Copyright © 2017. Originally published in The Family Business Legacy Handbook, 2017, by Family Business Magazine, www.familybusinessmagazine.com
When I was in third grade my teacher brought in some maple tree saplings as part of a science lesson. We were shown two possible places to plant these saplings; one spot was in an old forest with many mature trees and the other was in an open area with no other surrounding vegetation. Many of us choose the open area thinking the trees would get more nutrients by standing on their own; however, what I learned was that young trees grow better when planted around older trees. Young trees benefit from the pathways and protection created by older trees, allowing them the opportunity to develop a stronger and deeper root system.
These older trees have created a legacy, a connection through time that learns from the past and builds for the future. Though my teacher thought she was giving us a science lesson, she was really teaching us something more fundamental. She was teaching us about the importance of legacy. Legacy is a fundamental part of life – it gives life meaning. Legacy is not just an estate plan that passes down tangible assets; it is much bigger. It is the connections, the traditions, the opportunities that we pass down to those that come after us. It is what we have learned from the past and what we hope for the future. It is the bridge between what we have constructed in our lifetime and the opportunity for future generations to carry that momentum and continue building.
Each of us has the opportunity to build our own legacy. We leave a legacy in the values and priorities we give our children. We leave a legacy when we teach co-workers how to perform a task or approach a challenge differently. We leave a legacy when we set an example for others. Leaving a legacy is like passing a baton in a relay race, except the transfer happens in slow motion.
Entrepreneurs and family business leaders have a unique challenge in creating a legacy for themselves and their business. They must look not just at their own personal legacy but at the impact of their legacy on all stakeholders – owners, family and employees. Most entrepreneurs and family business leaders wait too long before focusing on the legacy they want to leave their families. They often realize too late that they don’t want to be remembered for how many hours they worked, how many business trips they took, or how many meetings they chaired. Managing the business day to day, as challenging as it may be, is not the same as planning how to pass the baton. Planning for the continuation of any enterprises is the ultimate management challenge. Building a legacy for the family business doesn’t just happen; it requires significant and focused vision and commitment. It requires the balancing of short and long term issues and goals. And, as many business owners know, there are plenty of short term challenges that always need attention and get in the way of spending time and attention on the long term issues.
It is never too early to work on your family business legacy. Building a legacy, like building your family business requires a daily commitment. Rome wasn’t built in a day, nor can you create a business that will thrive for generations and reflects the family’s values and ideals without a focused effort to make it happen. Since legacy planning is so complex and requires a dedicated effort, how can a business owner tackle this task? It must be addressed just like any large project. It needs to be broken down into manageable parts. There must be disciplined deadlines for each task. As tasks are completed, new tasks will be defined, making the legacy plan fluid as it changes to reflect changes in the family, the business environment and the family’s financial needs.
The first set of tasks the business leader must address is how to involve the family. The family needs a reason to continue the business, as a lack of interest will doom the family business. The owners must motivate the next generation of family members to truly engage in the business. If the next generation of family members do not have an interest or are not capable of managing the business, alternate exit strategies must be considered. Often a sale of the business can better support the family’s legacy than retaining the business without the family leadership and talent needed. Family communication and involvement are important components of this process. Tasks that are necessary to motivate the family may include, but are not limited to:
- Developing the children’s values and capabilities
- Talking about the business at the family dinner table
- Providing appropriate educational opportunities for the next generation
- Giving family members opportunity to work inside and outside the family business
As family members get older, involve them in developing a family mission statement. Help them understand the many rewards and opportunities of family business ownership.
Another important task is to develop a lifelong plan for the financial security of the current family business leaders. Without this key element, current family business leaders will be unable to retire. Necessary steps include:
- Having active family members develop a personal financial plan allowing for a comfortable retirement
- Tax efficient retirement planning for both spouses
- Defining post retirement endeavors that will provide current leaders with new challenges and opportunities (teaching, consulting, charitable work, etc.) These interests will provide a meaningful next chapter in their lives.
The third significant objective must be to build a management team. The management team may include family members, as well as key non-family employees. Career development for family members and non-family members must be a deliberate effort. This effort must allow individuals to learn and grow, and supply the business with the talent needed to meet its strategic objectives. Specific tasks necessary to build this objective:
- Selecting one more successors
- Planning the potential successors personal development, including career path options
- Developing a plan for retaining non-family business managers or hiring and developing a new outside management team
- Consideration may also be given to adding outside directors or an advisory board that can provide support and guidance during this management development process. A board may also be helpful in finding outside management talent.
And finally, the family legacy must also be supported by a business succession plan. A cornerstone of that plan includes personal development for the family members who wish to be active in the business. It is also critical to define a plan to address the role of passive family shareholders. The family may consider establishing a family council to address issues impacting the family. In many small to medium sized businesses the company’s operations may not be able to support multiple generations of shareholders. Resentment can grow between family members in such circumstances. Having a well-planned buy-sell agreement and securing cash to buyout passive holders can allow the business to continue to grow. The family must also consider the cost of the succession plan. Money will be needed to build and support the management team’s development. The cost of the owner’s retirement as well as the cash required to possibly buy out passive shareholders or make distributions to the entire shareholder group must be calculated.
All of these steps require time, focus and vision. They are not static parts of the business owner’s legacy. They must be fluid, like all aspects of business and family life. Over time, just like the trees in the forest, the roots of many trees will graft themselves to one another creating an interdependent underground foundation. This is legacy, the interconnection between those who come before us, providing strength and support for those who come after us.
DISCLOSURE
To ensure compliance with Treasury Circular 230, we are required to inform you that any advice concerning tax issues contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of avoiding any penalties that may be imposed by any governmental taxing authority or agency.