Many small businesses are family owned and run. After all, that's the American Dream.
What parent hasn't dreamed of turning a good idea and hard work into a booming business and passing it on as his or her legacy to children and grandchildren? Unfortunately, these stories don't always end happily ever after.
Family ties and relationships can frequently cloud critical business decisions and make them more difficult.
According to Cindy Iannarelli (known to most as Dr. Cindy), founder and director of the Center for Family Business at Indiana University of Pennsylvania, every family business has issues, but many don't want to deal with them. It's not uncommon for families to look at facts and figures and plan accordingly, but completely avoid other critical issues.
For example, passing a business from one generation to another while minimizing taxes is one factor. Another is how to ensure that the business is passed to the people who have the right skills and knowledge to continue to run it profitably.
Iannarelli consults regularly with family business owners in helping them to address these concerns. She frequently sees businesses, large and small, making the same mistakes. Among the mistakes:
Treating all children the same by leaving an equal percent of the business to each one. The reality is that children have different skills and interests.
It's just as unfair to burden a child who is uninterested in the business with the responsibility as it is to hinder the child who has always been active in the business with having to deal with his or her siblings when making decisions. Treating your children fairly doesn't always mean treating them equally.
One solution is to pass the company stock only to the children who are interested in the business and pass other assets to those who aren't.
Leaving the business to a spouse who has not been actively involved in the business. This is frequently done so that the surviving spouse doesn't lose control of what is probably the family's largest asset and doesn't have to look to the children for support. Unfortunately, this can cause confusion and resentment during a time of critical transition.
More attractive solutions include forming a board of directors involving key employees and family members or developing a buy/sell agreement that would enable a child to purchase the business.
If passing a business from the first generation to the second is difficult, it only becomes more so as time goes on. Consider a couple with three children which needs to deal with the personalities and opinions of all three and their spouses. Now imagine each of those three children has three children of their own and they are passing the business on 30 years later.
When developing a succession, it's important to work with a facilitator or adviser who not only will address the financial issues but the emotional issues as well. Legal, financial and tax issues need to be balanced with what you're actually trying to achieve.
Saving on taxes seems insignificant if the business is closed and the family is torn apart. The Center for Family Business offers quarterly programs in Indiana as well as Monroeville. You also may want to attend the Distinguished Family Business Day honoring the Howard Hanna family Nov. 6. For details regarding these programs, call (724) 357-2106 or visit www.drcindy.com.
Ruth Forsyth is a certified financial planner with The Acacia Group. She co-hosts "All Things Financial" every Wednesday from 7 to 8 p.m. on KQV Radio, 1410 AM. Reach her at (412) 922-4360 or at email@example.com.