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Wealth Transfer for Business Succession and Estate Planning by FBR System
- 1. Karl R. Bareither, CLU Wealth Transfer Specialist Ph: 805-595-2089 Email: karl@fbrsystem.com EDUCATOINAL WEALTH TRANSFER PLANNING
- 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
- 3. Family and Wealth What is your Definition of wealth?
- 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 1 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
- 7. Secrecy Control Power Autocratic Head/Ego Openness Sharing Knowledge Collaboration Heart/Spirit Creating and Preserving a Business Creating Transferring From owners only… …to the entire family A unique approach to planning that involves the entire family.
- 8. The Family and Business Renewal Model Phase I Examine Current Plan Phase II Develop New Plan Phase III Present & Implement Plan A proven success model that has saved business owners millions of dollars while preserving the family business.
- 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
- 14. Meet with trusted owner advisors, examine options, and draw conclusions Step 5: Seek Advisor Input
- 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 1 2 3 4 5 6 8 9 Your Wealth Transfer Plan 7
- 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 Fee or No Fee Option
- 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
- 24. We encourage ongoing discussions to determine the business owner objectives, and those of the family. Comments & Questions
Editor's Notes
- (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.