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Understanding the Key Transitions in the Family Business Life Cycle

Understanding the key transitions in your family business in relation to the family business life cycle can help you navigate the unique operating challenges of leading and succeeding in a family business.   With the help of Family-Owned Business Institute of Grand Valley State University and adaptations of several online resources[1], The Family Business Alliance has established a Family Business Continuum to help family businesses in West Michigan understand the distinct axes of the family business model and improve the opportunity for multi-generational success.

The Family Business Continuum Axes are defined as:

Ownership

The Family Ownership Axis identifies the key and controlling stakeholder(s) and is not linked to a specific generation.  In many cases, the first stage of ownership is established based on a Founder’s Dream.  The succession to the next generation can be either identified as a “New” Founder’s Dream or a Sibling Partnership. In a sibling partnership, the siblings jointly own the shares of the business, however, leadership may be singled out to a primary member.  As the family and business operations grow, ownership models may evolve to a Cousin Consortium which includes extended family through multiple generations or may evolve to a model which includes Distant Relatives.

Leadership

The Leadership Axis defines the experience and engagement of family leadership in the business. Stages include Leading the Business where control is either one primary family leader or shared among siblings.  The family leader(s) oversee all strategy and operations.  In Joining the Business, a potential successor(s) is introduced to build professional experience, operational experience, and industry knowledge.  At this stage, the business often

implements professionalization of roles and formal processes are developed.  As the next generation has its own visions and often a strong desire to introduce more strategic thinking, they assume mid-level management roles, defined as Working Together.  This leadership expansion phase is often linked with restructuring and may include the development of a board of directors, family governance policies, and family council meetings. Leadership succession can span more than a decade as a succession plan is created and implemented. Each generation transitions to new roles both internally and externally as they Pass the Baton. The family may also sell or expand to different markets and the family business may evolve to a Family Office.

Business

The Business Axis characterizes the stages of a business as it strives to move from a Start Up to Growth and Formalization, defined as the company leaving the niche market and entering a more competitive and larger arena.  Often, organizations engage in strategic planning with outside professionals to meet organizational objectives to achieve Maturity and Stabilization.  In this stage, the business focuses on the development of organizational talent and seeks to create a flexible framework to take advantage of market opportunities and manage threats.  At Regeneration, the key stakeholders face a strategic choice for further growth and maturity. If reinvention is not prioritized, these businesses have a heightened risk of decline.

Family Business Alliance, devoted to advancing family business organizations for multi-generational success, designs its programming, resources, and events to meet the needs of its members at these distinct stages.  Currently, the Family Business Alliance represents nearly 170 member organizations throughout West Michigan and offers the opportunity to create connections, elevate leadership, and navigate governance.

Understand your organization on the Family Business Continuum and download complimentary resources available through the Family Business Alliance.  Serving over 165 members, Family Business Alliance seeks to advance family business in West Michigan.  Together we, create connections, navigate governance, and elevate leadership.

[1] Sources: Ivan Lansberg, Succeeding Generations; Thwart Magazine, Family Business Life Cycle; Forbes How to Use the Family Business Life Cycle to Personalize your Family Office.

New Research Suggests Family Business Profit in Risk Taking

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.

Female Leadership in the Family Business

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.

 

How Servant Leadership Can Ensure the Long-Term Success of the Family-Owned Business

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

Eight Takeaways from Tax Season for Family Business Owners

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

 

Four Steps to Increase Separation Between Work and Family

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.

 

 

 

 

 

 

Using Outside Directors in Your Family Business

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?

3 Ways Your NextGen Can Increase Your Valuation

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:

Valuation Risk – Revenue Growth
  • How does the company grow? Are there new products or innovation?  Markets and technology change constantly.  Growth drives value.
Countering Conversation
  • Spearhead the discussion about future product lines and highlight what you as the NextGen bring to the table. Innovation and insights can be borne out of fresh perspectives.
  • Dream together about the future of the company – where will growth come from? What markets will you serve?  What do you need to do today to get there?
Valuation Risk – Key Person Risk
  • Over reliance on one specific person (for customer relationships, technical knowledge, etc.). This drives down value due to higher risk.
Countering Conversation
  • How will the transfer of this key knowledge or relationships take place? How will you know when you are done?
  • Is the NextGen a good fit for growing into these roles? Are these roles best split between more than one position?
Valuation Risk – Engaged Workforce
  • Finding a talented, highly engaged workforce can be challenging, particularly in a robust economy. This can limit capacity to grow.
Countering Conversation
  • People burn out more from lack of growth opportunities than from feeling overworked. How can you reinforce a culture that supports growth opportunities at every level?
  • How are future leaders being developed and engaged, so they can be retained and create a strong bench?

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