Transcript What all CPA’s need to know about Family Business

Carol Ryan – FBCG, Inc.
And the survey “sez….”
According to a 2007 Mass Mutual survey of
Family Businesses
 The most trusted advisor is their spouse
 The second most trusted advisor is their
accountant
 Most trusted business advisor is their
accountant
 So clearly…you are doing something right
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Why are you here?
So you can stay number one!
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Poll question

Of the following, which issues effect
your role as a trusted advisor the most?
Family issues
B. Ownership issues
C. Business issues
D. Governance issues (BOD and Advisory)
A.
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Agenda
Cover the unique traits of family
business
 Scenarios
 Ways to intervene effectively

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Unique traits of a family business
Three overlapping systems
 Generational stages
 Financial performance
 Strategic perspective
 Succession planning
 Ownership
 Values

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Systems

Different systems have different goals
 Family goals: love, loyalty
 Business/management goals: performance,
execution of strategy
 Owner goals: ROI
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The Basics: Three Circles*
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Family
1
5
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Business
2
6
Owners
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* Adapted from Gersick, Lansberg, Davis, McCollum (1997)
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Communications are easiest
when all wear the same hat
Manager to manager
Owner to owner
Sibling to sibling
Spouse to spouse
Adapted from: Lundberg, Craig C. Unraveling Communications Among Family Members.
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Adapted from: Lundberg, Craig C. Unraveling
Communications Among Family Members.
© Drew S. Mendoza, Loyola University Chicago
Family Business Center
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Poll question

Of the family businesses with which you
work, are they mostly…?
A. First generation
B. Second generation
C. Third generation
D. Fourth and beyond
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Generational Stages
Transition in a family business is seen in
generations
 Founder to sib
 Sib to cousins
 Cousin/Dynasty
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Generational Patterns in
Paradox
Family
Wings
Business
Business1st
Plan
Roots
Roots
Patience
Emergent
Emergent
Expediency
Expediency
Control
Trust
Inclusive
Contr
Selective
ol
1st Generation
Amy Schuman, Stacy Stutz, John L. Ward, FBCG ©
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Founder Generation
Financial controls and systems
 Estate and ownership succession
planning
 Mentoring successors
 Transfer to next generation
 Help developing a banking relationship

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Generational Patterns Continue
in G2
Business
Tradition
Business
Family 1st
Focus
Change
Roots
Money
Diversify
Emergent
Heart
Expediency
Process
Task
Merit
Equality
2nd Generation
Amy Schuman, Stacy Stutz, John L. Ward, FBCG ©
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Second Generation:
“Family Partnership”
Reviewing financial reporting and
management systems
 Tax consequences of various ownership
structures
 Bonus and incentive plans for managers
 Coordinating family members’ estate
plans
 Advice on business expansion and
growth reviewing banking relationships

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Generational Patterns in
Paradox
Family Members
Working In the Business
Family Members
Not Working In the Business
Business
Family
Loyalty
Invest
Freedom
Harvest
Privacy
Transparency
Democracy
Consensus
Family Branch
One Family
3rd Generation
Amy Schuman, Stacy Stutz, John L. Ward, FBCG ©
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Third Generation and Beyond:
“Family Dynasty”
Estate master plans to perpetuate the
business
 Transitional de-railers

 Shift in thinking to a stewardship way, taking
into account size of company, number of
owners, and who’s in vs. out
 Cash needs
 Valuation
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Understanding Paradox Across
Generations
1st Generation
Family Priorities
Roots & Wings
Strategic Choice
Emergent & Plan
Mgmt. Philosophy Expediency & Patience
Decision Making
Control & Trust
Ownership Focus
Selective & Inclusive
2nd Generation
Tradition & Change
Focus &
Diversify
Money & Heart
Task & Process
Merit & Equality
3rd Generation
Loyalty & Freedom
Invest & Harvest
Privacy & Transparency
Democracy & Consensus
Branch & One Family
Amy Schuman, Stacy Stutz, John L. Ward, FBCG ©
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Financial Goals
Stewards
 Willing to take a risk that may not pay off
for years
 Willing to forgo immediate profit for long
term non-financial benefit

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Family Firms
Outperform the S&P 500
Family Cos. Non-Family
(S & P 500) (S & P 500)
ROE+
15.6%
11.2%
Average ROA+
5.4%
4.1%
Revenue Growth (10-yr. avg)+
23.4%
10.8%
Income Growth (10-yr. avg)+
ROE predicted for 2006*
21.1%
12.6%
20.7%`
15.1%
EBITDA of companies still controlled by founders +6.65% **
+Business Week, 2003
*Morgan Stanley reported by International Herald Tribune, 2006
**Anderson and Reeb, 2003
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Family Firms Are More Profitable
Ward:
26% vs. 21% ROIC
(5 years)
Anderson-Reeb++:
5 – 10% S&P 500
(10 years)
Vellalonga & Amit+:
+19% Fortune 500
(7 years)
Pitcairn US:
30% Premium MV/BV
(20 years)
Morgan Stanley:
+16%/yr vs. MSCI &
18.5% ROE vs. 14.1% ROE
(5 years)
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Strategic Perspective
Future orientation is on a longer
trajectory
 “Future” means generation after
generation after generation
 Paradoxical issue of preserving the past
while innovating for the future

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Family Business Strategy and
Performance
Family controlled businesses have
higher profitability,
 more perceived quality by marketplace,
 less investment-intensive strategies and
 larger increases in R&D and marketing
spending for market share building

Source: Study of businesses in North America and Europe, John L. Ward
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Executive survey on strategic
perspective
Non-family firms
Family firms
I believe my company under-invests in
the future
43%
8%
Our planning horizons are getting
shorter
84%
59%
If I see a near-term problem, I shift my
focus to it at the detriment of longterm initiatives
74%
47%
The future will be better than the past
68%
90%
There's no doubt in my mind who will
control this company in five years
40%
82%
In our company we actively promote
the past
21%
75%
Source: Survey of 300 executives, John L. Ward
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Poll Question
I have attended the family meeting to
explain the ownership succession and
how the shares are divided.
Yes
No
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Succession Planning
Non-family Business
 Succession planning focuses on the
next leader(s) of our company
 Who will be CEO and concern for key
executives
 It’s about transition of the business
leadership
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Succession Planning
Family Business
 Ownership changes
 Ownership expands
 Estate planning
 Leadership development
 Leadership transition
 Emotional issues of “Letting Go”
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Poll question
When working with family businesses,
who do you interface with the most?
A. Owner/founder
B. Key management
C. Board members
D. Family
E. Owner and spouse
F. All of the above

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Poll Question
Who do you think you should be
interfacing with the most?
 Owner/founder
 Key management
 BOD members
 Family
 Owner and spouse
 All of the above

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Public, Non-Family Businesses vs.
Thriving Family Controlled Businesses
Popular Practices
Ownership
Philosophy:
Stakeholders
Family Businesses
Owners as traders:
Quick profits
Little loyalty
Owners as stewards:
Involved in enterprise
Focused on long haul
Business
Philosophy:
Top Managers
Tactically, financially driven
Quarterly numbers are king
Core competencies and
competitive focus suffer
Strategically, mission driven
Long term is king
Profound investments in
business and its people
Social Philosophy:
Staff &
Relationships
Individualism
Market/bureaucratic control
One-shot transactions
Extrinsic incentives
Collective, shared values
Clan control
Lasting relationships
Intrinsic incentives
Managing for the Long Run:
Lessons in Competitive Advantage from Great Family Businesses
Danny Miller and Isabelle Le Breton-Miller, Harvard Business School Press, 2005
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Ownership in Family Business*
Owners are related by blood
 Can be some “family of affinity” owners
 Ownership is passed down and/or gifted
 Owners can be disengaged
 Owners can be Managers, on the BOD,
on the Family council

* For the most part
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Ownership in Family Business –
Best Practices
Educating owners
 Focusing on making owners responsible
heirs
 Owners are part of family meetings and
help build values and value statements
 Owners have a closer relationship with
the fiduciary board

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Values
Family Businesses have them
 Non-family Businesses have them
 How are they different?

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Family vs. Non-family Business
Values – Research supports





Family firms have stronger “people” values
than non-family firms
Family firms are more likely to put
customers and employees ahead of profits
Research show non-family firms have more
commercially-oriented values
Family firms have more communityoriented values
Family firms value statements are more
permanent (there are more traditions and
artifacts to reinforce them)
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Scenario One

Pop asks the CPA for a plan to transfer
ownership equally to three sons and
control to one of the three

What is your first question to Pop?
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Scenario two
You are at the family meeting presenting
the ownership structure. No one asks a
question. Do you assume?
 They are afraid to?
 They are so confused they can’t
articulate a question?
 They are bored?
 All of the above?
What do you DO???

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Lessons?
Do not
 Assume you’ll be successful short term in
the family business market
 Assume that tax minimization is the only
goal of the planning process
 Assume that all families have the same
goals
 Be afraid to talk about values, goals,
aspirations for individual, family and
business
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Tensions often originate in
predictable spheres
Successors preparedness
 Non-family management preparedness
 Senior preparedness
 Customer preparedness
 Family preparedness
 Spousal preparedness

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Questions for the family to ask
themselves?











How are we going to behave toward one another?
How are we going to make decisions?
How will we handle conflict and disagreement?
What do we say about each other to others, especially spouses,
parents and employees?
How will we manage our public image?
What information do we pass along to each other from our parents
spouses employees and others?
If I leave, can I come back?
Are we two (three, four) families or one?
What steps do we as a family need to take to prepare cousins, our
children for shared responsibilities of family ad business?
How can we prepare our children for wealth and its responsibilities?
Should we have a family foundation?
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Questions for you to ask the
family
What is the purpose of the money?
 Does the family have a shared vision for
the assets’ deployment two generations
ahead?
 How can the family benefit from owning
an asset together?
 How can we prepare children for the
responsibilities of wealth?

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MORE Questions for you to ask
the family







How will you as siblings make decisions
together?
How many families are you?
How much should we give to the kids?
How much should we give away?
How will the next generation spouses be
prepared?
What is the vision of the next generation?
Can I work with them, too?
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Dangerous assumptions made by
advisors
The spouse is a potential adversary
 The kids are irresponsible
 The money will ruin the children
 Tax minimization and wealth
enhancement are always their #1 and
#2 priorities

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One last thought. . .

In order for an advisor to act as a
quarterback for a business-owning family
client, s/he must be able to read and
control the offensive line-up. Equally
important, s/he has to read the entire
defensive line, not simply the position of a
single player.
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