Entitlement with Kim Eddleston
The Family Constitution: A Foundation for Family Alignment
Your 7-Step Plan for Creating Chaos in Your Family Business
This article was originally published by Warner Norcross + Judd and has been republished with consent.
Most business owners know that proper succession planning can help keep their business running strong into the next generation. They understand the importance of creating a plan to prepare heirs and key employees to run the business when it is time. But sometimes owners are busy and fail to plan for the future of their business in a timely manner.
Executing an unplanned transition when the family business leader becomes incapacitated or passes can be painful for the family (at an already difficult time) and potentially damaging for the business. Families in this situation often engage Warner to help them create a path forward for the business.
We think it makes sense to offer some lessons learned by these families as a resource for current business owners. Instead of offering a typical “best practices” list, we took a different approach. Here are some “worst practices” that will surely wreak chaos in your family business after you pass – from families who have experienced an unplanned business transition
7 Ways to Create Chaos in the Family Business After Your Death
- Don’t document your good intentions. Think about succession planning for years, but don’t document any of your thoughts or planning ideas for the family. Or, to make it really interesting, keep jotting down ideas on various notepads, napkins or sticky notes over the years, creating obvious contradictions between the ideas.
- Leave business ownership to your family but without a skilled operator in charge of it. This spreads chaos over the widest possible range after your death, affecting family members, employees, customers, suppliers and professional advisors when the battle lines are drawn between children and possibly your spouse as they wrestle for control of the company while dealing with their grief.
- Pick one winner. Leave both the business equity and control to one child that seems reasonably responsible and ask them to do the “right” thing for their siblings and remaining parent. For maximum family strife, the “responsible” child should be married to a spouse who is greedy or difficult to deal with.
- Don’t do any estate or tax planning. This way your heirs will not only struggle with the above issues but will also inherit a huge tax bill that they were not expecting and will have to cover by taking out loans or by selling the business.
- Micro-manage future leaders. Allowing your children or other key employees to manage portions of the business will allow a leader or group of leaders to naturally emerge, whereas micro-managing those heirs and other key employees in their current positions will ensure that they won’t learn how to lead, make decisions or accept responsibility.
- Don’t discuss the future of the family business. Avoiding these conversations ensures that you won’t know whether your heirs or current managers actually want to run the business and allows you to create a pressing sense of obligation for the next generation to work in or run the business. Even better, this sense of obligation can create next generation business leaders who are resentful or who lack the passion that you brought to running the business.
- Keep your professional advisors under wraps. Failure to introduce your professional team to your children can create havoc for your business because neither of these groups will be prepared to handle the inevitable difficult discussions that ensue during a transition. Plus, your children will not know and may not trust your attorney, CPA, investment advisor or other professional advisors, adding even more obstacles to this transition.
Having No Plan Can Also Cause Chaos in Your Business
Naturally, we wouldn’t expect you to do any of the things on this list on purpose to cause disruption and bad feelings in your family. But sometimes, not planning for the future can have the same impact on your family as if you had intentionally tried to cause chaos, leaving loved ones in a less than desirable position down the road should something happen to you.
Many of the steps involved in successfully transitioning a family business can take years, even decades to complete, so it is better to start planning sooner rather than later. Contact your Warner attorney or Bill Lentine at wlentine@wnj.com or at 248.784.5061 to begin planning for the eventual transition or sale of your family business.
Rightsizing Risk Series: Creating Value for the Future
As the economy begins to emerge from beneath COVID-related restrictions, many uncertainties remain in the small business sector. But one step you can take to right-size your risk and improve your opportunities for future growth is to make sure you have good financial management and tighten your financials, according to John Ruther, managing director for consulting firm O’Keefe. He was interviewed by Sheri Welsh for The Welsh Wire podcast, sponsored by the Family Business Alliance.
“Making sure that somebody can see three to five years of really good solid financials, that you can’t poke holes in, it turns out to be really valuable,” he says.
Ultimately, the goal of good financial management is to create value for the future, Ruther says.
“And obviously, if something’s not valuable anymore, then there’s not a need for it. So as long as you’re keeping it valuable, then that makes all the sense in the world.”
Ruther also says it’s also important to expand company knowledge and expertise beyond the firm’s founder.
“In a lot of cases, you’ll see that the people who work for or work within that company look to that person to make all those decisions. So when it comes time to look to either pass it on or exit or take a look at even expanding the customer base, [if] it’s that person that is the reason that the business is so successful [then] it’s really important for you to start to pass that information on to somebody else.”
He also says you can help future-proof your business by spending time now in strengthening relationships and building trust with suppliers, bankers, etc.
The Family Business Alliance serves to advance family businesses in West Michigan with the tools, strategies, and partners to achieve multi-generational success. We provide educational opportunities, events, and resources that will assist you to elevate leadership, navigate governance and create connections.
Rightsizing Risk Series: Fraud in the Family Business
The Association of Certified Fraud Examiners expects employee embezzlement to increase by 71 percent over the next 12 months. Is your family business prepared?
One of the simplest steps to take is regularly checking your bank statements. “I know that those of you that are business owners may think, ‘Oh, I don’t have time, I have people to do this for me,’ but I will tell you, you will catch a lot of things if you periodically run and check the bank statement, just scroll through and see what a few things are,” says Kristen Spence, Fraud & Litigation Manager for Hungerford Nichols CPAs + Advisors.
Other topics discussed during the 30-minute podcast include how to spot red flag warnings in payroll operations, securely manage manufacturing inventory, and reduce risk by implementing proper internal controls.
Those formal internal controls are especially important for small family-run businesses, says Katy Felver, Business Advisor for Hungerford Nichols CPAs + Advisors. “It’s a little bit more challenging to put internal controls in place [but] it is possible,” she says. “And it isn’t because I don’t trust you, it’s because we’ve got to have each other’s backs. We always have to make sure that we’ve got it like you’re watching me, I’m watching you. We’ve got transparency and honesty going on,” continued Felver.
For any business owner, there is no substitute for knowing your employees and knowing what’s going on.
“Kind of my motto is when you’re a business owner, if you’re able, keep your finger on the pulse of what’s going on in your organization,” Spence says. “And a good way to do that is, honestly, hang around the water cooler. Get to know your employees. And if they are comfortable with you, eventually, they will start telling you things that they wish they had told you,” she stated.
Spence and Felver shared their advice for managing fraud risk when they were interviewed by Sheri Welsh for The Welsh Wire podcast, sponsored by the Family Business Alliance.
Banking Relationships that Make an Impact to your Bottom Line
Family-owned small businesses face lots of challenges. 2K Tool, founded 15 years ago by Heidi Smith and her son Kevin, has navigated a path to growth and success by having a productive partnership with their banker, Old National Bank. “I think that partnering with a banker who understands your industry is very important, [who] understands the manufacturing industry a lot, and you have to click in a way that you trust the relationship, too,” Heidi says.
2K Tool is an innovative leader in custom machining and mold making. It has 25 employees in Grand Rapids, including Heidi’s husband, her daughter Amanda, who serves as operations manager, and Heidi’s son-in-law Aric.
Leadership Skills that Deliver
Do you know who you really are? You better if you want to be an effective business leader.
Self-awareness is crucial to leadership, says Rob Elliott, a partner in Pondera Leadership Consulting. He talked recently with Sheri Welsh for The Welsh Wire podcast, sponsored by the Family Business Alliance.
The Secret to Effective Family Business Leadership
“What’s the key to effective leadership in a family business? Identity.”
– Tom Emigh of Acorn Leadership
“You have to know who you are before you can lead effectively, and that’s really the core of it,” says Tom Emigh, Leadership Coach & Principal for Acorn Leadership. “Identity is about the question, who am I?” Emigh talked recently with Sheri Welsh for The Welsh Wire podcast, sponsored by the Family Business Alliance.
Understand the Complex Dynamics of Successful Decision Making
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.
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.
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?
Family-Owned Businesses Wrestle with Talent Concerns
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.
Is family part of your brand identity?
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?