SMB Financial Planning for Multi-Generational Business

Certain financial challenges confront all growing businesses. For family business owners strategizing to scale, while maintaining family control of their companies over future generations, added issues in planning must be successfully managed. The usual conflicts of opinion on a wide range of business and family matters, including power succession, asset disposition, family hiring practices, and many others must be considered by family business leaders.
Here is some essential advice on best practices for family business financial planning for owners looking to scale their family businesses and keep them under family management through multiple generations.

Foundational Financial Planning for Family Businesses
A great benefit of owning a family businesses is that there is no obligation to appease other stakeholders or meet their short-term financial interests. This freedom allows business owners to focus their plans on the longer-term. This approach offers companies higher probability of sustaining themselves against industry-wide or broader economic downturns, or other potential financial impacts.
• Successful family businesses leaders are more likely to be focused on goals oriented to the next-generation than for the next year or quarter, per the Family Business Center.
• Family business owners are more likely to adopt financial strategies that make the best interests of their customers and employees priorities.
• Family business managers are more likely to emphasize social responsibility in their policies.

Accurately Evaluating Risk
Business ownership is a proposition fraught with financial risks. Changing market conditions, judgment errors in financial planning, false assumptions in estimating expenses, excessive optimism in projecting income, and unforeseeable personal, environmental or economic impacts are just some of the hazards to which a family business is continuously exposed.
Turning a profit for the year is just one of the requirements for success. Knowledgeably assessing risk is the foundation of effective business financial planning. The potential for growth and financial stability of the business over time depends upon the owner’s diligence of focus on safeguarding against the various perils that threaten the security of the company’s interests.

Business Planning for Multi-Generational Family Ownership
A family business’s growth and profit margins are driven by leadership’s strategic vision. Planning in a multi-generational family businesses, as for any business, is the most critical of all basic business disciplines. The foundational elements of family business management planning include:
• Clear arrangement of who will control management and oversight of operations.
• Compensation policies for family members who are involved in the business and for those who are not involved in it.
• Clear, written hiring policies for family members working in the business.
• A written management succession plan.
• A structure of individual ownership interests that is agreed in writing.
Setting forth the business’s ownership structure, which means formally establishing who owns the majority of the shares of the business’s value should be done at the outset of the startup. Clarify the form of the shares, whether an LLC or in a trust. Define the ownership blocs and accompanying voting rights. Try to arrange forms of ownership shares in ways that best fit your individual family members’ various interests.

Family Issues in the Family Business
Only family members with the skills, training and temperament to perform well in the business and in the family work context should be employed in it. Job descriptions and performance evaluations should be clear and fair for family members. Best practices are to align salaries and all other forms of compensation for family members with those offered for comparable positions at similarly sized companies in the industry.
Family members working in the business need to help ensure that the family’s ethics and values are sustained. This is integral to maintaining the company’s culture and ethics and is essential to preventing degradation of quality in services, and negative impact to customer satisfaction and to the business’s brand.

Managing Taxes on Family Members Working for the Business
Children working in the family business must be treated similarly to the way all other employees are handled:
• Records — Detailed employment records must be maintained, including numbers of hours worked and all payments for services rendered by the family member.
• Pay — Regular paychecks must be issued by the business to the owner’s children working at the company, and on the same schedule of pay as other employees receive it (weekly, bi-weekly).
• Roles — Services that children or other family members provide must legitimately serve the business’s needs, must be normal types of services for the type of business, and must be documented. (Household chores are not considered business activities.)
• Expenses —The IRS may assess that children’s wages were not appropriately classes as necessary for the business, and may deny those as business expenses, if children’s work activities are not defined the same as for employees in similar positions.

Reducing Tax Liability for Your Business
• Hire Your Family as Workers. — There are some excellent tax benefits for family businesses. There is no unemployment tax for the business owner’s spouse or parents who work for the company. Owners also may not be required to pay income tax or Social Security on their children who work for the business. The owner is required to follow child labor laws and to pay the child legal wages, in order to be eligible for the tax benefits. And, as mentioned, family members’ work must be of actual benefit to the business and be normal types of services for the business.
• Use Independent Contractors. — Using independent contractors saves the business from requirements to pay unemployment, Social Security and Medicare taxes. Ensure that independent contractors you hire do legally qualify as such, under IRS’s checklist of conditions and activities that define independent contractors.
• Schedule Purchases before Your Accounting Year End. — Don’t wait to make necessary repairs or to replace worn out tools or equipment. Instead, incur these costs prior to the end of your calendar or fiscal year, so you can include them in the current year’s expenses.
• Pay All Bills by the End of Your Accounting Year. — Paying as many bills as possible by the end of your accounting year end date permits you to claim as much as possible in expenses for the year.
• Give Donations before Your Year End. — Be sure to make all of your charitable donations by year end, so that you can claim those as deductions for the current tax year. Remember to keep the receipts for all contributions valued above $250, per IRS requirements.
• Utilize the Welfare-to-Work Tax Credit. — Helping individuals transition to the workforce from welfare can also help you, by reducing your federal tax payment. You can save up to $9,000 over two years for each new employee who qualifies.
• Claim All Allowed Deductions. — Keep your receipts, and maintain complete income and expense records. Have a well-skilled accountant. These are the first fundamentals for maximizing your savings on taxes. Maintain thorough records of costs for your business start-up, including office expenses, equipment, furniture, insurance, materials, supplies, professional memberships, conferences, education, write-offs, travel and other expenses.
• Learn about Additional Deductions and Allowances — Research online, and ask your accountant for tips on additional tax savings that you may qualify for. And, obtain a list of the many typical mistakes business owners make that cause them to pay more than necessary in federal taxes.

Family Concerns in Business Leadership
As a family business grows, and its leaders are becoming more experienced in business, increasing opportunities and challenges present themselves.
• Capital Expansion — Your company may have now grown in market share or profitability to the extent that capital expansion appears to be your most practical next objective. If so, in the sweeper industry, this has proven to be a reasonable time for businesses to consider diversification into additional service types.
• Family Dynamics — Declining financial performance in family businesses is not uncommon as the number of family members employed by the company increases. This is often due to family hires that compromise efficiency and productivity, creating a financial drain on the business. This problem can be due to deficiencies in maturity or in training or skills.
• Family Hiring Issues — Bad hires of family members can cause much greater risk to the business than non-family hiring problems. It can badly damage family cohesion. Even trying to manage against making bad family hires can be a problem for family business owners, damaging family trust and overall relations. And, an emotionally destabilized work atmosphere can put the business at risk.
Succeeding through multi-generational family business ownership requires business management discipline that is continuously and heartily maintained by the senior generations. Leadership must nurture the family’s shared values, maintain practical rules and order.

Succession Planning in the Family Business
Succession planning involves determining the future of the company’s leadership, how and to whom ownership shares will be allocated, and the form of those distributions. Best practices allow for a board of directors to be installed to select new leadership, determine responsibilities, and update policies for family employment agreements, compensation and retirement.
Defining family members’ roles and resolving conflicts over assets, leadership succession, favoritism and other typical family business problems can help keep the business under family management going forward. However, statistics do show that less than a third of family businesses continue into the second generation, per the Family Business Institute. And, just 12% are still family owned by third generation, and only 3% by the fourth generation.
Nevertheless, that still leaves many family business that do thrive under long-term family control. Developing strong leadership, management systems, conflict-resolution methods, and ethical standards can be very helpful. And, focus on the long-term future of the business can go far in helping a company succeed under family management through multiple generations.
Finally, best practices involve having senior family stakeholders develop an thorough estate plan that considers the clearly defined roles, value and obligations of family members to the business. These measures may not necessarily secure the business under future control of the family, however they can at least help ensure that the current generation succeeds in advancing the best financial interests of the family, the business, and the company’s employees as the family moves forward.

Twitter Digg Delicious Stumbleupon Technorati Facebook

No comments yet... Be the first to leave a reply!