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Thursday, Mar 28, 2024

Seminar Shows The Pitfalls of Running a Family Business

Ernest Doud has seen the good and the bad in the family business world from children of business owners who had drug problems that were costing the business money to a family that was smart enough to hire outside management and now own a multi-billion dollar company. Starting and growing a family business makes for a tough life under any circumstances, but Valley experts say the toughest part of a family business owner’s life may be giving it up and passing it onto the next generation. Earlier this month, Doud, a family business consultant and attorney William Staley presented a seminar to alert family business advisors, accountants, attorneys and others, to the obstacles that those companies often encounter. Doud, president of Doud Hausner & Associates, said that working as a family business consultant requires psychological knowledge as much as requires business acumen. In fact, several of his partners have backgrounds in psychology and therapy. Such expertise comes in handy when people have a hard time separating business and family decisions. The most successful family businesses, he said, have founders who recognize their limitations as managers and have a reasonable long-term plan for the company. “One that comes to mind, they’re just a second generation business, the dad died fairly early, the business was about half a billion dollars in sales. They built it up to about a billion and a half and the owners, the family, got together and said ‘we don’t have the talent to keep this going,'” Doud said. “They brought in outside executives, they created a fiduciary board with a majority of outside directors. It’s now a $2.2 billion company owned by six brothers and sisters.” Things do not go that smoothly for most businesses, however. “It has not been unusual for us to get a call occasionally from an attorney who says something like ‘Ernie, six months ago I just completed the world’s finest buy/sell agreement for one of my family business clients. It’s been on their desk for six months and nobody’s signing it,'” Doud said. “Those kinds of blockages are good indications of something wrong in the system.” Waiting too long Doud said that the mistake that many family businesses make is waiting until problems are well out of their control before seeking any help from consultants, attorneys or other advisors. About 80 percent of the businesses in the country are family-owned, and over half of the country’s employees and the half of the gross domestic product depends on them being run intelligently. Most family businesses want a successful business and a tranquil family life along with some personal well being, Doud said. Too often they end up with under-performing businesses, family conflicts that never get resolved and uncertain personal well-being. Scary statistics back up Doud’s premise. Only twenty five percent of family businesses survive long enough for the second generation to take over, and thirteen percent are around long enough for a third generation to take the reigns. Sixty six percent of them have no written strategic plan, and although between one third and one half of family business CEOs are expecting to retire in the next five years, they have not chosen a successor. It’s a dangerous position for business owners that do not want to see their business leave the family. Without serious planning and discussion in the family, owners often end up unprepared and forced to sell a business for much less than it is worth in order make any money. Owners forced to sell because they have no plan to take a business to its next stage end up dealing with what Doud calls “bottom feeders.” “People like us, with a little bit of money who are trying to buy an income. People who look at a family business that’s in stage one and say ‘they haven’t taken advantage of the opportunities, but I see them. It’s not worth very much, I’m going to buy it cheap and I will take advantage of the opportunities.” Families that could not find a way to move from owning a relatively successful small business need to find ways to invest in independent, income-producing assets, Doud said, which starts from making sure a business is run by the right family members after the first generation retires. “I had a phone call yesterday with the advisors of a family business in Orange County. For about 10 years Dad, who was second generation, has been promulgating the myth that his first and second can work very well together, and that his first son is going to be groomed to take over the business,” Doud said. “And the reality is that the best candidate to lead that business is the number two son, and the worst possible candidate to lead that business is the oldest son.” No equality Family heads think that the idea of equality is just as important in running a business as it is in raising a family but, Doud said, the opposite is true. “Interestingly enough, equality has no place in family businesses,” he said. Meanwhile, said Staley once the business reaches a point at which there is income flowing into owners’ hands, parents should incorporate giving money to their children as they think about passing on the business. “Give to the kids until it hurts,” Staley said. “Paying gift taxes is better than paying estate taxes on some assets.” After 2008, tax exemptions on gifts are increasing, so Staley said business owners should be sure that financial advisors should be abreast of all the relevant estate law changes. Parents can also make sure that a business is taken care of and that all of the children are happy, by splitting up business and property interests. Giving ownership of a business to the right heir and real property holdings to another can save a family’s emotional and financial well-being at the same time.

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