Never expecting or planning for change is a major risk for a business. Families who own a business should expect and embrace change. They should also control change as much as possible and then communicate why a change is taking place and the plan to make the change effectively, says Rich Snebold, co-founder of The Family Business Center at NexTier Bank.
Change can be difficult for family businesses because relationships and emotions are involved, says Snebold. Some of the most successful family businesses utilize the outside advisers to help them work through changes. Outside advisers can benefit a company because they are looking at a situation with an unbiased opinion and they understand both business and personal issues and the investments involved.
Smart Business spoke with Snebold about how to plan for the unexpected and to utilize the proper sources for guidance to ensure the success of both the business and the family.
How do personal changes such as death or divorce affect a family business?
It is necessary to plan for key events that may occur such as the death or disability of a business owner to create a peace of mind for the family and the business.
A set of documents sometimes referred to as a ‘family answer book’ should be developed to alleviate some of the questions and stress of unexpected change. This book should include a letter of direction describing the future of the business. Copies of all important documents such as a will, business agreements, tax returns, etc. should be in the book.
A buy/sell agreement is needed if there is more than one owner that details what will happen to the deceased or disabled owner’s share of the company.
These decisions should be communicated to the family as soon as the book is developed. Conversations explaining the decisions and the rational need to occur so the family understands.
Divorce is difficult to deal with in a business, so an attorney should be utilized when developing a company to plan for such events. Expert approaches can direct a company on what should be done if someone who is no longer part of the family still owns a share of the company or prevent it before it happens.
How can a family-owned business prepare for the retirement or loss of an executive member?
So often, business owners put everything they make back into the business to make it successful. Most owners would not have enough money to live the lifestyle they are currently living if they had to retire today.
Business owners cannot look at the business as their sole source of retirement income. If a family business is passed down to children, they should not be responsible for financing their parents’ retirement. That can be too stressful and strain family relationships.
Planning for retirement is easier the earlier you plan. A portion of the income should be set aside in a retirement plan and outside investments to provide retirement options in the future. Outside advisers can help owners determine the best plan for their future.
For business owners who have not planned properly for their retirement, there are plans that allow owners to put large sums of money away for their retirement. The IRS has also approved the 419 plan which allows business owners to have their companies pre-fund their future health insurance premiums with tax deductible business dollars.
How should a family decide the direction in which the company is headed?
The most enlightened families put together a team of both family members and business experts to make decisions about the business. They should determine what products are needed to further the success of the business.
New family employees are often the best at developing new ideas because they are looking at the business with a fresh set of eyes. A forum should be developed to test these ideas.
Only the key business owners should be involved in the planning process. It may also benefit a family business to bring in employees who are not family members as business decision-makers. After the planning process is complete, the plan should be shared with all family members.
How can a company successfully separate business and family?
There is no real way to separate the family from the business. The business becomes a family identity. It is important to enjoy the positives of a family business, such as a family working together. A family should separate things that may have a negative influence. Communication is necessary to make a family business successful.
RICH SNEBOLD is the co-founder of The Family Business Center at NexTier Bank. Reach him at email@example.com