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Its More Than Business. Its Family.
Navigating the complex dynamics of decision-making can be one of the biggest challenges to family business success.
Wade Wyant, Executive Advisor/Scaling Up Coach at Red Wagon Advisors of Ada, suggested ways to address those challenges when he spoke with Sheri Welsh for The Welsh Wire podcast, sponsored by the Family Business Alliance.
Family businesses perform better in highly competitive environments if they invest in risky activities like mergers and acquisitions, according to new research on risk aversion versus performance in family-owned firms.
Ana Gonzalez, Director of the Family Owned Business Institute and Assistant Professor at the Management Department at Grand Valley State University, talked about her findings when she was interviewed by Sheri Welsh for The Welsh Wire podcast, sponsored by the Family Business Alliance.
New research on gender diversity in family businesses shows that women tend to be more upbeat about business performance than men — but that changes if the women are in leadership positions, according to Ana Gonzalez, Director of the Family Owned Business Institute and Assistant Professor at the Management Department at Grand Valley State University. She was interviewed by Sheri Welsh for The Welsh Wire podcast, sponsored by the Family Business Alliance.
This article was originally published by Warner Norcross + Judd and has been republished with consent.
Bruce Young
Partner, Warner Norcross + Judd
If you have spent your career preparing to take over the family business, it can be frustrating to wait for the senior generation to decide that they are ready to retire. It also may be hard to understand why mom or dad chooses to keep putting in the long hours and would rather deal with the challenges of the business instead of retiring and enjoying life.
For the next generation, the waiting is even more difficult if your parents have not created a succession plan. This causes great uncertainty regarding the role each person should be preparing for and how a successor will be chosen if a parent passes away without a plan.
Sometimes the wait exists because the parents may still enjoy running the business. They likely are in no hurry to let go of a company to which they have devoted their lives. Or, parents may not wish to deal with the complex emotions, the fear of the unknown or the hard feelings associated with choosing successors. These issues and others can create barriers to planning for a transfer of the business to the next generation.
If you want to help your parents focus on succession, it is important to understand the issues behind their reluctance to do this planning and understand the strategies for addressing them (warning: it might take years). Below are some common issues that our succession planning attorneys, working with the family’s other professionals, help families overcome to begin preparing for ownership transition and creating a succession plan.
1.They are uncertain about how they can be financially secure away from the business.
This one is huge, and succession will not be addressed if this concern is present. However, many options exist to solve this problem, and your wealth advisors and your attorney can certainly help you find one that is right for your family.
2. Their identity is tied to the business.
3. They worry that their life will lack purpose without the business to run.
After they have devoted decades to building a business, it may be hard for them to see that they could have an important purpose elsewhere.
4. They believe successors are not ready to run the business.
Find out what their specific concerns are and take steps to alleviate these concerns.
5. They believe that they are irreplaceable.
Some of the strategies mentioned above can help with this concern too. However, this one may be difficult to address without outside help.
6. They are avoiding hard feelings that will occur in the family when a successor is chosen.
This is where a good succession planning attorney or advisor can help your family design a plan that creates a win-win situation for the members of both generations.
7. They equate retirement with a decline in health or even impending death.
Everyone has heard a story about someone who died soon after retirement, and even though this is rarely the case, some people still equate retirement with the end of an active, healthy life.
8. They fear losing their prestige in the community (the business leader and/or the spouse).
If you are in a waiting situation that appears to have no end in sight, perhaps it is time to engage someone to help you have conversations about the future of the business. Our succession and estate planning attorneys can often facilitate these conversations and help families start planning for a successful business future. If you have questions related to succession planning or transferring the ownership or control of a family business, please contact your Warner attorney or contact Bruce Young at byoung@wnj.com or 616.752.2144.
Originally published by Warner Norcross + Judd.
This article was written and originally published by the DWH and has been republished with consent.
DWH and Adamy Valuation began a series called “Tactical Tuesdays” in 2020 in response to the impact of the COVID-19 pandemic on our clients and business partners. The goal of “Tactical Tuesdays” was to provide up-to-date information that would allow leaders to make tactical decisions to run their business. As COVID (hopefully) winds down, the Tactical Tuesdays focus is shifting to address longer-term issues. Over the next several weeks, DWH and Adamy will be publishing a series of blog posts around exit planning for business owners.
A transition of company ownership, whether internal or external, is a complex process. Before attempting to sell a business, owners should make sure they are ready. This means determining their desired outcome, developing transition thinking, understanding options, and assembling a solid advisory team.
Determine Your Desired Outcome
For an owner to successfully transition ownership of their company, they must first understand their desired outcome. Outcome considerations include:
The desired outcomes will drive the preparation and structure of a transition and transaction.
Develop Transition Thinking
Transition thinking involves two main ideas:
Understand Transaction Options
There are many options available to owners and we will cover this topic in a future blog post.
Assemble a Solid Advisory Team
Owners must have an experienced team of advisors to support them through the transition and transaction. Steve Whitteberry of Invictus M&A says, “Owners should invest the time to find qualified advisors including M&A attorneys, CPAs with transaction experience, and an experienced investment banker. A strong team is a key to a successful transaction.” Members of this team include:
Succession/Transition Advisor – This advisor supports the business owner by developing a transition plan, which includes the identification of opportunities to maximize the business’ value, and then helps facilitate execution of the plan.
M & A Attorney – Transactions can have a significant amount of legal complexity, so engage with an attorney that specializes in M&A activity in your industry and can support your team throughout the process.
Certified Public Accountant (CPA) – Many owners do not consider the impact of taxes on the proceeds from a transaction until it is too late. Have a CPA with M&A experience get involved early in the process.
Wealth Advisor – The wealth advisor works with the owner to develop a plan for managing the proceeds of the sale to achieve ownership goals.
Estate Attorney – In conjunction with the wealth advisor and CPA, an estate attorney can help an owner and their family setup a structure that minimizes taxes and protects wealth for the current and future generations. (We will cover estate planning in-depth in a future article.)
Investment Banker – The investment banker will help prepare offering documents, bring the company to market, vet potential buyers, and guide the company through the sale process.
Valuation Advisor – Many transactions fall apart due to misalignment in the purchase price. The valuation advisor provides owners with a comprehensive valuation of their company based on the company’s performance, asset valuation, and/or market comparisons. (We will cover business valuation methods in next week’s article.)
Key Takeaways
Additional Reading
Written By:
Ben Borisch, COO, Partner, DWH
bborisch@dwhcorp.com
Monica King, CEO, Managing Partner, DWH mking@dwhcorp.com
This article was written and originally published by the Seidman Business Review and has been republished with consent.
Ana C. Gonzalez L., Ph.D., Assistant Professor, Department of Management and Director of the Family Owned Business Institute
COVID-19 has hit us all hard, individuals and organizations alike but with very different implications. Family businesses are no exception, of course. A survey conducted by the advisory firm Banyan Global found that even though family businesses are as concerned and focused as everyone on the short-term, having working capital and facing revenue decreases, they are not concerned in the long run about the overall health of their business (Liberti, 2020). This could be interpreted as arrogance, but it is not that at all. It is more confidence that, despite the uncertainty that the pandemic has brought to the world, family businesses have survived more than one crisis throughout their existence, and they have the resources and capabilities to manage and even thrive beyond the crisis. In other words, they are resilient.
Resilience is understood as “the reservoir of individual and family resources that cushions the family firm against disruptions and is characterized by individual and collective creativity used to solve problems and get work done.” (Brewton et al. 2010, p.156) Family business resilience has three main characteristics: 1) adaptive capacity, which refers to the ability to minimize the impact of environmental shocks; 2) strategic renewal, i.e. the ability to find opportunities despite the circumstances and materialize them into innovative solutions, and 3) appropriation capacity, associated with the use of past experiences and tacit knowledge to handle the post-crisis period (Mzid et al., 2019).
At the Family Owned Business Institute (FOBI)1, in the early weeks after the lockdown, we interviewed John Barry, President of the Aluminum and Plastic Sales Division at Schupan & Sons, a West Michigan family business to learn if the company had deployed any of these characteristics and to ask about his perspective on the future. Schupan & Sons operates in the recycling industry, though not exclusively collecting and disposal. The company is vertically integrated with manufacturing operations and trading divisions. With over 700 employees, the family business is led by a second generation member, Marc Schupan, and both second and third generations are active in the business. Barry is a third generation company leader.
Adaptive Capacity
When the lockdown started, Schupan remained open as it was considered essential, even though the largest revenue producing division, the Beverage Recycling Division, was shut down by the governor as a contagion preventive measure. They applied early to the Paycheck Protection Plan (PPP) program and received a loan to protect employee jobs, and everyone was sent home with pay. Even though they work in an independent and decentralized way across five states, the leadership team (CEO and division presidents) met weekly for updates and spoke daily, as needed, to support each other and more importantly, to support customers. Barry mentioned that engagement with customers occurred as never before. In his own words, “We’re connecting customers with other customers. Sometimes we hear one customer saying I can only go 90%, but I don’t have the other 10%, and you’re able to connect them.” When asked why they were doing that, his answer was blunt: “If our customers don’t do well, neither do we.” In synthesis, they supported each other and customers and looked for resources available to deal with the emergency. They were able to pivot without firing employees due to the pandemic nor did they have a COVID-19 outbreak.
Strategic Renewal
When asked if the pandemic has triggered new ventures, Barry proudly nodded. This is the story: “A CRNA2 came up with the idea of adding an additional layer of protection when intubating a patient. It’s a process that involves many aspirations, so the risks are higher for health professionals. The nurse contacted a mechanical engineer who’s also a friend of mine for help in the design, and my friend – the engineer – asked me if we could donate the material to build a few for the hospital. I said yes, then asked if they needed a hand manufacturing them, and he said, yes!” Therefore, they reconfigured the machines, and Schupan manufactured the 20 units they asked for as a gift. Then Barry added, “When they came to pick them up, only three could fit in his car.” Thus, they redesigned a collapsible unit. Barry negotiated with the nurse and his friend to patent and add the product to Schupan’s portfolio3. This new product has significant sales potential since the demand for these types of supplies has only increased through the pandemic. Sales of the product were increasing at the time of the interview. Moreover, the product was recently referenced in the Cleveland Clinic Journal of Medicine for intubation procedures (Chahar, Dugar and Marciniak, 2020). Having the flexibility to decide, reconfigure, and create is an example that illustrates a common family business strategic renewal capacity.
Appropriation capacity
Family businesses are known for their capacity to transfer not only the business across generations but also intangible resources, such as knowledge. This tacit knowledge refers to “the knowledge that is bound up in the activity and effort that produced it.” (Horvath, 1999, p. ix) The transmission of this knowledge is very common in family businesses (Gonzalez et al., 2011), and its use provides evidence of appropriation capacity. At Schupan, Barry mentioned that they have learned over time that diversification is a “must-do”, and this pandemic was proof of that. When the Beverage Recycling unit was unable to operate, they knew they could rely on the other divisions for sustaining revenue. Barry added that he knew there was going to be a contraction in demand for his division at some point because of the economic downturn, but he had confidence that the other divisions could “hold the storm.”
In addition, Barry reflected on the company’s commitment to customer service, which has been a hallmark since its beginnings. Customer support in service of value creation without exception and diversification to reduce risk, have been key tenets of the business during both good and bad times. This commitment reflects Schupan’s appropriation capacity.
About the future after/with COVID-19
Regarding the future, Barry mentioned that there is still a lot of uncertainty to plan for both next quarter and beyond. He continues to foresee a contraction in demand, and the Schupan leadership team is preparing for a “very tough two following years.” He did not deny his concerns with this outlook but confirmed that they are ready to deal with the crisis. They are focusing on efficiency, working capital, and on taking care of customers and employees. These principles should keep the company solid and strong for the long run. In this particular case, Schupan is confident that it has the resources and capabilities necessary to face environmental shocks. While not the only example in the region, Schupan & Sons is a good testament to West Michigan’s family business resilience.
1 The Family Owned Business Institute (FOBI) is an academic center at Grand Valley State University Seidman College of Business that champions and serves family businesses through scholarship, education and advocacy. For more information visit gvsu.edu/fobi.
2 Certified Registered Nurse Anesthetist
3 For more information visit: https://aero-guards.com/why-aeroguard/
References
Liberti, J.M. (2020, September). Family Businesses Are Experiencing the COVID-19 Crisis in Unique Ways. KELLOGG INSIGHT. https://insight.kellogg.northwestern.edu/article/family-businesses-experiencing-COVID-19-crisis
Brewton, K. E., Danes, S. M., Stafford, K., & Haynes, G. W. (2010). Determinants of rural and urban family firm resilience. Journal of Family Business Strategy, 1(3), 155–166. https://doi.org/10.1016/j.jfbs.2010.08.003
Chahar, P. (2020, May 13). Airway management considerations in patients with COVID-19. Cleveland Clinic Journal of Medicine. https://www.ccjm.org/content/early/2020/05/13/ccjm.87a.ccc033
Gonzalez. A.C., Gonzalez, G., & Diaz, L. (2011). The Role of Tacit Knowledge in the Identification of Entrepreneurial Opportunities: A Study of Family-controlled Businesses. In Understanding Entrepreneurial Family Businesses in Uncertain Environments. In Nordqvist, M., Marzano, G., Brenes, E., Jimenez, G., & Fonseca-Paredes, M. Understanding Entrepreneurial Family Businesses in Uncertain Environments: Opportunities and Resources in Latin America. Edward Elgar Pub. https://doi.org/10.4337/9781849804738.00015
Mzid, I., Khachlouf, N., & Soparnot, R. (2018c, March 27). How does family capital influence the resilience of family firms? Journal of International Entrepreneurship. https://link.springer.com/article/10.1007/s10843-018-0226-7?error=cookies_not_supported&code=e00aa023-7448-4da8-bb88-209e9cc4c3c1
Down, J., Sternberg, R. J., & Horvath, J. A. (2000). Tacit Knowledge in Professional Practice: Researcher and Practitioner Perspectives. Administrative Science Quarterly, 45(1), 170. https://doi.org/10.2307/2666987
The following article was written by Wade Wyant of Red Wagon Advisors.
Every business owner wants to achieve growth. And every business owner should.
So it makes sense that, when you’re seeking growth, you should be able to answer a basic question: What is your primary path to growth?
Now of course, everyone’s answer to this question will include some basic fundamentals, such as focusing on great products and services, and focusing on taking care of customers.
But beyond those fundamentals, there are three primary paths to growth that apply to all industries. And I often find that corporate leaders aren’t entirely sure which of the three best suits their companies. As a result, they’re going full-bore in all three directions, and often wearing out their people in the process.
Here are the three:
And that speaks to a problem I see with many businesses. Their pursuit of growth is either misaligned with their real strengths and opportunities, or it’s scattered across all three without a real commitment to the one that makes the most sense.
What is your best path to growth? The answer to that question lies within the strengths and opportunities of your company, as well as your market positioning. It lies within the capabilities of your people and your processes.
Do you do the basic fundamentals extremely well, and sell your products and services with exceptional success? Then your primary path to growth might be organic.
Is your execution so strong that you’re running circles around your competition? Then maybe you should consider bringing them into your organization and consolidating your hold on the market.
This is not to say you shouldn’t try to excel at all aspects of your operation. Does it make sense to seek organic growth while also striving for excellence in execution? Of course it does. You want to do everything as well as you can. But you’re trying to grow right now, and the focus of your growth strategy should be on the path your company can pursue most successfully based on its structure and positioning today.
But what about the unicorn? What about the big idea that could change everything? Why shouldn’t you pursue that? Didn’t Steve Jobs? Didn’t Bill Gates?
Of course they did. And so have a lot of other people whose names you’ve never heard because they didn’t become Steve Jobs or Bill Gates. I love big ideas and I am the last person who’s ever going to tell you not to pursue one.
But here’s what you need to know: Big ideas usually take a long time to come to fruition. It never feels that way when they first come to you. You get inspired and you start imagining all the places your idea can take you.
You might even call your team together and share your vision, and they might get very inspired too. Once they’ve heard your idea, they’ll head back to work feeling inspired to make it all happen.
This can be trouble. That idea is probably a very long way from realization, if it ever happens. Your team is excited now, but in six months they’re going to wonder if this is ever really going anywhere. In a year they might be thinking you’re tilting at windmills. In three years, they’re no longer taking you seriously when you talk about big ideas.
Nothing’s happened. There’s been no growth. You keep telling them to just wait for the unicorn, but all they see is the same stagnant company every day.
And it didn’t have to be that way. You can have your big idea and you can chase after it. But in the meantime, your path to growth has to be based on where your company is strong and capable right now. Your team needs to be focused on that.
There’s nothing wrong with having select, strategic people helping you push toward an exciting innovation. But how are you going to make it happen if you’re not growing and earning revenue from your existing operations? That’s where you need your team focused, and they need to know that’s where the company is focused.
Which of the three paths to growth fits your company best? It shouldn’t be a hard question to answer for anyone who really knows their company and their people.
But in order to answer it, you first have to know enough to ask it. Now you do.
Wade Wyant
Grand Rapids, MI
The following article was written by Scott Hill of Varnum LLP.
Through my work as a corporate attorney, I’ve had the opportunity to observe many beautiful businesses on a regular basis. And while there are shared strengths across successful companies such as weathering storms of surprise in regards to sales cycles, supply chain external forces, and shifts in talent, I am often most struck by the prevalence of the servant leadership model at the highest levels of these businesses.
Servant leadership, a philosophy in which the main goal of the leader is to serve, differs drastically from the traditional leadership model where the leader’s main focus is the thriving of their company or organization. Robert Greenleaf (who most attribute to coining the term “servant leader”) noted in 1977 that the authentic nature of a servant leader enables them to accept people as they are, fostering an environment of creativity and risk-taking without the fear of ridicule from (gasp) one’s parents or relatives. In my mind, this type of leadership style could be compared to the Elmer’s Glue from an elementary level art project – unrefined and messy at times – but, serves to hold things together and provide a platform for growth and success in the learning years to come.
My belief is that servant leadership is instrumental for business sustainability and that we see it more commonly in the family business construct due to the bonds that familial relationships bring prior to involvement in a business. In turn, these bonds help to build foundations of service to one another. So when family businesses find themselves at generational crossroads, I posit that despite Millennials’ mixed reputation, the servant leader model is of tremendous importance to imprint on this next generation and can act as a meaningful measuring stick for long-term business success.
Mike Novakoski, the featured speaker at the Family Business Alliance’s February meeting, knows quite a bit about leadership, how people interface well with one another, how to challenge people, and how to grow. Mike’s teachings (through public speaking and his and John Parker’s book Unmistakable) surrounding right-brain thinking augmenting left-brain leaders and how he shares the journey of his team at Elzinga & Volkers is worth paying attention to. Varnum is pleased to be the sponsor for this FBA event titled Leading the Business as we’re excited to sharpen our minds on the topics Mike will be discussing. I hope you will join us and learn from his teachings. You won’t be disappointed and I look forward to seeing you at the event.
Scott Hill
333 Bridge St NW #1700
Grand Rapids, MI 49501
Written by Robert Tyndall: Managing Director of Investment Banking and Corporate Finance at Fifth Third Bank
U.S. market valuations for middle market companies are at an all-time high according to GF Data, but the cycle may be at a peak. So for business owners considering a sale of their company or a similar transition in ownership, it is a good time to learn about and evaluate options. Selling a company is a mission-critical, complicated process often taken on with the help of advisors. In addition to a market update, this article will describe the process and seller considerations in detail.
I. Sellers M&A Market
II. Sustainability of Strong M&A Market
III. Business Owner Considerations
IV. Process for a Strategic Transaction
V. Timing a Sale Process
Sustainable drivers of a sellers’ market include:
Other market factors with less sustainability or visibility include:
It is likely a near-term market downturn would be moderate relative to the severe recession of 2008-2009, due in part to stable liquidity and banking system which was not in place previously.
III. Business owner considerations. The issues business owners face are multi-faceted and complex, between shareholders, company, management, succession plans, and personal or family issues. A strategic transaction, such as a sale, may resolve core challenges and meet key goals.
Types of transactions. There are a variety of common strategic transactions. An investment banker or other advisor can help a business owner evaluate options and the best transaction for the company. Often, an investment banker can run multiple transactions in parallel, allowing the company to choose once market feedback is obtained. Common strategic transactions include:
Preparing for a strategic transaction or sale. Great insight, intention, and effort are often required to prepare a company well for a sale. It is usually a mission-critical, once-in-a-lifetime or once-in-a-career transaction for the shareholders and management. The process has voluminous and substantial complexities, risk, and potential for extraordinary gain. Common areas for evaluation, improvement or clean up in preparation for a strategic transaction are described below. Many companies engage legal, tax, accounting, M&A and other advisors in preparation for a process.
Led by the investment banker with the company’s input and approval, this can include:
i) creating detailed support for growth initiatives and market opportunity, ii) effectively tailoring the message to each investor or buyer, iii) anticipating and mitigating potential concerns, iv) highlighting specific areas that may help an acquirer stretch on value, and v) anticipating buyer questions and addressing them in marketing materials.
Deliverables and milestones of this phase often include: a) indication of interest letters from buyers, b) management meetings between company and buyers, c) formal offer packages from buyers, and d) an executed letter of intent between finalist buyer and seller.
This final phase goes best when the company has made proper evaluations and improvements prior to the transaction, and when the company works with qualified advisors who have also helped the company prepare well (see prior sections). Without these two conditions, deals are at higher risk of failing or falling in value during the closing phase.
Deliverables and milestones of this phase include: a) completion of buyer diligence on the company, b) financing of the deal by the buyer if needed, c) execution of purchase agreement and ancillary documents, and d) funding of transaction and payment to sellers.
Importance and selection of third-party advisors. Most middle market companies will fare better in a transaction process by engaging accounting, legal, and M&A experts to structure and coordinate the deal under the company’s guidance. Shareholders should see a large payback on fees paid to advisors in terms of: i) higher valuation for company, ii) higher certainty of closing, iii) lower risk, and iv) faster and more efficient process than without advisors.
For example, an audit and/or quality of earnings report from a reputable and capable accounting firm, along with the ongoing support of the sellers’ accountants during the transaction process, is critical to demonstrate credibility of financial statements and keep momentum in the deal, as well as to minimize surprises later in the process. Also, attorneys with seasoned experience and solid track records in M&A transactions are most likely to help the company achieve the best, market-based terms and their knowledge will enhance the efficiency and speed of the process while protecting the sellers from unnecessary risk.
Investment bankers are likely to achieve a higher valuation for the company than it could on its own, as well as: i) organize and manage the process so owners and management can focus on the business, ii) provide comprehensive market-based feedback, iii) enable owners to make fully-informed decisions, iv) advise management and owners on key decisions and market standards, and v) move the process along rapidly while maximizing value and quality.
Written by Robert Tyndall: Managing Director of Investment Banking and Corporate Finance at Fifth Third Bank
[Read more…] about Anatomy of a Deal: Mergers & Acquisitions
We just finished filing taxes under the largest reform in 30 years! As we reflect back on
this filing we’ve compiled a list of key takeaways for family business owners.
The biggest changes are: the increase of standard deductions, changes to the income
tax brackets and the addition of a new qualified business income deduction.
1. Limitation on State and Local Income Tax Deductions
The tax law change in 2018 created a new cap for itemized deductions of $10,000 for
state and local income tax and property taxes.
While taxpayers in California and New York were hit the hardest, some taxpayers here
in West Michigan also hit the cap. Those who fall into higher income tax brackets, high
property tax and second homes were impacted the most by this cap.
2. Charitable Giving Impacted by Tax Reform
Charitable contributions may not have as much of an impact on your tax return as a
result of the increase in the standard deduction but that doesn’t mean you shouldn’t
donate! By the way, you may not have received as much of a benefit from contributions
in the past as you thought. We have more information on this topic HERE.
3. Entertainment Expense is No Longer Deductible
Business related entertainment expenses are no longer deductible. Certain business
meals remain 50% deductible and the substantiation requirements have changed under
the new law. But, sorry sports fans, those business related rounds of golf and sporting
event tickets are no longer tax deductible.
4. The Loss of Miscellaneous Deductions may Hurt
In the past you may have been able to deduct a portion of investment fees and
expenses, tax preparation fees as well as casualty and theft losses. These
miscellaneous deductions along with a list of others were eliminated under the new tax
reform. The actual impact on each taxpayer will vary.
5. Un-reimbursed Business Expenses May Impact your Employees
A portion of un-reimbursed business expenses are no longer tax deductible on an
individual taxpayer return. One example of this change may apply to your sales staff.
Previously some employees would write off meals, travel, vehicles, etc. that were not
reimbursed directly by the company. As an employer, you should recognize the change
in compensation for these employees and consider creating a plan to reimburse them
according to IRS guidelines.
6. Qualified Business Income: Beneficial for Most Family Businesses
Introduced in this tax reform is the new Qualified Business Income Deduction. The
deduction is 20% of qualified business income subject to limitations. Depending on the
type of business entities (S-Corp, Partnership, Sole Proprietor), the industry you
participate in and your income level, your qualification and level of this deduction will
vary. In addition, the complex formula may be impacted by retirement contributions and
other moving pieces.
7. Covering Moving Expenses Now Counts as Income for Employees
Whether you reimburse a new employee for moving expenses or whether a new
employee pays for moving expenses themselves, the tax benefit has been eliminated. If
you reimburse the expense it is now considered income to the employee. If the
employee pays the moving expense, the tax deduction is eliminated.
8. Tax Returns for Business Owners More Complicated
The largest tax reform in 30 years means CPAs have to relearn the rules. It’s taking
longer to digest the rules and translate them as it applies individually to you and your
company. We expect that you saw an increase in billable time for the preparations of
your returns this past filing season.
As a family owned business, Kroon & Mitchell is experiencing the same tax and
financial changes and is happy to answer any of your questions. Feel free to reach out
today with questions at 616-356-2002.
Author: Amelia J. Mitchell, CPA, MSA
Kroon & Mitchell, Integrated Tax & Investments
Written by Haans Mulder, JD, MBA, MST, CFP®
If you own a business with another family member, you know that family businesses are different than other companies. A lot can be said about how, but I’d like to point out one area you may not be aware of. If you’re part of a family business, you’re a greater target for the IRS. In other words, when you have a business transaction with another family member, that arrangement is at risk of being questioned and scrutinized by the IRS.
A recent tax case illustrates this. A family-owned business loaned money to another family-owned business over a number of years. They followed the legal formalities in some cases (i.e. promissory notes were signed, actual repayments were made on the loan, etc.). But, as happens with family businesses, the arrangement changed over time and informality crept in. The borrower eventually couldn’t pay back the loans and the family-owned taxpayer tried to claim that those written-off loans were a bad debt loss (which would have given them a tax benefit). The IRS challenged this and ultimately the government’s position was upheld.
The take away from this case is that family businesses need to be very vigilant and treat transactions with family members like they do any other arrangement with an unrelated company. The relationship needs to be documented and it needs to be implemented as you would with a customer or supplier. If you remember and follow this principle, you’ll be in a much better position if a transaction is ever challenged by the IRS.
If you have any legal questions regarding your family business and structuring these types of transactions, feel free to contact me.
Haans Mulder, JD, MBA, MST, CFP® Partner, Cunningham Dalman, P.C. PHMulder@cunninghamdalman.com
Written by Sheri Welsh – SPHR, CPC, CERS
The struggle to find talent is real. The acute shortage of professional talent is staggering! Traditional methods of finding key employees such as job board or website postings often fail to produce a single acceptable candidate. It might just be time to seek help. But many family businesses are hesitant to do that.
Growing up in a family owned business, I understand the struggle in deciding whether or not to outsource a function. We carefully weigh the investment against our ability to do the work internally. If you’ve built a strong operation, with a great customer base and an excellent reputation you may have never experienced a problem with recruiting talent – until now. You may never have faced a business challenge that you couldn’t solve with the help of your family leadership team. And when it comes to recruiting, many think, “This shouldn’t be that hard! We should be able to handle this!” Unfortunately, the game has changed – sourcing great talent just isn’t easy anymore.
Here are some tips on how to know when it’s time to get some help:
Sheri Welsh – Welsh and Associates
Several weeks ago, Amway made the headlines – the privately-held, family-owned company hired its first non-family CEO, Milind Pant. Mr. Pant brings tremendous leadership and business experience to the company and has worked extensively in Asia, Africa, and Europe. Nevertheless, this is big news as the company has been led by a family member for nearly sixty years.
Many family businesses believe that succession only involves developing leadership within the next generation. Often this is true. But with the advent of millennials seeking careers outside the family business, many companies are looking for other succession options.
In the case of our family business, my husband’s great-grandfather, grandfather, and father all took the reins of the company. But by the 1990’s, my father-in-law was ready to pursue other interests. My husband was in his late 20s and was practicing antitrust law in Washington, DC – not yet the leader the company needed. The board reached out to a nonfamily president who stayed with the business for over 20 years and achieved tremendous success.
Fast forward to today where my husband has been serving as CEO for three years. The transition process was extensive and involved him getting his MBA, gradually taking on new responsibilities, and gaining the support and confidence of the board. It has been a rewarding, but sometimes stressful, process – one that we may need to repeat with our teenage daughter in 20 years.
We relied heavily on family business consultants, family council meetings, and an engaged board and staff to assist in the transition. If you are facing a change in leadership in the next 10 years, we encourage you to join our annual forum on November 8 with Joe Astrachan. This presentation will provide you with the guidance and resources that you need to be successful in your journey. If you’re looking for an in depth more personal focus, please look at our follow up Deep Dive on succession as well. Please see the links below to register.
Written by Diana Schad
CEO, Family Business Alliance
Diana@fbagr.org
Written by Haans Mulder, JD, MBA, MST, CFP®
Last month, I wrote about the importance of balancing two principles in family succession. Family businesses need to pass along ownership to certain members of the next generation who are most capable of continuing the business. Second, they should also strive to equally divide “all” assets so family members who don’t receive business ownership will still feel they are treated fairly.
This month, I want to write about one way of achieving this balance. By definition, family businesses have an entity or multiple entities that are the “operations” of the business. At the same time, families very often have acquired real estate that the business operates on. This real estate typically has significant value and can be used to “equalize” the distribution and achieve the second principle above. In other words, the children who don’t receive ownership in the business can instead receive ownership in the real estate holding entities.
While this approach can work very well to achieve equity, there’s a key issue that needs to be addressed. The business relies on that real estate for its location and the real estate owners rely on that business for a financial return. It would be extremely disruptive if the business was no longer supported by the real estate (such as the rent being above market and not affordable for the company). On the other hand, if the rent was “below” market, the family members who owned the real estate entity would inevitably resent the lease terms.
Because of these considerations, structuring a fair long-term lease with options for the term to be extended and rent escalations is critical. If these provisions are built into the structure, each side should then be able to feel they’ve been treated fairly and the business operations can have a reliable location for future operations.
If you have any questions on this approach or need assistance with his kind of planning, feel free to contact me.
Haans Mulder, JD, MBA, MST, CFP® Partner, Cunningham Dalman, P.C. PHMulder@cunninghamdalman.com
In general, people naturally try to keep their work and home environment separate to make day to day life easier; the advantage found in the ability to do so is inherently lost in a family business. However, there are steps family members and coworkers can take in order to create a more advantageous and harmonious work environment.
Family Talk Versus Business Conversation
Family employees who blend family life and work life are likely to make business decisions based on considerations of family issues and are likely to converse about business during family events (qtd. In Cooper et al.). Making the decision as a family to never talk business while spending time together as a family and to never discuss family issues or occurrences while at work is an impactful way to keep family and work separate. Set this boundary together (and discuss why it is important) and honor it. In addition to this, making distinctions in the way family members will be addressed at home versus at work can help to build the divide between family time and business time.
Code of Ethics and Consequences
Consequences for family employees should be the same as those for non-family employees, as well as the expectations set regarding their behavior. Creating a code of ethics with both family and non-family employees (Cooper et al.) and laying out clear consequences for violating regulations can help to maintain a division between family and work. This will result from a heightened awareness for the need to react to family employee’s behavior in the same manner one would to a non-family employee’s behavior.
Role Clarity
Employees need to have a clear understanding of their role and the expectations that role places on them. Role ambiguity is the lack of clarity in one’s role, and it has a higher presence in a family business than a non-family business due to the overlap of roles (e.g., role as a family member versus role as an employee – or – current role versus future role while a business plans for succession) (Kidwell et al.). Often, it can be tempting for family business leaders to attempt to exert too much control over a young family member who has been given a position of leadership or to continue in attempts to operate the family business after they have been succeeded them (Cooper et al.). On the other hand, in leaving a family employee without enough direction (if one assumes she will be able to navigate the role well enough on her own due to family relation, growing up in the midst of the business, etc.), the business will be negatively affected due to the creation of role ambiguity through the blurring of family and work dynamics. Uncertainty of expectations in one’s work role has been linked to decreased work performance (qtd. in Kidwell et al.). Because of this, it is crucial for a business to clearly define an employee’s work role and the expectations being placed on them. This can mean ensuring that a family employee doesn’t have authority or voice that a non-family employee would not have in the same role. This can also mean avoiding the other end of the spectrum, wherein a family employee’s input is more easily disregarded or perceived as coming from a place of lack of knowledge than a non-family employee’s input. Having open conversations with family employees that set expectations for their responsibilities and boundaries can help create role clarity.
Respecting Privacy and Physical Space
Family employees should respect each other’s privacy at work as well as at home (Cooper et al.). Although ability to create physical space within the work environment varies depending on the type of business, it can also be very helpful to utilize separate work spaces when possible. For example, two family members could benefit from having separate office spaces. Creating this physical space helps family members to stay focused on business and decreases opportunity to discuss any thoughts on family affairs while at work. Privacy of family employees is then bolstered.
by Mark K. Harder
Publicly traded companies have boards of directors primarily comprised of outsiders. But how many owners of family or other closely held businesses think about, much less have, outside directors for their businesses?
David Hodge, CFA, CFP
Gimbal Capital Management
Tell the story of GCM, how it was founded & how it became a family business.
Gimbal Capital Management was founded in 1994 by Dan McAdams to provide investment management services to families in West Michigan. Dan got his start in West Michigan as a commercial lender at Old Kent Bank in the late 1970s, and spent time as the controller of a beef processing company in the early 1980s.
When one of his banking clients developed and sold a large industrial parcel, Dan started working as the Chief Investment Officer of his family office. This gave Dan the experience to see how challenging it could be for families to coordinate their investments with their operating business and generational succession.
Dan founded Gimbal Capital Management to implement his vision of providing best-in-class investment services to families in West Michigan, and his first client was the family with whom he had worked. The business grew rapidly, and in 2003 Dave Hodge, Dan’s nephew, approached Dan to ask him how to start a hedge fund. Dan knew that he could trust Dave and thought he would be a good fit for the business, so in 2004, Dan hired Dave and Gimbal Capital Management became a family business.
What is the most rewarding aspect of being part of a family business?
Investment management is a business that works in and delivers, an intangible product. As a result, quality can be very difficult to gauge, and results are not immediately obvious. In this type of business, trust is extremely important, and the natural bonds formed in families can create the basis for an excellent working relationship.
In addition to helping us work together well, mixing business and family has worked to bring our families closer together. With an uncle-nephew relationship, after the next generation grows up, it can be difficult to keep close family ties, particularly after kids grow up and have kids of their own. Working together means that you live together during the workday, and this keeps our family closer than it would be without the business.
How have you managed to grow and maintain good family relationships?
Good family relationships stem from quality communication. This starts with respect and trust, and by being in a family business, we know that we have to treat each other well, because we’ll be seeing a lot of each other!
In addition, we work hard to maintain openness in our communication. We don’t assume how each other thinks about decisions, and we talk freely about the things we think are important. We don’t think you can have open communication without respect and trust, but just having respect & trust doesn’t mean that you will automatically have openness in your communication. We work on this and make sure to take each others’ thoughts into account before making big decisions.
How has being a family business helped you attract top talent?
In the investment business, the quality of service depends entirely on the people you are dealing with. The value of the business is almost entirely intangible, so business succession and continuity is a point of major importance with our customers and employees. Family involvement assures that our business will thrive for decades to come, and this commitment on the part of our family inspires confidence among our clients and employees.
Talk about your experience as a member of the FBA, how it has helped, what value you’ve gained, and your involvement.
When we first joined the FBA, we quickly learned that the events were filled top-notch, relevant content. The events alone were worth the price of admission to be a member of the FBA, but what added the most value to our experience was when Dave joined NextGen group #11. Being able to interact with peers on a monthly basis and standing shoulders together going through family business transitions was a huge help to enabling a successful transition in our business, and giving Dave the confidence that he needed to step up into new leadership roles.
NextGen leaders have a unique opportunity to increase the financial value of their company by driving three key conversations with the NowGen that can mitigate business (and valuation) risks. Here are the risks and their counter-balancing conversations:
The NextGen can take a leadership role by driving these crucial conversations. By mitigating these key valuation risks, the NextGen can help forward successful succession plans while also increasing the value of their family business.
Credit: Matt Rampe of Beene Garter
As president of Grand Rapids Label and chair of the Family Business Alliance, Bill Muir understands what family-owned companies are going through right now. According to Muir, manufacturers remain optimistic heading into the new year, and they’re making more investments to support their customers.
Eventually, the economy will go into another cycle and we’ll have a downturn. How well are family-owned businesses prepared for it?
I think family-owned businesses have gotten smarter in terms of not getting too far ahead of ourselves. I think there is a conservative nature of a family-owned business compared to another business in terms of being able to hold cash. It is different because family-owned businesses are willing to put their own money back into the business to support it.
When you think about your business and its brand, what words come to mind?
Pause. Really think about this for a moment. Jot down 3-5 words.
So, what words made your list? Quality? Service? Innovation? These are all great words. But, what about family—did it make the cut? If not, we suggest that it should. And research supports our position.
Sure, working with family can be tricky, but in the minds of your customers, family is a positive attribute. Family Business Magazine reports that 60 percent of consumers say that they prefer to buy from family businesses.
Here are a few reasons to brand yourself as a family business and examples of our FBA members who are getting it right:
1. Humanize your brand. Without a doubt, your business has a story—one that includes a unique set of circumstances and an interesting cast of characters. These stories give context to your business, inspire, and ultimately make your brand more endearing and relatable.
Take this story from BISSEL Inc. BISSELL started out of necessity—Mr. and Mrs. Bissell was looking for a more efficient way to clean up the constant trail of sawdust in their crockery shop. Mr. Bissell invented a unique sweeper and patented it. The story goes on to share that after Mr. Bissell passed away, Mrs. Bissell the business and became the first female CEO in America.
The BISSELL story is pretty remarkable. It gives you a peek at the family’s values of innovation, tenacity, and perseverance.
2. Set yourself apart from the competition. Anyone can start a business, but doing so, and growing it with family, is unique. Use this to differentiate yourself.
Researchers from the Institute for Family Business conducted a survey of 125 family businesses for their report titled Family Business Branding: Leveraging stakeholder trust (note: this report is loaded with great information—definitely worth skimming). Participants were asked why branding themselves as a family business was beneficial. The report states, “A distinct family business brand is assumed to contribute to a company’s image of trustworthiness (81 percent), social responsibility (70 percent), quality-orientation (68 percent) and customer-orientation (67 percent).”
Take King Flour as an example. On their website they say, “King Milling Company has been family owned and operated for over one hundred years. From its humble beginnings using the stone grinding process, to the fully automated network of steel rolls today, the King Milling Company has always pushed to be on the leading edge of milling technology. A quick look at our history will show that our company has always strived to be a pioneer in the milling industry, finding the most efficient way to produce the highest quality flour and wheat products for our customers.”
Without a doubt, this type of information can go a long way in differentiating yourself on the shelf.
3. Build trust. The title of this 2015 Harvard Business Review article says it all—Study: Customers Really Do Trust Family Businesses More.
Positioning yourself as a family business demonstrates steadiness, reliability and a commitment to being around for the next generation. All of these things help customers feel confident and secure in your relationship.
We like this example from Skytron. On their website they say: “Skytron is proud to be a privately held and family-owned company. Since our founding in 1972, we have stood firm on this business structure. We believe it’s one of the many ways that demonstrate our commitment to integrity and long-term focus.”
Reflections: If you are not currently branding yourself as a family business, why not? How could you use this key part of your business to build trust, differentiate yourself and connect more deeply with your customers?
