capital-intensive company. The successful company represented about seventy-five percent of the family’s net worth. Of the family of seven, both parents and only two of the five children were active in the business. The parents owned ninety-five percent of the outstanding stock, with the remaining five percent owned by the lawyer who originally incorporated the company and took shares of stock in lieu of fees.
The parents wanted the business to stay in the family, but had not planned for the future. They were still young and had not yet decided which of their children would run the company. The company had a multi-million dollar key man life policy for the company’s CEO (the father). Their standard wills allocated the balance equally to the five kids.
On a fateful skiing trip, both parents and an inactive, married daughter died in a freak accident. The life insurance and a majority of the non-equity assets paid the estate taxes. The four surviving children were only left with about twenty percent interest in the company; the deceased sister’s share went to her children.
Aside from the salaries for the two working family members, the heirs did not receive a dime. The deceased sister’s husband convinced the inactive siblings to join him in voting the two active siblings out of a job. One of the two terminated brothers sued the company for wrongful termination. Next, the children took what they could out of the company, completely neglecting the five-percent stockholder: that stockholder sued, claiming self-dealing and corporate waste.
Just four years after the accident, the company went out of business. Why did it fail? Some of their problems could have easily been solved with a business continuity plan and an outside board of directors for counsel. Though they did hold family meetings to discuss the business, the family did not work together. As a result, these meetings were never about helping the company succeed, but rather how the three non-active owner-families could take the most money out of the business.
In this case, poor planning caused chaos in the business and conflict in the family. The parents had known what they wanted for their business, but never created a plan to ensure their vision would become reality. This great family, who had created millions in wealth over a generation, lost it all in just four years.
Why You Need to Plan Now
No one wants to think about post-death scenarios for their business, but without a succession plan, key employees may leave, the business could be dismantled, and lifetimes of hard work and sacrifice may disappear. Succession planning is disaster planning.
Have you considered the following?
If I died suddenly, who will run the business?
Is there a business agreement and business continuity agreement in place?
Are those wishes also explicit in my trust?
Could my premature disability or death force my company into liquidation where it is sold for pennies on the dollar?
Can a costly lawsuit destroy my company? If yes, can we take steps now to both prevent this suit from happening and also minimize its damage?
Has my family accumulated assets outside of the business to protect them against business problems that could deplete the family income?
Often, a large percentage of family wealth is tied up in the business. Having little or no debt is a competitive advantage for family-run companies. However, it puts the family at risk for financial disaster without significant reserve funds to protect it against creditors, predators and frivolous lawsuits.
Many people make a living suing business owners. Unfortunately, most business owners have done little to protect their personal assets from lawsuits. Many assume that forming a business entity, like an LLC or Corporation, is enough—but it only provides some personal liability protection.
There are many ways to protect personal assets. For example, purchasing an umbrella policy protects against personal liability. These inexpensive policies can provide millions of dollars of coverage. Attorneys recommend creating different corporate entities for each type of business property. For example, a business that owns equipment as well as a building may have three separate companies: one company will house the operating company; one will hold the real estate; and a third will hold the equipment. If there is a large suit or business reversal, all three companies need not be lost.
When the bulk of a family’s assets are tied up in the net worth of the business, and creditors win cases against the company, the owner and his family can be personally wiped out. Therefore, we recommend funds be established as soon as possible and moved to family accounts. Once business resources have been depleted, it is too late.
Confronting Challenges Most Business Owners Face
The biggest challenges that family business owners face are survival from generation to generation. The great majority of family businesses cannot keep their doors open. They go out of business, get liquidated, or are sold, forcing future generations to start all over again.
Catch phrases have taken hold to describe this problem, not only in the United States, but also in other areas of the world. In the U.S., it is “roll up your sleeves” to do the grunt work as you establish your business. A skilled tailor stops making clothes and creates his own clothing designs—and a fashion company is born. When his children take over, they use the business to support entitled, lavish lifestyles. Their children, the founder’s grandchildren, take over a depleted business with big debt and slim prospects. This company is one of 88 in 100 family businesses that do not make it to the third generation. Now the third generation is again in “roll up your sleeves” mode, analyzing what went wrong and how to start over again.
In Asia, it is “rice paddies to rice paddies” in three generations. A rice farmer creates a company that processes rice and creates new food products. The second generation lives lavishly, and milks the business without making it better; the third generation inherits a dead business with debts and little cash. The grandchildren lack the knowledge and skill to save the business, so the business dies. They must repeat the cycle of going back to the rice paddies to start again.
The purpose of this book is to encourage you to evaluate your existing operational and succession plans. Are they effective? Have you performed a fire drill to test them? Do you know how to get help if needed?
I will discuss several major challenges that businesses face.
Once a new leader is selected, the process is never complete until the reins have been transitioned from the current leader to the next. Bridging this gap takes thought, planning, and diplomacy within the family.
There will be family members who are fearful of the changes. They will need to be comforted and facilitated in the shift. In some instances, professional counseling may be needed.
How leadership communicates the succession decision and plan to family and employees can significantly affect the outcome. If other family members or key employees suspect favoritism as a factor in the decision, the successor will lack credibility and may face authority issues. If, however, leadership communicates that the successor was chosen through a well-defined process based on objective benchmarks, the transition will likely be smoother. The message to be transmitted is clear: the successor is capable, well regarded, and completely in control.
Why Some Family Businesses Succeed
Family businesses succeed because they have strong competitive advantages:
They are well financed, especially when they get to the second generation and beyond. We have seen economic storms destroy businesses that relied on borrowed money. Companies with heavy loan obligations often cannot weather a severe economic downturn. Family businesses commonly self-fund their businesses with internal family investments.
The leaders have a long-term perspective and plan. They are not trapped in the short-term mindset many companies are forced into by shareholders. Therefore, they do not make knee-jerk, “quick fix” decisions from quarter to quarter. Their long-term strategies are focused on company sustainability from generation to generation.
They focus on customers and market niches that result in higher returns on investment. Family businesses earn 6.65% in higher returns than non-family businesses.
Management has a desire to protect the family name and reputation, which results in better product quality and service. Better quality and service often means higher profits. Companies can charge more for their products with a better customer value proposition.
Why Some Family Businesses Do Not Succeed
The owner procrastinates. They keep saying: ‘There is no rush; I have plenty of time. One day I will get around to it.’ For many, that day never comes. Disaster strikes—a sickness, illness, or accident stops everything and exposes the lack of planning. The business is ruined; the family in chaos. Business owners have seen this happen to friends and colleagues, yet still they never get around to addressing it. No friend, family member or advisor ever insisted they create a plan. During my years as a Family Business Coach, I have seen this outcome many times.
They don’t assess their business. Time must be spent on self-appraisal so that someone can realize there is a problem. The business owner’s most trusted advisor needs to quarterback this planning. The family business owner alone cannot manage the planning because they are wearing too many hats. They are overseeing marketing, finance, cash flow and profitability, all while acting as the boss and parent. Just as specialists are called in to improve the business, experts must structure and execute the SET Planning™. They don’t seek outside counsel. Many business owners are action-oriented, type A personalities. They have succeeded because they saw a need, and filled it quickly and profitably. They do not like to sit around talking to advisors, and have not taken the time to read 300page books written by PhDs. They want the information required to make decisions, so they can get back to the baby they love, their business.
FAMILY BUSINESS
The Backbone of America
Family Businesses and the Economy
Families and family businesses have always been the strength of America. Nowhere else in the world have so many risen from modest means to great success. From the couple that owns the neighborhood store to the Marriott Corporation, family business is the backbone of the American economy.
But that backbone is fracturing. The statistics of family business survival are discouraging:2
Of every one hundred American family businesses, only thirty-three make it to the second generation.
Of these thirty-three American family businesses, only twelve make it to the third generation.
Only three survive to the fourth generation.
Factors that could cause premature failure of a family business could be: family strife; inherited, rather than earned, management roles; and differences in strategic goals. Many times, a company that the founder intended to last several generations ends up crashing and burning. Not only is the business shaky, but the relationships between siblings, parents, children and extended family may be damaged forever.
Why Is It So Important for Family Businesses to Succeed?
Consider these facts:3
Family-owned and/or family-controlled companies account for approximately 90 percent of incorporated businesses in the United States.
There are about 27.5 million businesses in the U.S.according to the Small Business Association Office of Advocacy.
It is estimated that there are almost 25 million family businesses in the U.S.
One third of all Fortune 500 companies are family-controlled, and 60 percent of publicly traded firms are under family influence.
While many family businesses are small, there are 138 family businesses in the U.S. with revenue greater than $1 billion in annual sales.
Family firms account for 64 percent of our gross domestic product—approximately $6 trillion.
Family businesses have contributed 86 percent of all jobs created in the last decade.
Family businesses have had a major impact on America’s history. Beyond jobs, family businesses are innovative and produce many new products and services. Family businesses embody an entrepreneurial spirit and demonstrate the drive to “build a better mousetrap.”
Many businesses, and the families behind them, are at the forefront of educational and philanthropic endeavors. Their charity includes family foundations for the arts, feeding, clothing and sheltering the homeless, funding medical and scientific research. One only needs to look at our finest universities to find professorships, programs and buildings endowed by families and their businesses.