If you own a successful closely held business and have a family, it is critical to take the time necessary to consider establishing a new plan. This plan transitions your wealth to your heirs while minimizing costs, enhancing open communication that results in greater family harmony during life and beyond while maximizing business profitability. It makes sense, and sounds easy, yet it is not.
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Wealth Transfer for Business Succession and Estate Planning
1. Karl R. Bareither, CLU
Wealth Transfer Specialist
Ph: 805-595-2089 Email: karl@fbrsystem.com
Educational Wealth Transfer Planning Presentation
2. Family & Business Objectives
The FBR System
A holistic approach to planning,
not transactional
Treats wealth as more than just
property
Recognizes the importance of
open family communication to
the planning process
Acknowledges that planning is a
journey, not a destination
4. Family Business Statistics
88% of current family business
owners believe the same family or
families will control their business in
five years, but succession statistics
undermine this belief...
•Only about 30% of family and
businesses survive into the second
generation
•12% are still viable into the third
generation
•only about 3% of all family
businesses operate into the fourth
generation or beyond1
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Family Business Research Institute
5. The Need For More Effective Planning
Statistics reveal a disconnect
between the beliefs and reality.
This information indicates lack of
family business succession
planning.
This was confirmed by our own
survey which indicated the
importance of including all family
members.
6. Wealth Transfer Challenges
The ownership succession planning
issues that seem to be the most common
areas of contention or omission in family
business succession planning are:
1.Technical mistakes
2.Planning in a vacuum
3.Leaving the business to the surviving
spouse
4.The challenge of treating children
equitably
8. The Family and Business Renewal Model
Phase I
Examine
Current Plan
Phase II
Develop
New Plan
Phase III
Present &
Implement Plan
The FBR
System is
a proven
success
model that
has saved
business
owners
millions of
dollars
while
preserving
the family
business.
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Your
Wealth
Transfer
Plan
9. Interview each person individually
Business family members and
spouses
Passive family members and
spouses
Key employees
Step 1: Individual Family Interviews
Clarify personal goals, concerns and
intentions of each family member
10. Step 2: Determine Family Objectives
Identify family and business
expectations and concerns.
11. Review existing owner and
business documents:
Financial Statements
Income Tax Statements
Life Insurance Policies
Business Agreements
Wills
Trusts
Step 3: Analyze Current Plan
12. The Wealth Transfer Specialist will:
Completion of Phase I
Understand the existing
wealth transfer plan
Understand the goals, concerns,
hopes and dreams of each
individual family member
13. How, when and to whom will
leadership of the business be
transferred?
Step 4: Examine Transfer Options
Wills
Trusts
Gift
Buy-sell agreement
Reorganization
Sale (family members or
non-family buyer)
Charitable arrangement
We examine
various tools
and techniques
to determine
which ones
should be
incorporated
into your
personal plan.
14. Meet with trusted owner
advisors, examine options,
and draw conclusions
Step 5: Seek Advisor Input
We work
collaboratively
with your
existing trusted
advisors – we
value the work
they’ve done
and the
knowledge they
have shared
with you.
15. Step 6: Develop the New Plan
Determine wealth transfer
options
Organize information
Seek to satisfy both family and
business concerns
Promote decision-making that
is both sensitive and pragmatic
16. The WTS
Completion of Phase II
Creates a written report
detailing the new plan
Determines the most viable
options for transferring the
family’s wealth
17. Step 7: Present New Plan
The Family Retreat:
Present new plan
Examine business
financial, legal and tax
issues and options
The art of
planning
and
facilitating
a family
retreat is
part of the
FBR
System
18. Consider viable options for providing needed liquidity
Sale of assets
Loan
Insurance
Sinking fund
Step 8: Consider Liquidity Options
19. Obtain agreement to
implement plan
Complete financial, tax,
and legal requirements
Monitor plan progress
Step 9: Implement and Monitor Plan
20. The Family and Business Renewal Model
Phase I
Examine
Current Plan
Phase II
Develop
New Plan
Phase III
Present &
Implement Plan
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9 Your
Wealth
Transfer
Plan
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The FBR
System is a
proven
process that
has been
successfully
used with
hundreds of
business
owners.
21. What are the costs and benefits?
Cost dependent upon:
scope of work
number of family members
complexity of business
Expectations
Defining Your Investment
Free initial interview
Planning fee is established
22. 1. It’s a family affair not just an owners affair
not just a transaction
not closed and secretive
not a telling one
not exclusion
not closing discussion
1. It’s a family affair
2. It’s a process
3. It’s an open agenda
4. It’s an asking format
5. It enhances family life
through inclusion
6. It’s a way to open family
dialogue
12 Principles of Family and Business Renewal
23. 7. The greatest resource
is people
7. The greatest resource
is people
not plant, equipment
and real estate
not one at the expense
of the other
not a whitewash
not excluding anyone
who may differ
not a free-for-all
or anger tirade
not a risky venture
8. It deals with both external
and internal matters
9. It ensures an examination
of all issues
10. It seeks input from
owner advisors
11. It uses an objective
planner as a facilitator
to plan a family retreat
12. It assures a money-back
guarantee if not totally
satisfied
12 Principles of Family and Business Renewal
(This slide can be customized for the individual WTS.)
Good evening, ladies and gentlemen. My name is ________________. Welcome to our presentation; Planning a Family & Business Legacy.
Let me introduce myself more fully (discuss biographical information as appropriate).
Our subject this evening is how to move beyond traditional business succession planning and secure the future of your family’s business by using a process called Family and Business Renewal.
The FBR System was developed by Karl Bareither to help family owned businesses successfully transfer their wealth.
READ SLIDE
What is your definition of wealth?
Most people identify wealth as money, property or other tangible items. In fact, wealth can include many things – including our health and the love and support of family.
(Use this opportunity to share a personal story about yourself, your family or other loved ones that will help your audience relate to you as a caring human being. Demonstrating your willingness to share personal information will help audience members become comfortable sharing their personal experiences with you as the presentation progresses.)
According recent studies 88% of current family owned business believe that the same family or families will control their business in five year, but as you can see succession statistics differ.
Does it seem strange to you that with all the attorneys, accountants and financial advisors available to business owners that so few are able to keep the business in the family beyond the first generation? Obviously, there is a failure somewhere in the planning process.
There is a need for more effective planning – research indicates that family business failures can essentially be traced to one factor: an unfortunate lack of family business succession planning.
So the question really is,
“Why are family business owners reluctant to plan for succession?”
I believe that the root cause of the failure to plan springs from the family dynamics themselves. Lack of communication, dysfunction within the family - including things like alcohol and substance abuse - paralyzes the wealth transfer planning process.
Family business owners must understand that the reason so many family businesses fail is because of family issues, not business issues!
Here’s an interesting point that many entrepreneurs don’t realize. Some of the characteristics that helped them create a successful business in the first place work against them when it come to planning for preserving the business.
For example, secrecy may be important early on in order to protect the business as it is getting started. When planning for continuation, however, openness is required so the needs of everyone involved can be taken into consideration during the planning.
Control is important initially because the entrepreneur is responsible for virtually every aspect of the start-up business. When planning for continuation, it is necessary to share control for the long term good of the business - something that might be difficult for the entrepreneur.
The entrepreneur must wield the power in the business early on in order to make progress quickly. In long-term planning, knowledge replaces power.
The entrepreneur may also be more autocratic in dealings with associates, employees and family members in order to facilitate efficiency. The planning process, however, requires collaboration.
Also, the planning process when focused on the entrepreneur alone, centers on what I like to call “matters of the head and ego.” Involving the family in the process expands the focus to include “matters of the heart and spirit.”
Here are the three phases and nine steps in Family and Business Renewal wealth transfer process.
In Phase I we determine the objectives of the individual family members as they relate to the business and examine the existing wealth transfer plan. This process consists of three stapes which we’ll examine more closely in a moment.
In Phase II we develop a new wealth transfer plan based on the needs of all family members and business concerns - again using three distinct steps.
In Phase III we present the new plan to the entire family in a retreat setting where issues and concerns can be resolved to everyone’s satisfaction. The process ends when a workable plan has been implemented and a process put in place to monitor its ongoing success.
The phases and steps result in three major benefits to business owners. We’ll discuss them in more detail next.
Step 1 is to develop an understanding of what each individual member of the family expects of the business. Each individual is interviewed in order to better understand what the expectations and goals of family members and key employees are so these can be taken into account when developing the new wealth transfer plan.
To do this, each family member must be interviewed in-depth. Your participant’s booklet includes a copy of an interview guide. These are the key questions asked of each individual during the confidential interviewing process.
Every family member must be interviewed - including spouses and in-laws - whether they are active in the business or not. Non-family employees who are key to the success of the business are also interviewed.
The goal is to clarify each individual’s goals, concerns and intentions with regard to the business.
The process calls for objective listening skill on the part of the interviewer so as to obtain honest input.
Step 2 is to determine the family objectives.
This is accomplished by studying the responses from the individual family member interviews and using the information to identify goals, needs and dreams of all family members. The goal is to compile an accurate profile of the expectations the various family members have for the business and its future.
Step 3 is to analyze the existing business continuation plan.
It begins by gathering any personal or business documents related to planning that has already been completed. In order to be effective as the WTS, I must fully understand how these documents work and what they accomplish. The business owner can be extremely helpful by recalling the original intent you had when these documents were created.
Remember that every business has a continuation plan. If the owners have not taken the time to develop one, the state intestacy laws will determine the business succession plan. The point to ponder is “Do you want to develop your own business continuation plan, based on thoughtful consideration, or would you rather wait and see what the state government has in mind for your business?”
After completing Phase I, I will have a thorough understanding of the goals, concerns, hopes and dreams of all the family members as they relate to the business. This understanding will assist the business owner in making more informed decisions.
I work with the business owner and other family business advisors to make certain I have a clear picture of the existing plan before proceeding with the new wealth transfer plan.
Once the family objectives have been determined and the current wealth transfer plan documented, Phase I of the process is now completed.
Step 4 in Phase II is to examine the ways in which the transfer of business ownership might be accomplished.
These are the typical transfer techniques families use:
Will and trusts - ownership of the business can be arranged using one of these legal instruments.
Gift - shares in the business interest can be gifted to other family members.
Buy-sell agreement - you can arrange for the transfer of ownership through a formal buy-sell agreement drafted by an attorney.
Reorganization - in some cases the business can be reorganized into a different structure to facilitate ownership transfer.
Sale - installment sale to provide retirement income for business owner.
Sometimes, if philanthropy is a goal, gifts to charities can be incorporated into wealth transfer planning resulting in opportunities for personal satisfaction and encouragement of philanthropy by other family members. Charitable planning can also result in substantial income and/or estate tax savings.
The various techniques must be examined at this point in order to determine which of these alternatives should be considered for the new plan.
Developing a wealth transfer plan involves a high degree of expertise. In addition to my own skill and experience in this area, I also meet with the team of trusted owner advisors to take advantage of their expertise. In addition, I want to learn the history of the current plan to understand why it was developed as it was. I will use all this information and the input from the other advisors to develop a new plan taking into account all the information gathered during the individual family member interviews.
Each member of the team has his or her responsibilities. The attorney must draft legal documents, the accountant examines the tax aspects and the financial advisor is responsible for financial objectives. I act as the quarterback of the team, if you will, coordinating meetings and keeping the planning process moving.
This is the essence of the new plan.
The options available must be determined and recommendations complied into a new plan.
The new plan must seek to satisfy all family as well as business concerns.
The goal of the planning process is to promote decision-making that is both sensitive to family members and their issues as well as pragmatic.
Your participant’s booklet includes a form that can be used to capture the overall plan design.
At the conclusion of Phase II, the WTS will:
Have determined the most viable options for transferring the family’s wealth to the next generation.
Have created a written report that details all the elements of the new plan.
The responses to the three questions will guide the discussion of the old and new plans. The goal is to get everyone’s goals, expectations and concerns out in the open where they can be dealt with. As the new plan is revealed and discussed, each family member will come to understand how it addresses their individual needs or they will know the reasons why it cannot.
The presentation of the new plan includes a discussion of the financial, legal and tax issues that affect the design. This material is discussed in “layman’s” terms and only to the extent it is useful to help everyone understand why the plans has been developed in this form.
I avoid jargon and complicated technical terms.
Lack of liquidity for estate and business purposes is usually the principle need for the typical capital intensive business owner. Failing to provide for it will likely cause the plan to fail. All options for providing the liquidity needed by the plan must be considered. These usually involve insurance and/or other financial products.
Again, while these topics can be technical in nature, each is discussed in “layman’s” terms until everyone agrees that they understand how the solutions work and what are the best alternatives.
The new plan is discussed and questions answered until there is general agreement that the best possible solutions have been developed. The retreat ends with the family’s agreement to implement the plan.
Implementation includes completing all the necessary financial, tax and legal requirements.
The plan might also include other implementation aspects such as a development plan for one or more of the future owners.
Once the plan is implemented, it must be tracked and periodically reexamined to make certain it is working and remains in the best interest of everyone involved.
Here again are the three phases and nine steps in Family and Business Renewal wealth transfer process.
In Phase I we determine the objectives of the individual family members as they relate to the business and examine the existing wealth transfer plan. This process consists of three stapes which we have discussed.
In Phase II we develop a new wealth transfer plan based on the needs of all family members and business concerns - again using three distinct steps.
In Phase III we present the new plan to the entire family in a retreat setting where issues and concerns can be resolved to everyone’s satisfaction. The process ends when a workable plan has been implemented and a process put in place to monitor its ongoing success.
Most business owners want to get to the bottom line - what is this going to cost?
Well that answer, as you might guess, depends upon the scope of the plan, the number of family members involved in the interviewing and the complexity of the business.
The entire fee for this service depends upon the scope, size and complexity of the business and the planning involved.
The actual fee will be determined during a free initial interview. Assuming the Family and Business Renewal process is a feasible option for your business, you and the specialist will negotiate a fee and capture it in a formal, written agreement.
However, there may be instances when the No fee option is appropriate. For example: if it is a simple transaction with instructions to sell the business on the owners death; a small service business; a family owned business with no heirs interested in being involved in the business or the business owner doesn’t want to inform family of succession and estate planning strategy until the owners demise.
Fee is also dependent upon your expectations – for example: if you want a written report; if you want to include all family members, or if you want to involve your other advisors.
These are the 12 principles of the Family and Business Renewal process.
At its core is the recognition that wealth transfer planning is a family affair - not just an owner’s affair.
The planning is an ongoing process, not a one-time event.
The planning agenda is completely open - everyone’s opinion matters and all input is considered.
The key to achieving the open exchange of information is that the process requires asking, not telling.
It has the potential to not only protect the family’s wealth, but also enhance family life through inclusion - not exclusion.
It’s a way to open the family dialogue, benefiting both the business and family relationships - as opposed to a process that closes off discussion.
The Process underscores the value of individuals by recognizing that a business’ greatest resource is its people - not the plant, equipment and real estate.
It deals honestly with matters both internal and external to the business - but not with one at the expense of the other.
It ensures examination of all important issues without whitewashing over any of them.
It includes input from all of the owner’s advisors - including those who might differ - to assure that all viewpoints are considered and all alternatives explored
It utilizes a trained, objective person as a facilitator to plan the family retreat so it does not become a free-for-all or deteriorate into an anger tirade.
It assures a money-back guarantee if not totally satisfied with the results of the process.
We hope this conversation is the beginning of a relationship – we encourage you to make comments and ask questions. Our goal is to have ongoing discussions.