1. Is there an objective process for the younger family member to develop? Is there a measurement for performance and accountability in place?
2. Is there a business plan in place that operates parallel with the succession plan? Succession and business planning need to operate hand-in-glove. If you want your 30-year-old to run the business, you want to know that it is going to be a healthy business in the long-term.
3. Pace yourself. The older, entrepreneurial owner often turns to his or her attorneys and accountants for advice, usually about gifting, tax consequences and similar topics. But if the entrepreneur hasn’t developed a succession plan or developed the management skills of the successor, or if there are two children in the business who both want leadership roles, there can be problems. If one starts giving away shares of the business prematurely, the entrepreneur may be creating long-term problems.

Published in Valuation Magazine 2012 Q1

For full article go to

http://www.valuation-digital.com/valuation/20121stQ/?pg=29&pm=1&u1=friend

Without structure for setting boundaries and managing expectations, three outcomes may result:

• Family members employed in the business do not have clear performance guidelines, are not managed according to the business standards, and the business suffers
• Family members employed in the business are subjected to more stringent expectations than outsiders or one family member feels at a disadvantage to another.  The result may be a sense of unfairness that can lead to conflict
• The non-family employees may become confused and perhaps resentful due to the multiple “standards” operating within the company culture at any one time, and productivity declines significantly.

Many business owners find balancing multiple roles within the business operation and the family unit difficult and uncomfortable.  One cure is for family businesses to look at the big picture and understand that it is possible to separate company ownership and management from family membership. A performance evaluation system that everyone understands is one example of a structure that can help create the necessary environment for the business to run more effectively:

• It supports the business and protects the family dynamic by creating a process for setting baseline job qualifications, developing the requisite management skills, and assessing the individual’s progress.  This levels the playing field and places similar expectations and standards on the family member as apply to a non-family employee
• Compensating family members for the jobs they perform based on industry standards helps to eliminate a sense of entitlement or, on the other hand, “golden handcuffs” that coercively bind a family member to the business

Family owners who do not work in the business feel more comfortable with compensation of family managers if performance criteria are clear and metrics are established.

Best practices for managing a family business and increasing accountability include:

1. Establish a performance review system that evaluates employees regardless of family ties.  Further increase objectivity by having a non-family employee or outside advisor take some responsibility for the review
2. Set compensation levels that relate to performance and job function.  Develop profit-sharing mechanisms outside of performance that benefit all family members according to the plan of ownership
3. Prepare a non-binding “Family Business Partnership Charter” that codifies the principles and relationships that will operate in the business.  Use this process to improve communication and prevent future misunderstandings. Use this as a basis to examine binding agreements such as Wills and Operating or Shareholders’ Agreements
4. Prepare a “Family Business Participation Plan.” This is especially useful when children in the family join the business.  The plan can:
   1. Set rules about who gets to join the business
   2. Determine if there must be a position open and with what documented requirements before adding a family member to the payroll
   3. Provide for how to develop family members’ skill sets
   4. Outline accountability and compensation rules
   5. Describe how non-working family business owners can learn good shareholder skills and how they are to be educated about business investment priorities.

Planning ahead even in the absence of conflict can improve the prognosis for the business and the family.

For full article published in Fortune Magazine clic here

http://management.fortune.cnn.com/2011/11/08/when-your-parents-pay-your-salary/

Edward Rosenfeld was president of International Furniture Rentals in Hawthorne until it was sold to Warren Buffett’s Berkshire Hathaway. Today, he serves as a consultant to other family owned businesses and has seen plenty of role confusion in them. “If there are other family members in the business, their relationships with the founder are fraught with emotion. The founder may not always be aware of when he or she is functioning as father or mother, boss, or investor.” He adds, “They are often fearful of conflict and so are frozen in inertia or are caught in a conflict that is destructive to the business.”

As Rosenfeld explains, “Any business has to be able to recruit and retain good employees. You have to recruit a family member into the business with open eyes.” After all, “One of the advantages of being an entrepreneur is creating a nice situation for your children, but if that’s the only criterion for hiring a family member, the other employees won’t respect that person.” In addition to an advisory board, he recommends a mentoring system, where a non-family employee works with the new hire to ensure equitable treatment. “The family member shouldn’t be at the whim and mercy of their parent,” he says.

Read the full article:

http://www.westchestermagazine.com/914-INC/Q3-2011/The-Family-Business-Soap-Opera/

“When things like phone hacking and spying are part of the corporate culture it makes you wonder what the family culture is like.”

Edward Rosenfeld in Forbes Magazine November 11,  2011

For full article click here  or copy and paste into your browser:

http://www.forbes.com/sites/friedaklotz/2011/11/04/the-lessons-of-succession-planning-for-a-family-business-murdoch-style/

Is Your Business Prepared for Your Exit? Creating a Business Exit Plan is rarely something that we think about in the day-to-day rush of our businesses. However, someday, the day will come when someone else will take the reins. Below, we have a few questions you should ask yourself if you haven’t yet thought about the day you’ll exit your business.

Do you know how much money you need for the rest of your life?

A financial planning professional can put a number on “your number”. Make sure you can get it. Have you developed a management team and business organization that is capable of running the business in your absence? In other words, have you structured your business as an investment? You need to make your business more than just “you”.

Have you maximized the value of your business?

How do you know if you have? Do you have a written strategic business plan or is it all in your head? A failure to plan is a plan to fail, it is said. A good plan does not have to be lengthy but a written plan will be invaluable in defining and achieving your goals. It has to be a “living” plan, not one that just dies on your shelf.

Have you had a formal valuation of your business?

Business owners often use a “rule of thumb”, or the IRS value for estate taxation as their business value. A reality check is important and it is worth getting a formal valuation.

Have you identified whether you will sell your business to an outsider, insider or give or leave it to a family member?

While organizing your business for maximum value is necessary for any exit strategy, specific actions are necessary to make a smooth transition, especially if the sale is to a family member.

Do you have a post exit “Lifestyle Plan”?

Often business sellers are selling for the wrong reason and then want to buy back in to a business owning situation. Make sure your motives for selling are clear and what you will do next so the boredom does not destroy your happiness or motivate you to buy a new business just to stay busy.

Do you have a pre-exit contingency plan to mitigate any dangers your exit plan may face?

A loss of key customers, employees or managers will derail your plan. Proper planning and insurance can help mitigate these dangers.

Have you done your tax and estate planning to mitigate the taxes your exit will generate?

Often business sellers wait until they have a buyer and then ask about how to save on income and estate taxes. Most strategies for saving taxes take at least a year and as much as 3 or more years. The time for restructuring your business is well in advance of your anticipated sale date.

Have you put together your exit planning team and designated a Quarterback for your team?

This may include your lawyer, accountant, M&A advisor, insurance professional and financial and/or business consultant. Do they have the specialized experience beyond your day-to-day needs to accomplish your goals?
If you haven’t thought thoroughly about each of these questions, I recommend you do so now. Schedule some time with your lawyer/accountant/financial planner until you are comfortable with the answers. If you would like assistance in creating your business exit plan, please contact me, Edward Rosenfeld, directly. I’d be happy to hear from you.