Hopkinson & Abbondanza Blog

Thursday, April 13, 2017

Beyond the Bottom Line

Engaging the business client in a meaningful conversation about passing the values on to the next generation can be a rewarding experience.  Knowing how to help the client focus on those values that helped establish the family legacy is the challenge.

IntroductionAs the focus of estate planning has moved from developing the best tax strategy to focusing on asset protection, values promotion, and virtues-driven planning, we as practitioners need to arm ourselves with tools to gain the client’s confidence, so that we can create plans that work not only at a financial level, but work for the founding generation, the successor generation, the clients and the other stakeholders. 

Too often the focus in estate planning for business owners has been on the financial legacy.  How much can we leave our kids, in what way, with minimal tax and administrative fees?  The problem with a focus on finances is that it can miss the mark in the overall business transition – and the health of the family business is a key element of the overall family legacy.  Understanding the founder’s values is critical to the success of the plan.  The next generation may embrace the founder’s values or may be waiting for the moment to change directions, but the values are an integral piece of the business and the family legacy that is being transitioned.

This article is based upon three premises.  First:  A family that focuses solely on the financial aspects of estate planning in the business context will be challenged to instill the family values in the next generation.  Second: A family that is willing to engage in a critical conversation with their advisors and other stakeholders will have much greater success in passing precious values, virtues and wealth. This seems simple but we know that many family businesses do not succeed when the business passes the founder-generation.  Third:  The family business is grounded in values whether or not the client chooses to acknowledge or articulate them.  They are critical to the transition, either because they need to be embraced or because they need to be dealt with carefully.  This last premise is one that can be easily overlooked, but is critical to the analysis.  If we accept the three premises, the question becomes how do we engage in the work to add this value for our clients?

If we have a deeper discussion with our clients about their values, what are some of those values and virtues that might come up?  Honesty, Respect, Humility, Risk, Sacrifice, Thrift, Industry, Responsibility, Temperance, Political leanings, Compassion, Internal Drive, Faith, Integrity, Loyalty, Philanthropy, Community Involvement, Commitment to Family, Commitment to Education, and the list goes on.

Before we proceed, there is one other element that often interferes with this style of planning.  Oftentimes, the client has made-the-deal and just needs the attorney to write the documents.  Since most estate planners are not litigators, we are often referred to as transactional attorneys.  I would argue that there is a third category of lawyers that we are striving to be – relational attorneys.  The key to values-based planning, whether it be within the business or the personal context is that we develop the relationship with the client. 

If we are meeting with a new client, he/she is not likely going to walk in the door and start talking about values. How do we transition that client from thinking about the transaction to thinking about the success of the next generation?  Our first conversation needs to reveal our confidence that there is more to the transaction that we need to know.  As we talk with our clients, our trained ears and active listening allow us to frame follow-up questions which open the door to the values-based conversation; then the dynamic of the meeting totally changes.  Confidence and active listening should lead to the development of trust and hopefully the values discussion can begin in earnest.

Allow me to introduce some values-based thoughts that might help us frame questions and begin to dig into what really makes the business tick.  Are the other family members involved in the business?  Are the other family members’ best talents being utilized? Have the founding members used their social capital to further philanthropic goals? What leadership style does the founding owner have?  Is it detailed and oriented toward succession or does the founder let successors figure things out on their own?  Collaborative or not?  Inclusive or unilateral in decision-making? How supportive are they of staff?  What is the style with respect to client service?  How do they perceive themselves in their community?  Is that even important to them?  Do their political or spiritual beliefs color their business practices?  And, even what really excites the founder about his/her business?  What about the founder’s spouse?  Slightly back toward the financial, what do the books of the business tell you about the above, about succession?  Are they complete or is your client a serial entrepreneur?

These are some of the initial thoughts to build into the conversations with the business owner client.  It may be that the client has never specifically focused on these thoughts.  He or she is involved in the day to day operations of the business, and the values that made it successful are so natural and ingrained that they are simply the essence of the client’s make-up. Being able to articulate them is challenging but doing so becomes a cornerstone to helping the family’s transition. 

When we begin to delve into the business there is so much to learn about the business and the values of the client, not to mention the values of the successor.  Transitioning a family business is complex in that it is actually rooted in the family’s value system – whatever that system may be.  Learning values and traits on the front end makes the engagement much more likely to succeed and that success is all the more satisfying when legacies are included in it. 

Once the client has begun to trust the relationship with the advisor, it becomes easy to begin engaging the client in a conversation outlining a family mission statement (“what does your family want to accomplish?”), which leads to a conversation to establish the vision statement  (“what is the goal of those accomplishments?”).  The conversation may continue beyond the business context, but isn’t the business only a piece of the client’s over-all plan anyway?  There may be different family and business mission statements as well. These identify the family’s true legacy. Values-based planning is not for every client, but for the right client it can be very useful to help articulate generational values for the family, which helps the next generation understand the family’s true legacy and what the family stands for.

While engaging the client in early in high level values discussions opens the door to a values based engagement, this is not a typical revocable trust engagement.  Obviously this process takes time.  The advisor needs to cultivate the relationship so that the client understands the big picture and the long-term benefit.  Even when looking at a business sale from a tax strategy perspective, the advisor needs to know the other moving parts in the owner’s asset mix, the other investments, the other businesses, whether or not the businesses are related.  Just gathering the data for these clients can often be a full engagement. 

Once the data is gathered, the attorney needs to analyze the data.  The attorney may need to meet with the business leadership.  How often do we, as attorneys draft a beautiful purchase and sale agreement and receive the exhibits on the last day before closing?  The attorney may need to develop a relationship with the operations manager or the finance manager.  Will these employees remain with the new ownership?  Has the client made any promises to them?  Understanding general staff and human resources issues may be key.  Will the new management treat employees with the same respect and inclusion as has your client; maybe the work environment will be even better and not an issue. Value points here are clauses relating to employee transition, employee terminations and longevity protection.  All too often, the client is focused on the bottom line and just assumes that the successor management will manage things just the way they are.

If the transition is not to an outside buyer, there are even more business discussions involved in completing the transition effectively.  How well are company processes documented?  Does the next generation support them?  Is the next generation just itchy to change everything?  Can the business support this?  A huge question is how will the next generation pay for the business?  An extended buy-out?  Will this be more or less than the client is taking out of the business now?  Is the next generation believing that it will finally be able to live his/her parents’ lifestyle?  Can he/she with the buy-out provisions?  What about how much time the business actually consumes?  When dad is out golfing all the time with his three biggest vendors, is that work or play?  What will come of that foursome after the transition?  Will the next generation keep this business going?  What if he/she can’t?  All of these are very touchy values issues.  Yes, they are financial, but … the underlying issues are values issues.

With the gathered information, the analysis continues in the mining of the data.  Mine it for values, and for value.  It will provide points that can be discussed.  Once armed with data, the remaining questions become pretty obvious.  All of this will divulge family values to the attorney.  Once, one of my clients was showing me her factory and I noticed that she knew the name of even the employee who was sweeping the floor and acknowledged everyone she passed.  That spoke volumes about some of her values.   Other cues we might take note of, if the client has no philanthropy, the client is not likely philanthropic.  If the client has three children pursuing graduate degrees, the family likely values education.  These all require additional discussion with the client, but the conversation becomes pretty easy.

It is truly critical for the attorney to step back or dig in and analyze.  Successful business clients have usually learned how to tell people what they want to hear.  More than once, clients have espoused the values they think I want to hear.  Sometimes, we just have to ask, so, what are your real values?  Becoming a relational attorney requires a real commitment to digging deeper than the surface. 

It has been said that we should always start with the end in mind.  As estate planning lawyers, we know that once we have identified a family mission statement and family vision statement (or even some simple design goals), developed an outline for a successful business transition, we are ready to start looking at the long term estate plan. 

Estate planning for values, virtues and finances requires a plan and a structure to work effectively.  There are a number of guiding principals that can be embedded into the conversation.  At this point, let’s look at how some of the focus on values comes into play with some typical business planning clients. 

Example #1: The family farm client where only one of three children is involved in farming, but, the history of the family is that the eldest child receives the farm as an inheritance.  Right away, we know that a predecessor valued keeping the family farm intact.  What are other practical ways to honor the family value and the current family dynamic.  A mission statement would be highly beneficial in this situation – the value has survived prior generations and the current client wants that to continue for generations to come.  Values here might include heritage and hard-work or maybe education for the non-working siblings.  “Fairness vs. equal” treatment of the children needs to be deeply discussed.  These are questions that should be asked of the client. 

The client might be interested in newer entity strategies to keep the farm intact for the future generations.  We, as the advisors, need to consider who would manage this entity and what types of shareholder agreements might be put in place to protect the farm from subdivision. 

If farming and heritage are the important value, the advisor might encourage the client to develop rituals, traditions or ceremonies to share the family pride and heritage with the younger generations, bringing them back to the farm  annually or more often and providing a funding mechanism or hook to keep the family engaged.  The client might engage in documenting family artifacts in a way that makes them meaningful tools to reinforce the family history.  The client might engage in documenting family stories and legends in a way that makes them accessible to family members at a time when they are open to understanding them.

These are tools that really excite clients.  And, they are opportunities that are not often explored by other advisors.  The level of value that these tools can bring to a family often far outweighs accurately recording the plan. 

Example #2: A successful vacation-land theme park where 4 of 5 children are involved in the business, each child managing a particular function of the business, but some of the functions more are critical and valuable to the company.  For this family, fun must be a core value, right?  We, as the advisors, need to figure that out.  Since so many members of the family are involved, developing strategies for communication between them is critical, and a risk if not successful.  If a value is to keep this family intact, there is much that the relational advisor can offer.

For this family, there is an opportunity to propose a corporate governance program to offer objectivity.  Bringing children onto a Family Board of Directors and receiving objective guidance early and while the senior generation is still in leadership could help divert future leadership issues.  Such a board might be a way to include the non-participating member of the family.  Defining the values here may play a role in solving big decisions down the road.  Teaching the family/board to operate as a business with many decision makers and learning boundaries for each is simply an imperative.  And, since this is business is one where other families come to play and bond, being involved in family type organizations in the community (if that is a value) could be a place for philanthropy or for a Family Foundation to thrive. 

Example #3: The business has experienced a 300% increase in value in 2 years and is being sold.  The client, wants to engage in tax-centric planning.  The clients’ children are still in college.  The client values philanthropy, but has no framework in which to discuss it.  What other values might exist here?  With the facts presented, the client likely values education and possibly hard work.  If that is the case, these first generation entrepreneurs have worked very hard and often don’t want their children to experience affluenza.  They want their children to be hard workers, too.  Additionally, in a younger family, owners are aware that their children may not be used to dealing with the kind of money that may be appearing and they value protecting them from poor decisions.

In this situation, basic Wealth Docx style estate planning is critical.  Using GRATS, defective grantor trusts and other such planning tools in desirable jurisdictions, which protect the beneficiaries from immature financial decisions, divorce and creditor claims is critical.  A discussion with the client about the client’s values and whether or not certain behaviors should be rewarded or encouraged may be included in the plan.  Depending upon the sale price, charitable planning may be critical.  Here, a Family Foundation might be used to keep otherwise self-focused kids focused on the needs of their community and others.  All of these should, of course, be based upon a family mission statement or a family vision statement which could change how the family will be remembered for generations. 

In the prior examples, I have outlined some clients and for the sake of discussion have presented some possible values.  Therein, lies the crux of this article, as the relational advisor, we also have values.  It is critical that we spend time with the client to hear and understand their values, to remain objective, to bring their legacy together.  We simply cannot assume the client’s values (which is essentially what attorneys have done for centuries). 

Conclusion: In values based estate and business succession planning, all of the stakeholders will benefit from the process.  Clients often benefit from the process itself, by learning things about themselves and their family that they haven’t taken the time to learn.  We may be able to reveal personality traits or issues that would have otherwise unwound the succession plan. 

In the business planning itself, helping the client identify his/her real values in the transition may change the face of the plan itself, for the client, the family, and likely for the employees, vendors and/or clients.  In the case of the family farm, the prior generation gave the asset to one heir and possibly used some life-insurance to offset that gift.  How different this next generation might feel about its heritage with some of the techniques outlined above.  In the business sale case, the use of strategic philanthropy may change how those young adults will approach not only their lives, but possibly those of their children and their community.  Oftentimes, in values-based succession planning, the charities (and their communities) benefit from both the financial resources that may be allocated but also from the awareness of the family members who may become spokesmen/women or day-to-day volunteers. 

Advisors benefit too!  This is where estate planning gets fun.  Estate Planning is always interesting but knowing that we may positively influence the transition of an entire generation of wealth makes this style of planning so rewarding.  And, then, there is the benefit of the additional planning and generational wealth that will require planning in the future.  What family wouldn’t trust the advisor who created not only great documents but a plan for true family wealth?

This article is based upon a presentation developed by Richard J. Abbondanza and Stan Miller and presented at The Gathering in San Diego, CA in 2016.  Richard J. Abbondanza is an AV rated attorney and charter member of WealthCounsel  He is a partner with Hopkinson and Abbondanza in Portland, ME.  He has been practicing in the area of estate planning, real estate and business law for over 30 years.  He welcomes the opportunity to co-counsel in business transition engagements.

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