Fiving It All Away - Part II
For the heir interested in and committed to the business, the wealth for him is the organization that gives him power and ability to carry out his dreams. For others, for whom the business is not an interest, wealth is the opportunity to do other things. To give the opportunity of the business to those who are not interested is irresponsible largess and an injustice to interested heirs.
What future equity growth there is in the business will come as a direct result of what active management does with that opportunity.
Know The Family TreeThere are infinite variations on the family theme -- daughters coming first, daughters coming later, many children, few children, sons-in-law, daughters-in-law, capable children, helpless children, interested children, and non-interested children. Say there is a daughter who is the oldest and happens to marry a son-in-law who has good business judgment and acumen. Say, also, there is a young son just entering college. There's no way this father is going to assume logically his son alone is going to inherit leadership of the business. If there are more older daughters, the founder will have to deal with more known sons-in-law before the son is ever ready to make the big decision.
This is why it is so important for us to recognize, very early, the pattern our family is taking. We must recognize talents, interests and real abilities of our children and our instant family as they grow or join our family. It's crucial to put the family tree down on paper in some organized way, because it's on this tree the leaves of stock are going to be distributed. Since that distribution must be related to needs of the company, this chart can help expose potential mistakes.
Let's say, for example, there is an older son born to a young man and this older son is brilliant and able, a hard worker who loves his father. Let's say, too, this older son has a younger brother who is much younger and worships his older brother. There is a big difference between a situation like this, which offers an almost guaranteed hierarchy, and a situation where, say, three daughters were born to an older man and none are interested in business. We have to think ahead.
Twenty years ago, I got the bright idea to plant some willows on my property. I looked into my backyard from my den and thought, "Wouldn't two of them be just right there and over there?"
I bought two saplings about three feet tall and planted them in carefully chosen spots 20 feet apart. They looked beautiful. For the next 10 years they grew like only willows can grow. I watched, happy and contented from my favorite chair until what should have been obvious became obvious -- the trees were starting to overlap and they were only half grown.
I got a book on trees and looked up how large willows can get. I saw within 20 years they could expand to over 30-foot diameters. My amateur landscaping plan was destroyed because I didn't take the time to think about the future. All trees grow, some much more than others.
This sort of problem is very common in family business -- only instead of willow trees, we grow family trees. Instead of branches we deal with stock. There are many stock distribution plans that look very clever today, and they are proposed by people who should know -- lawyers, accountants and trust officers who have spent their professional lives getting to know the vast intricacies of the tax laws. But too often instead of taking their advice as just that -- technical advice -- business founders tend to ignore their own judgment and follow prescriptions of the professional "Rasputins" uncritically and with great eagerness.
Taxes Aren't EverythingOf course, the tax savings are often very real and immediate. The consequences for the business may be good, too, in the early years, but given time, stock ownership can resemble the flu. If it isn't contained, everybody starts to catch it. It multiplies -- or more accurately, divides -- and becomes a major menace.
It may make good tax sense today to give some stock to the children on a per capita basis. Or maybe the founder wanted to bring in a key man with expertise he needed but couldn't afford. So he gave him some stock. Then there was the employee stock ownership plan, or the stock he gave to the lawyer instead of cash, so he could get incorporated.
Later, as the founder becomes more successful and mellows his attitude toward money under the powerful influence of his love for his grandchildren, he begins to think it would be a magnificent philanthropic gesture to give little blocks of stock to them, and maybe long-term employees, in appreciation. Of course, because he has tax advice, he's encouraged because everyone agrees the best tax move is to give it all to the kids early on, saving a bundle on taxes.
But those are today's considerations. What situations will these actions produce after the founder has met his own bottom line? Just consider what can happen:
A per capita distribution to the grandchildren will result in each grandchild inheriting equally. The intent was to leave the business to our children, using the grandchildren's lower tax brackets as a vehicle. Trouble is our children aren't usually equally fertile and the family with the most grandchildren winds up with more stock and more control. On the other hand, had the stock been left per stripes -- equal shares per family -- that would have concentrated control of the company in the hands of whoever was lucky enough to be an only child. It's unlikely either of these outcomes were the founder's intent.
Let's say the key man who got 20% died and his wife inherited his block of common and remarried. Now she -- and her new lawyer-husband -- attend every board meeting conducted by the harassed successor-president.
The start-up lawyer may no longer have any relationship with the business for some very good reasons, but he will always insist on wielding his 5-10% whenever the opportunity arises.
Or what about the involvement/influence of the 20% that was distributed all over the lot in decimal-sized blocks by Grandpa? After it's had some time to grow, the shareholder tree is beginning to look more like bramble -- the family business has become a private corporation owned and harassed in varying degrees by people the successor management hardly knows. That's getting pretty close to the definition of ñpublic,î without having the benefits.
Extrapolating Tomorrow<WhatÕs needed early on is a little bit of arithmetic. We can look at our family tree and see that in, say 10 years, there will be this number of kids at various ages. ThatÕs not a very complicated thing to do. Then we can guess whatÕs going to happen simply by adding numbers and logical progressions over the coming 100 months.
A 20-year-old daughter in 100 months will be 28. She probably will be married and is likely to have two or three children. ThatÕs not an unreasonable assumption, and it leads directly to some very important questions. For example, what the quality and interest will be of her spouse? How well will he get along with the other sons-in-law and the other children? Is there a chance he may want to join the company? Will there be room for him?
Naturally these questions canÕt be answered before the young man shows up and we can see what we got, but asking the questions can lead to a range of implications and suggestions for actions now, while weÕre waiting. In the case of the son-in-law, for example, it would seem logical to start right away doing everything possible to assure there will be acceptance and accomodation among everybody in the family when and if he does arrive.
We canÕt put off our estate planning until all the facts are in, and all the loose ends are neatly stitched and tucked away. We may have a natural tendency to procrastinate, but it has to be overcome. I prod myself to tidy my own affairs by constantly imagining that next week somebody is going to say, ÒWasnÕt that great, he had a premonition.Ó Well, it wonÕt be a premonition. ItÕs just a matter of keeping an orderly house because I know that someday IÕm going to have to leave it in the hands of others, others whom IÕve taken the time to know and understand as best I can.
It will be on the basis of this kind of knowledge that future shareholders will be selected. When you leave shares, you have to leave power -- it comes with the stock. When the founder leaves, he will be leaving power distributed in some way. Some people will inevitably be more equal than others.
Whatever plan a founder chooses, one thing is sure. He will someday have to make one of his heirs president and others something else.. No matter what is done, one of the sons will have to have a little more right to the last word than the others, even if ownership is distributed evenly.
The goal every founder must constantly keep in mind is continuity, not tax savings. Continuity has its own demands, demands which must be given thought and acted upon if the business is to survive past the first generation. The decisions which have to be made are subjective concerns in many ways. They depend on needs of the owner/manager and on readiness and capability of the people involved. They are only secondary technical questions. No amount of expertise in law accounting, financial planning, or management is going to be sufficient to direct these decisions.
It takes a lot of wisdom, courage, preparation...and prayer.