May 15, 2017: An Introduction to Stage 3 Planning: Planning for Both Business and Family Governance

While “stage 1 planning”™ and “stage 2 planning”™ strategies are important family business planning tools, the historical emphasis on “financial planning” without comparable attention to “people planning” has often come at great cost to families in business together, as most failures are more appropriately attributable to intra-family mistrust and miscommunication.  This inadequate attention reflects a historical under-appreciation for the unique qualities of a family business. For example, every business needs to consider such issues as how to generate more revenue than expenses incurred, how to grow, and how to compete. Only family businesses, by contrast, are controlled by two or more individuals who, to work together well, must also figure out how to smartly reconcile the conflicting roles and responsibilities that inevitably arise as a result of the frequent incongruity between traditional “family values” and “business values.” Without appreciating the distinct attributes of a family business, too many families and their professional advisors have failed to sufficiently consider how family members might work together, presumably trusting that family members would naturally support other family members and work well with each other. In our experience, however, families seem to take for granted that goodwill and trust will continue without effort when, in fact, failure to structurally enforce open lines of communication is a primary cause of failure.

These considerations generally received inadequate attention until sometime in the 1970s when the field of family business consulting is traditionally considered to have been established, principally by psychologists and social workers. The field continues to develop and, as a result, there are no licensing requirements to counsel clients, no commonly accepted understanding as to what training consultants should have, what they should be doing, how they should do it, nor what is reasonable for their clients to expect. Many family business consultants, however, strive to help family businesses by developing processes and structures that are designed to enhance the quality of interpersonal relationships and the quality of decisions that impact the future of the business, including by seeking to align values, vision and mission, and developing plans and policies that are informed by those core principles. Such efforts, that we refer to as “stage 3 planning”™ are often informed by helping families to better appreciate the intersection of three roles that individuals might have in a family business: (1) roles within the family, (2) roles as owners of the business, and/or (3) roles as employees of the business, as traditionally reflected in the following three circle model developed by Harvard Professors Renato Tagiuri and John Davis in the 1980s(1):

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(1)     Infographic inspired by Kelin E. Gersick et al., Generation to Generation: Life Cycles of the Family Business at 6 (1997).

After clarifying these differing roles and accompanying responsibilities, many consultants seek to help their clients by introducing them to planning tools designed both to promote more harmonious relationships and thoughtful business operations. Because of their importance to effective planning for family businesses, and because these tools may be less familiar to attorneys, particularly in the family business planning context, we consider in our next weeks’ blogs how these three circles are used to advance planning along with some of the most important tools.

Scott E. Friedman, Andrea H. HusVar, and Eliza P. Friedman, Advising Family Businesses in the 21st Century: An Introduction to “Stage 4 Planning” Strategies, 65 Buff. L. Rev. (forthcoming May 2017).

May 9, 2017: Stage 2 Planning: Maximizing How Much Can Be Given

In this week’s blog post, we discuss the continued historical emphasis on financial planning and the development of “stage 2 planning™” strategies designed to minimize estate and gift taxes.

For most of its history, the United States did not generate revenue by taxing transfers of wealth, whether made during one’s lifetime or upon death. That changed in 1916 when the federal government enacted an estate tax, and to address a planning “loophole,” it added a gift tax in 1932. Even today, the IRS continues to modify the tax code, seeking to close other “loopholes” utilized by crafty planners. As a result, different families in similar circumstances often pay different taxes, depending upon the extent to which they take advantage of creative planning opportunities.

Over time, these laws created an incentive for families in business together to engage in (and, perhaps, disproportionately focus on) planning exercises designed to reduce, if not eliminate, such taxes. Because estate and gift tax planning requires a high degree of technical competence, especially when assets (or an estate) consist largely of a family-owned business and the tax laws keep changing, many family business owners have—understandably—sought the help of attorneys and other professionals to navigate these laws and develop strategies to preserve wealth.

While planning to minimize otherwise applicable taxes serves a purpose, an accumulating body of data suggests that only a very limited percentage of family business failures are attributable to estate and tax planning (i.e. “stage 1 planning™” and “stage 2 planning™”) but, instead, that most failures are more appropriately attributable to a lack of “people planning”. These considerations generally received inadequate attention until sometime in the 1970s when the field of family business consulting is traditionally considered to have been established. We refer to this work as “stage 3 planning™”, which we turn to in next week’s blog.

Scott E. Friedman, Andrea H. HusVar, and Eliza P. Friedman, Advising Family Businesses in the 21st Century: An Introduction to “Stage 4 Planning” Strategies, 65 Buff. L. Rev. (forthcoming May 2017).

May 1, 2017: An Introduction to Stage 1 Planning: Who Gets What?

We believe family business planning strategies currently fail primarily as a result of professional advisors giving disproportionate attention to helping families answer two questions inextricably tied to their wealth: first, “who shares in the wealth?” (which we refer to as “stage 1 planning”™) and second, “how much do they get?” (which we refer to as “stage 2 planning”™).  “Stage 1 planning”™ strategies are discussed in this week’s blog post.

The modern-day emphasis on financial planning is, to some extent, a by-product of the abolition of primogeniture in the nineteenth century, which allowed latter-born children to share an estate with the oldest child.  While the tradition of bequeathing estates to the eldest son remains common in some countries like Japan, this tradition came under attack in the United States, in part, because it was inconsistent with this country’s growing emphasis on equality. By the end of the nineteenth century, the general rule in the United States was that children (regardless of gender and birth order) shared equally in intestate property, giving rise to current forms of estate planning.

Although research suggests that family businesses are generally disadvantaged by automatically transferring the business to an eldest son, the system of primogeniture, at least, provided a clear and efficient approach to succession planning.  Without primogeniture in place, attorneys and other trusted professional advisors developed planning strategies to assist families in determining how to most appropriately allocate their estates.  These strategies—which we refer to as “stage 1 planning™”—include the use wills, trusts and, over time, other increasingly complicated estate planning instruments, with the aim of divvy up assets, including interests in a family business, as fairly as possible among multiple heirs.

We suspect that neither our early American legislators nor owners of businesses fully appreciated the multi-dimensional impact that resulted from an approach through which wealth was spread among more than one child. As a result, less attention seems to have been given as to how multiple heirs who, as a result of their shared ownership in a business, would constructively reconcile differing perspectives on the multitude of decisions every business faces. Because of such challenges, attorneys developed another aspect of “stage 1 planning™”—conflict resolution mechanisms. Today, attorneys routinely include “dispute resolution” mechanisms when drafting legal agreements between and among family members, often selecting mediation, arbitration, or litigation as the stipulated mechanism to resolving disputes if and as they might occur. Unfortunately, in practice, traditional dispute resolution mechanisms in a family business are often “too little, too late.”

In short, notwithstanding the importance of “stage 1 planning”™ tools to families in business together, the emphasis on “financial planning” without a comparable attention to “people planning” has often come at great cost, as most failures are more appropriately attributable to intra-family mistrust and miscommunication. In next week’s blog post, we discuss the continued historical emphasis on financial planning and the development of “stage 2 planning”™ strategies to minimize estate and gift taxes.

Scott E. Friedman, Andrea H. HusVar, and Eliza P. Friedman, Advising Family Businesses in the 21st Century: An Introduction to “Stage 4 Planning” Strategies, 65 Buff. L. Rev. (forthcoming May 2017).

An Introduction to Stage 4 Planning™ for Family Businesses

By Scott E. Friedman, Andrea H. HusVar and Eliza P. Friedman

While family businesses can achieve great economic prosperity and often outperform their non-family firm counterparts, authorities continue to cite statistics suggesting that approximately 70 percent of family businesses fail to successfully complete a transition to the second generation, and a staggering 90 percent of family businesses fail to complete a transition to ownership by the third generation.  The commonality of family business struggles is often expressed through the well-known proverb, “shirtsleeves to shirtsleeves in three generations” – a proverb that seems to have a counterpart in every country with family businesses.

While the accounts of what compromises these statistics will often only be known to the family members and their advisors, many of whom serve under professional obligations of confidentiality, there are nevertheless seemingly endless published accounts of prominent families in business together, including the Gucci, Guinness and Gallo families, whose infighting has become known through the public litigation process.

In spite of endless seminars, articles, websites and other information designed to help families in business together, not much has changed and far too many families, many of whom expend substantial resources designed to allow them to secure the most advanced contemporary planning techniques, continue to experience dysfunction – and the “failure statistics” cited above appear to remain as predictable as they are consistent.

We believe the failure of current planning strategies results primarily from professional advisors giving disproportionate attention to helping families answer two questions inextricably tied to their wealth: first, “who shares in the wealth?” (which we refer to as stage 1 planning™) and second, “how much do they get?” (which we refer to as stage 2 planning™).

Some families in business together have engaged family business consultants, professionals with varying academic degrees and professional experience. Family business consultants often use tools like codes of conduct, mission statements and family constitutions, and help to professionalize governance (which we refer to as stage 3 planning™).

Taking it a step further, which we are introducing as stage 4 planning™ – now widely used by the largest companies in the world – considers and applies new insights from science, particularly from the fields of positive psychology and social neuroscience.

An increasing amount of research is being undertaken at some of the top colleges and universities in the world to examine, with scientific rigor, factors that influence how individuals and organizations flourish – and languish. And some of the world’s greatest companies – including Google, Amazon, Zappos and many others – have been increasingly driven to apply those insights and others that they uncover from their experience. Insights include best practices for common business procedures, including how to start a meeting, how to ask constructive, open-ended questions, how to listen thoughtfully and how to practice empathy.

While stage 4 planning™ strategies have gained increasing recognition in non-family business settings, they remains a virtually undeveloped planning paradigm for family businesses. In recognition of the continuing value of traditional planning strategies, but understanding the importance of insights from science, family businesses would be well advised to integrate both the “hard” and the “soft” issues to provide a more holistic approach to family business planning.

Scott E. Friedman, Andrea H. HusVar and Eliza P. Friedman are attorneys at Buffalo, New York-based Lippes Mathias Wexler Friedman LLP / NextGen Advisors LLC. They may be reached by email at SFriedman@Lippes.com; AHusVar@Lippes.com; EFriedman@Lippes.com or by phone at (716) 853-5100.