BUSINESS GOALS____________________________________________________________

Navigating the Generational Divide in Family-Owned Business Decision Making

OWNER GOALS____________________________________________________________

Who Needs SETPLANNINGTM to Bring Goals Back Into Focus?

Letter from PartnerHOW DOES A FAMILY BUSINESS EVOLVE?

April 2012

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Contents

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2 HOW DOES A FAMILY BUSINESS E VOLVE?What are the signs that indicate your business could turn into something that can span generations of your family? Why do so many business owners turn to an outright sale, instead of considering family succession planning?

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5 NAV IGAT ING THE GENER AT IONAL DIV IDE IN FAMILY-OWNED BUSINESS DECISION MAKINGIn Family-Owned businesses, management and strategy is often divided among the new and old generation. These two groups of family members (we’ ll call them Gen 1 and Gen 2) often have very different expectations and ideas on the strategic (and tactical) decision making within a family firm.

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7 WHO NEEDS SE TPL ANNING T M TO BRING GOALS BACK INTO FOCUS?Have you ever asked yourself, “What happens to the financial value I’ve had locked up in my business on the day that I depart my business, either voluntarily or otherwise?” It’s at that time that every owner wants to receive the maximum amount of money in order to accomplish their personal, financial, income, and estate planning goals.

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HOW DOES A FAMILY BUSINESS EVOLVE?BY DAVID KRAJANOWSKI | MANAGING PARTNERdkrajanowski@singerlewak.com | 949.261.8600

What are the signs that indicate your business could turn into something that can span genera-tions of your family? Why do so many business owners turn to an outright sale, instead of consider-ing family succession planning?

Creating a successful family busi-ness doesn’t just happen on its own. It takes a well thought out plan to cultivate the seeds early, demonstrating what opportuni-

ties may exist for something that could span generations. Getting your next generation excited about your business is also a pro-cess. In actuality, the same things

we teach our children early, in hopes of them having a success-ful life, go hand in hand with things we can teach our children about our businesses, early in their lives.

The perfect place to start the conversations about a family business is over the dinner table. We share stories and conversa-tions about life in general at our dinners. What else takes up more time for the parents than operat-ing a family business? Do young family members not see the good days and bad days, by the way we interact at the table? What better way to share and help mold our younger family members than by sharing at the dinner table:

•The pride in the accomplish-ments that happens, in turning a dream into reality

•The strong work ethic required in whatever endeavor a person chooses

•The family tradition of fairness & concern for the employees of the business

•The social responsibility to be involved in your community

There is an old saying that the first generation builds a business, the second generation lives off the business and the third gen-eration kills the business. Does this happen because of the lack of communication that occurs as a business is created? Our kids see, or perhaps we send signals of the stressful, seemingly tireless toll that a family business takes on the founders. By banishing talk at the dinner table, we shut off the opportunities to share both the triumphs and disap-pointments that happen every day. What better place than around the family table, to share the satisfaction that comes with building satisfied customers or developing a new product that

Creating a successful family business doesn’t

just happen on its own. It takes a well thought out

plan to cultivate the seeds early, demonstrating what opportunities may exist for something that could span

generations

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will revolutionize an industry. How better to share the pride and sense of integrity in making the right moral decisions, and the enjoyment that comes from these endeavors. Imagine the experience for wide –eyed family members, as an issue is discussed, solutions debated, decisions reached and the results shared, creating a love for a business that is now real and means something for everyone. Talks about money can be tied into allowances and the need to save and prepare for times that will not be as bright. Applying for and obtaining summer jobs instill the value of hard work and the responsibility of performing when reporting to a non-family member. Expos-ing kids to the family business is positive, regardless of the cur-rent condition or outcome. Who knows what skills they will devel-op or where their hearts will lead them in life. But to avoid at least exposing our kids to the fam-

ily business, is the same as not exposing your kids to the arts or science, as they are growing up. The managerial, business deci-sion making and problem solving skills learned, even if they choose not to go into the business, will benefit them in whatever field they eventually choose.

3 T Y PICAL ENTREPRENEUR-IAL BUSINESS CYCLES :

START-UP CYCLE : Usually typified with the founder having to spend vastly more time in the business vs. developing the family as the business gets started. The neglect of the family is top of mind, creating conflict as com-pared to having a “normal job”.

SUCCESS CYCLE : Begins when the business is successful, capable of running smoothly and allow-ing more time with the family. Unfortunately with this cycle comes over-indulgent behavior by the founder. The entrepreneurial

owner “over steers” to compen-sate for so much time away from the family, and showers the fam-ily with benefits derived from the business, with no understanding by the family as to the “why” or “how” it happens. This cycle is crucial in helping family mem-bers adopt a strong set of values that will serve them throughout life.

RE T IREMENT OR SUCCES-SION CYCLE : the third and last cycle where conflicts between generations appear.

•The founder may want to pass on the business but the second generation may want to just live the high life.

•The founder wants to choose the successor but other mem-bers want a more democratic method.

Perhaps other members joined in the business while the founder continued to hold authority,

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leaving their roles, responsibilities and accountability in the orga-nization poorly defined. Such an entry results in never allowing family members to mentally “buy into the business”, as being theirs one day.

Most destructively, some mem-bers may want to be in the busi-ness and other family members have not developed any desire to be part of the business, thus creating the conflict and battle over what to do with the business to placate the family.

Perhaps we err in making the market value of the business the sole measure of what a family considers in determining whether to transition a business to the next generation or sell it. Maybe market value is just a score, not the goal. Maybe a clearer under-standing of what the goal of a family-owned business is would help in the decision to continue running a family-owned busi-ness. Yes, it is about market value but isn’t a family business also about teaching good business skills and creating strong families whether or not a family agrees on everything? Doesn’t a family business teach each other how to deal with a crisis? What is the loss to our community when a family business sells out to a larger company?

By creating effective dinner table conversations about the family

business, many kids will lean toward exploring the continuance of the business as they consider their college years. The next big decision comes after graduation. Return to the business and start at the bottom, is many founders’ belief. But is that really neces-sary? Does someone have to know every job function in the business? How must it feel to be forced to start at the bottom with the unspoken words of “the founder’s kid” and the pressure it

brings? Perhaps the better choice is for the graduate to go to work for someone else for a number of years, and gain some experi-ence skills outside of the “family bubble”. The “graduate school” of hard knocks “getting in the trenches” is where hard work can bring self-assurance. Strong learning skills continue to be developed, as well as seeing that strong motivation can lead to rewards.

Upon returning to the busi-ness, definable programs can be established with accountability. If you do “X” over this time period with success (where success is clearly defined and not necessar-ily in terms of dollars and cents), the next step in the transition will be “Y” with additional roles and responsibilities defined for the next time frame. Meanwhile, the same dinner conversations, perhaps now move over to a board room table, continuing to create a culture of participative interaction. Empowerment starts to shine through. Not only is a business plan created, but more importantly, a family business plan is created, emphasizing that the business is a vital part of, but not the complete, universe. Agreement of what is expected if the business is to remain in the family is defined for every family member, that includes training, social responsibility and looking forward to the next transition of power.

Yes, there will be conflict but there will be opportunities as well. The same skills learned early over the dinner table will continue to be the foundation that will continue to support the family business. Remember, it is a journey that never reaches a destination.

The managerial, business decision making and problem solving skills learned, even if they

choose not to go into the business, will benefit them

in whatever field they eventually choose

NAVIGATING THE GENERATIONAL DIVIDE IN FAMILY-OWNED BUSINESS DECISION MAKINGBY JIM PITRAT | ASSURANCE & ADVISORY PRACTICE LEADERjpitrat@singerlewak.com

In Family-Owned businesses, management and strategy is often divided among the new and old generation. These two groups of family members (we’ll call them Gen 1 and Gen 2) often have very different expectations and ideas on the strategic (and tactical) decision making within a family firm. Navigating these differences and gaining consen-sus can be difficult, and ignoring the importance of consensus can have devastating impact on the business and the family.

However, navigating this divide and gaining consensus is infi-nitely more difficult in the fam-ily business than in a corporate environment, because the stakes are so high. Emotional issues and Family harmony issues may have an overriding importance on the decision making that can cause poor decisions to be made for the business. Conversely, the abso-lutely correct business decision may have very damaging impact on the Family itself. And the Owner-Operators of the family-owned businesses must consider

and effectively merge these needs if decisions are to avoid causing irreparable damage to either.

IN TERGENER AT IONAL DIFFERENCES:

During this process of develop-ing a plan and navigating these differences, it is absolutely critical to understand that there are typically significant differences in the goals and aspirations of Gen1 and Gen2. Older genera-tions are–to no one’s surprise–generally more conservative, and concerned with wealth preser-vation, harvesting the fruits of their labor. Often times, a “if it ain’t broke--don’t fix it” thought process occurs. Their businesses are mature and generating cash, they’ve built a business that is

working and it’s time to enjoy it.

Conversely, Gen2 is often more aggressive. They are potentially more in tune with the changing world and environment, more predictive of coming changes that may impact the business. They want to change and adapt and grow. In short--they are concerned the company will not adapt to the changing market place, and want to start taking control. They also may want to

grow. Ironically, much of this may be focused on their concern that the current business may not be able to provide for their securi-

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Navigating these differences and gaining

consensus can be difficult, and ignoring the

importance of consensus can have devastating

impact on the business and the family

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ty when they are in Gen2’s shoes because the world has changed around the company and the business has not adapted.

F IRST THINGS F IRST–WHAT ’S IMPORTANT:

Because the goals of the gen-erations can be quite different, in order to find the common ground and develop the strategy for the business it is important to understand, and clearly define the ultimate goal of the busi-ness. Unlike public companies or private equity backed compa-nies, the family-owned business generally does not have as its primary goal a series of financial measures such as EBITDA, or return-on-equity, return-on-sales, earnings-per-share, and return-on-assets. These measures are generally designed to benchmark the performance of the com-pany as it relates to the overall enterprise value--what the com-pany is worth in a sale or other transaction. Though they may be important (and maybe not) for measuring or benchmarking the performance of a family-owned business’s operational character-istics, they are not the primary motivator for the business.

Conversely, the goal of the family-owned business is primar-ily to provide for the achievement of financial goals for the fam-

ily and its members. A key part of these family goals is usually the security of Gen 1. If not the primary goal, this goal needs to be foremost in the mind of the current management, whether it is Gen1 or Gen2. This goal--as established by the family’s plan--needs to be incorporated in the

strategic objectives of the Busi-ness Plan. Said another way, just as a public company may have as its strategic goal, increasing the stock value of the company, and thus creating a strategic plan that is directed toward that goal, the Family-Owned Enterprise may have as a strategic goal of its plan to fund some sort of retirement plan, or create a wealth outside of the business for Gen1’s security. The Strategic Plan should incor-porate this goal into its operating decision making. If this goal is met, then the ability to navigate the differences between genera-tions is likely to become much easier, or at least much more straightforward.

CONCLUDING THE NAV IGAT ION:

Once the members of the fam-ily understand the intergenera-tional differences, and attribute the appropriate respect to each other’s desires, and the financial security of Gen1 is understood and given the appropriate level of importance, the members of management and the family can go about developing the business plan. In order to do this effective-ly, the family and management need two ingredients:

1. Objective performance infor-mation regarding the com-pany and the family’s existing financial situation

2. The ability to see the other sides arguments and beliefs in the context of valuable and thoughtful ideas.

Often times, the easiest way to do this is with objective facilitators or family business consultants. Without the abil-ity to be objective, either about performance or one’s own desires, the process is going to be hard pressed to create a plan that ar-rives at consensus.

The goal of the family-owned business is

primarily to provide for the achievement of financial goals for the

family and its members

WHO NEEDS SETPLANNING™ TO BRING GOALS BACK INTO FOCUS?SPECIAL CONTRIBUTOR: MARK A. KANDARIAN | SETPLANNER™mkandarian@successionretirement.com

Have you ever asked yourself, “what happens to the financial value I’ve had locked up in my business on the day that I depart my business, either voluntarily or otherwise?” It’s at that time that every owner wants to receive the maximum amount of money in order to accomplish their person-al, financial, income, and estate planning goals. As the owner and perhaps the founder as well, wouldn’t you like, no don’t you

deserve a say in what happens to your hard earned equity no mat-ter how, who, why or when the lever gets pulled? If your answer

is yes, there are a multitude of exit routes and strategies to con-sider. If you’re not acutely aware of all of your particular options, you should. If you want to, you can.

Succession, Exit & Transition (SET) planning is your manage-ment tool for this. It is for every business owner and would have ideally been in place the day you opened your doors.

Succession Planning – Ensures the Business continues, Family, Co-Owners, Management

Exit Planning – Transfers value to Insider or 3rd Party Investor/Buyer Transition Planning – Evolves the Owner from an Op-erator to Passive/Absentee-Owner Business Value Drivers - to both

Preserve & Enhance Owner value

All business owners want to suc-cessfully (whatever that means to them) transition from (again, whatever that means to them per-sonally) their business, whether voluntarily (3-20 years out) or otherwise (0 years out), but gen-erally don’t know how to accom-plish that goal. Start by harness-ing a systematic approach to take control of the SETplanningTM process in order to maximize the value you as a business owner receive on the sale or transfer of your business. It’s not all on you. Collaborating with your qualified trusted advisors when they work well together as a team is critical to the creation of your written Road Map. However, your first taking the time on your own to think through your “pie in the sky” scenario is a most effective way to begin this process.

Failing to set goals in writing means that you as an owner will not be able to exit your business in style. Identify and quantify your goals and objectives. Con-sider in a voluntary exit:

As the owner and perhaps the founder as well,

wouldn’t you like, no don’t you deserve a say

in what happens to your hard earned equity no

matter how, who, why or when the lever gets pulled?

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Why might you depart? Have you amassed enough financial resources or just plain old had enough? How will you know when it’s time to exit? What are your personal tell tale signs? Is there a magic date in the offing? Will it be family driven in some way? What do you feel needs to be fortified? An Exit Planning Preparedness Assessment is an invaluable tool to enable you get-ting your arms around all of these intertwined topics and issues.

Many owners do not set exit objectives precisely because it is emotionally too retching to sepa-rate themselves from a business they have created, nurtured, lived with, suffered with, brought to maturity, and in which they have totally immersed themselves. It may be difficult, if not impossi-ble, for any planning professional to engage you in the planning process until you are emotionally prepared to leave your business.

Those who are emotionally ready to face leaving often do not know what to do or where to begin. Be receptive and open minded when introduced to a qualified profes-sional. That first conversation will be at least eye opening and at best liberating.

There are three straightforward retirement goals that you must fix in your mind. Establishing these goals allows you to cut through a lot of muddled thinking that previously prevented you from moving forward. These objectives are:

1. How much longer do I want to work in the business before retiring or moving on?

2. What is the annual after-tax net income I want during retirement in today’s dollars?

3. Who do I want to transfer the business to -- family, co-owner, key employees, or outside parties?

How many times have I been asked – “When should I start planning for my exit?” Answer, “Yesterday!” How many times

have I been told “I’m not ready to exit!” “Well you should (al-ways) be!” As you can see, the answer’s nearly the same. In an involuntary (This is decidedly at

Many owners do not set exit objectives precisely

because it is emotionally too retching to separate

themselves from a business they have created,

nurtured, lived with, suffered with, brought to maturity, and in which

they have totally immersed themselves

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least as important as our experi-ence has taught us that owners’ reasons for exit are 4:1 involun-tary/encouraged to voluntary!) exit, question number one sadly is answered for you. The answers to numbers two and three may be entirely different than under a voluntary scenario so consider this as well. There are no right or wrong answers, they’re simply your answers and they’re impor-tant.

You can’t effectively leave your business without setting each of these objectives in writing under both scenarios, yet only a hand-ful have carefully formulated these objectives in advance so the actual transfer of the business can be planned.

These are your objectives, from which all planning efforts and results will flow. You are the person primarily responsible for this step, but you need not work alone. No one advisor has all the answers.

Once the amount of retirement income that needs to be received is calculated, your planning pro-fessionals can create a financial retirement model for you based on the following factors:

4. Retirement income needs based on your current life-style expenditures.

5. Inflation assumptions.

6. Size of your current invest-ments.

7. Investment growth assump-tions on both your current and future investments.

8. Your number of years to retirement.

9. Life expectancy, yours and that of your spouse.

Summarily the next steps are:

Your business is probably your most valuable asset, as most busi-nesses comprise between 65 and 90% of the typical owner’s total assets. Understanding (identify and quantify) its value within the context of your SETplanTM

is invaluable. Financial security depends on converting that as-set to cash. It is important for you as the Business Owner to understand that the “value” of your business and the amount of cash you take from it may not necessarily be the same thing. Additionally, to quantify your personal financial assets at this point as well is to learn whether

you have the capability to exit on your terms regardless of the disposition of the value in your business.

In our third step, we must work to ensure that we preserve as much business value as possible from the grasp of the IRS. We additionally work to promote the value of the business through value drivers. Value drivers, a whole other topic, are the vari-ous characteristics of a business that professional buy-out experts believe drive value upward and for which they are willing to pay top dollar. A Value Drivers Analysis here is an invaluable tool to enable you to crystallize where your hidden value lies and how to mine for it. Finally, we work to protect the business value from the grasp of creditors.

The direction of our fourth and fifth steps depends on our choice of Exit Plans. If we are selling to a third party we will follow a very specific systematic process. If we are transferring the business to an insider we must minimize your risk by reducing the time that you have to carry a note.

Up to this point, our Exit Plan-ning has focused on moving on past your business. We must spend some time planning for contingencies. We work to be certain that your family will ben-efit from your life’s work should

you be unable to continue work-ing in your business. This is Step 6. Often times, you’ll find this is your starting point.

Finally, when you have success-fully transitioned from your busi-ness we want to make sure that you accomplish your short and long term personal, financial and estate plan goals.

In summary, a written SET-planTM crystallized around your business owner objectives should:

•Preserve your existing as-sets–including your monthly paycheck from risk and taxes, protect your interests against, creditors, predators & thieves, and build value within their business using tools you already have.

•Transfer ownership and value as profitably as possible no mat-ter who you plan to sell to.

• Integrate personal, financial and estate planning goals with the goals of your business to maximize profit, minimize tax liability and minimize timing.

SETplanningTM should be both enjoyable and rewarding for you. You might consider yourself fortunate to have the need to do

such planning. As one client put it, “It beats running through a meth lab with your hair on fire by a long way!”

You’ve most likely got a great story as to how you started your business, but few have given much consideration as to how well they’ll pass their final test of greatness! What steps have you taken to leave your business in style?

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You might consider yourself fortunate to

have the need to do such planning. As one client put it, “It beats running

through a meth lab with your hair on fire by

a long way!”

MARK K ANDARIAN, A IFExecutive Directormkandarian@successionretirement.com866-99-SRSSI

W W W.SINGERLE WAK .COM | 877.754.4557

DAV ID KR A JANOWSKI dkrajanowski@singerlewak.com | 949.261.8600

ROB SCHLENER rschlener@singerlewak.com | 949.261.8600

J IM PI TR AT jpitrat@singerlewak.com | 310.477.3924

DAVID K AMATH dkamath@singerlewak.com | 949.261.8600

STE VE CUPINGOOD scupingood@singerlewak.com | 310.477.3924

GLENN CARNIELLO gcarniello@singerlewak.com | 949.261.8600

SALLY AUBURY saubury@singerlewak.com | 818.999.3924

MARK COOK mcook@singerlewak.com | 949.261.8600

THE SKILLS YOU NEED. THE SERVICE YOU EXPECT.

OUR FIRMENTREPRENEUR-OWNED BUSINESSESSingerLewak knows the importance of relationships to excel and meet the needs of entrepreneurs and their businesses. Our client service relationship stresses client strategy and sound advice in all aspects of business - including the transfer to a new generation, the sale, or the operation of the company in perpetuity.

FAMILY-OWNED BUSINESSESFamily-Owned Businesses have been the drivers of our economy for a long time. We understand the significance of the family business structure, as well as the day-in, day-out efforts that have made an economic impact on both your local and the national community.

We understand the inter-relationships between the Goals of the Family, the Owner and the Business. Any one of these may impact the others in a significant way. We represent this with our FAMILY BUSINESS GOALS MODEL:

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