familyownedbusinessblog

The Family-Owned Business Blog is a resource for stakeholders of family-owned businesses and their advisers. This blog will explore best practices for success at the intersection of family, management and ownership in these businesses. The lawyers of the Family-Owned Business Practice Group of Ater Wynne host the blog. Visit www.aterwynne.com.

This site is provided for informational purposes only and does not constitute legal advice, nor does it form the basis for an attorney-client relationship.

The Family-Owned Business Blog is a resource for stakeholders of family-owned businesses and their advisers. This blog will explore best practices for success at the intersection of family, management and ownership in these businesses. The lawyers of the Family-Owned Business Practice Group of Ater Wynne host the blog. Visit www.aterwynne.com.

This site is provided for informational purposes only and does not constitute legal advice, nor does it form the basis for an attorney-client relationship.

The Family-Owned Business Blog is a resource for stakeholders of family-owned businesses and their advisers. This blog will explore best practices for success at the intersection of family, management and ownership in these businesses. The lawyers of the Family-Owned Business Practice Group of Ater Wynne host the blog. Visit www.aterwynne.com.

This site is provided for informational purposes only and does not constitute legal advice, nor does it form the basis for an attorney-client relationship.

Family Stories Important to Tell

At the Oregon FFI Study Group, family members from three successful family businesses each of which had been in the family over 100 years discussed the importance of know the history of the family business. As each representative member introduce the business, they spoke of the founder, their great-great grandfather. Each knew when and where that founder was born, traveled to the US or traveled within the US finally arriving in Oregon. Each knew how the founder got started in the current businesses and how each succeeding generation passed the business onto the next generation.

During the discussion following the introductions, one of the family members made the observation that part of the success of these businesses was due to the connection each of them had to the founder of the businesses.  In turn each member agreed how important that story was to them and feared that their grandchildren would not know that story.

These stories are important. It is who we were and who we are. Capturing these stories and passing them onto the next generation and the next is important work. It may be that it is the work of the current generation to capture these stories orally and in writing as they hand over the business to their successor.  These should be seen as a gift one generation gives to another...the story of who we were and who we are. it will be for the next generation to be who they become. Their story will then be told by their children but always in context of who we were.

Words of Wisdom

On Friday, May 7, 2010, the Oregon FFI Study Group met at the offices of Ater Wynne, LLP, in Portland, Oregon.  There we met with a family member from each of three family-owned business each of which had been in the family for over 100 years.  While each family business differed in their governance structure and size, there were important similarities.

First, the current generation in management of the family business had worked outside of the family business as adults where they were able to find success and build confidence. And, each speaker thought this was a significant element in the success of business currently. Their insight is supported by the best practices espoused by consultants in the field of family-business advising and succession planning.

Second, each representative discussed the importance of a trusting relationship between the family members. Two of the families felt that to continue that trust it was important to only have those working actively in the business be the owners of the business.  The third family has built trust through professionalizing management and adopting governance structures that include family members.  In both cases, the family has found a mechanism for allowing non-interested and non-involved family members to withdraw from any participation or ownership in the family enterprise. There has been sufficient resources in the family to equalize the value of business with other assets so that fairness in the estate plan is achieved.  Treating children equally is such an important consideration for parents who are owners of businesses or business interests that a way must be found to equalize the the wealth among the next generation.  In these 100 year old family businesses, the generations have found a way to do this.

Third, each of these businesses have a generation in management and control that is able to clearly articulate what is expected of the next generation and what the next generation can expect. There is no guessing. There are clearly defined rules regarding entry into the ownership of the businesses and management in the businesses. While each of these businesses differ as to the expectations, there is no doubt within each business what is expected and what is to be anticipated.

And lastly, the current generation sought the assistance of professionals skilled in family business succession planning to assist them in gaining an understanding of succession and articulating the expectations for and of the next generation. 

Washington's Domestic Partnership Law May Impact Your Business

Washington's Domestic Partnership Law, which went into effect on December 3, 2009, provides that for all purposes, registered domestic partners must be treated the same as married spouses, unless doing so would conflict with state law.  "Registered domestic partners" include same-sex domestic partners, and also opposite-sex domestic partners, provided one of them is at least 62 years old. 

 

This new law will have a significant affect on all businesses that provide employment benefits, especially benefits mandated under state and/or federal law, such as family medical leave, which conflict in some respects.  In practice, administering benefits in light of the conflicts between state and federal law can be complicated.  You can read more about this topic on Ater Wynne's Northwest Business Litigation blog, here.

 

Dynamics of Family-Owned Business highlighted in February/March issue of OSB Bulletin

Advising family business is interesting and challenging.  Emotional issues imposed on technical issues are not always a good easy fit. Read more about this in the current issue of the Oregon State Bar Bulletin where Kay Abramowitz (partner at Ater Wynne) and other lawyers from around the state of Oregon discuss their understanding of the dynamics of family-owned business.

Razing Roadblocks: Preparing Your Business for Sale

Often business owners overlook the fact that selling their business is like selling their home.  It requires the right presentation and correction of problems to increase its value to a buyer.  After the signing of an offer or term sheet, the buyer will begin to review everything about the business in a process known as “due diligence.”  You must anticipate and expect that the buyer will find roadblocks to closing the sale.  You should predict the potential roadblocks and raze them in advance.  The closing will not occur until the buyer and seller have resolved these roadblocks through negotiation.  If you wish to be prepared for that inevitable negotiation, you should consider and understand the nature of the seven principle roadblocks which are discussed below:

1. Valuation:  Obtain an independent valuation report or at least a detailed report on comparable business sales to assist in valuing your business.
2. Changing Business Conditions:  Prepare a business plan that will identify strategies and market conditions, which will allow you to intelligently answer business condition inquiries.
3. Financial Status:  Obtain a financial review or audit of the business financial records so that you may credibly present them to a buyer.
4. Presentation – Internal Documentation:  Create employment agreements, proprietary rights and confidentiality agreements, as well as other written business agreements and policies, which will be shared with the buyer and will clarify your business practices.
5. Legal Issues:  Organize vendor and vendee contracts, licenses and permits; clarify loans and transactions between you and the business, asset ownership and related debts, and all other items that are typical for a legal due diligence checklist, which may be obtained from your legal counsel.
6. Entity and Structure:  Seek legal advice regarding your present legal entity and the tax and legal consequences of each type of sale structure (stock, assets, merger, etc).
7. Management Succession:  Consider whether you or other employees are necessary to ongoing operations and whether you wish to remain in the business.

Just like there are experts that can assist you to sell your home, your legal and financial advisors can help you identify and answer these questions, as well as many others, to better present your business for sale and to receive the greatest value.

Oregon Updates: Trusts and Estates

Following are some important updates affecting Oregon trusts and estates.

1. Estates subject to probate may file a short form (Affidavit of Claiming Successor) for estates of $275,000 or less so long as the personal property value does not exceed $75,000 and the real property value does not exceed $200,000.

2.  Oregon has now joined virtually all states by allowing springing powers of attorney. The so-called springing power of attorney provides in the document itself that the agent cannot act unless and until the principal is incompetent or incapacitated. The principal may also appoint a third party to determine when the principal is disabled or incapable. For example, "This Durable Power of Attorney shall be exercisable on my disability or incapacity, and only if accompanied by a written certification signed by my personal physician, or a physician designated in writing by my personal physician, stating that he or she has personally examined me and, in his or her opinion, I am unable to effectively manage my financial or other affairs.   My personal physician is __________, located at ________."

3. Starting on January 1, 2011, the surviving spouse's election against the estate of the deceased spouse will include an augmented estate. The augmented estate includes probate and nonprobate assets and any transfers to the surviving spouse whether by probate or nonprobate. Currently, the election is against probate assets. For long-term marriages, the elective share is 33% (currently 25%). For shorter-term marriages the percentages is lower. Continuing is the ability for spouses to waive their right to the election (frequently done in connection with premarital agreements).

4.  A settlor of a trust now has the ability to name a person to be an adviser with regard to certain trustee acts such as choosing how to invest trust assets or when to make distributions. The named trustee is not liable for the acts of such adviser except in cases of reckless indifference on the part of the trustee. The trust instrument may absolve the adviser from any fiduciary duty.

6.  Another change in the administration of trusts allows the trust to be modified without court approval even when the settlor is dead so long as all beneficiaries agree upon the modification.

7.  New also is the change in who needs to be notified. If a beneficiary is entitled to receive a specific gift and does so within 6 months of the date it is due to be made, the trustee has no obligation to furnish a copy of the trust instrument or the financial information to that beneficiary.

 

Trust: The Glue That Holds Things Together

Trust is the most important ingredient in a successful family business. It is trust, not love, that allows individual family members to work together. It is the presence of trust that allows  non-family employees to work successfully in a family business. It is the absence of trust that underlies the suspicion and resentment of family members not involved in the business toward those family members who are involved. 

Trust can be lost easily and regained only slowly. Trust is that set of behaviors that states that the welfare of all is being served not just of one. Family businesses that are most successful achieve a culture of trust which requires that individuals are trustworthy.

Trust is achieved by following these rules:

1.  Keep promises.

2.  Frequent communication.

3.  Honest communication.

4.  Remaining calm when others are not.

5.  Maintaining a transparent work environment.

6.  Act swiftly and correctly when something goes wrong.

7.  Accepting responsibility when something goes wrong.

There may be other rules of the trust game. These are the ones I've observed over the years as essential to establishing and maintaining trust.

Landmines: Influences on Owners of Family Owned Businesses

Landmines are explosive devices usually concealed or camouflaged which when detonated will cause great harm. There are 4 types of landmines that will have the ability to cause great harm to succession planning In family-owned businesses.

The first of these are the ethical issues arising out of the attorney-client relationship. When a lawyer has multiple clients, there is great potential of a conflict of interest.  Even when the lawyer is representing only the company, frequently there is a perception of a conflict because the corporate attorney is working through one of the family members (usually the President).

The second of these are the client-centered issues arising out of the complex web of relationships within the client's family and business. These issues can be identified when observing how family members use the close family ties to effect the course of the business or the planning. For example, an adult child being offered an executive level position within the family business even though that child lacks the skills, knowledge or experience to successfully meet the challenge of the position.

The third type of landmine is attorney centered and arises out of the skill set of the attorney and the attorney's own web of family relationships. From time to time a corporate attorney will be called upon by the family to draft the complex estate plan without the experience or skill necessary for the level of need. Even when the competent lawyer is drafting the estate plan, care must be taken by that attorney to guard against having the client's web of relationships trigger a response in the attorney that causes the attorney to lose sight of the client's goals and needs; and

Then there are the technical issues arising out of the laws of contracts, wills, trusts and taxes. The best laid plans of man may be derailed by the need to adhere to certain requirements of contract such as employment agreements. Other legal requirements surface in succession planning that involve gift, estate and income taxation that make some plans more tax efficient than others.

Maneuvering through the fields of these landmines is the role of the attorney, accountant, consultant and others who focus their practice on taking families successfully through these fields.

Key to Successful Succession Planning

The key to a successful succession plan is the ability of the business to produce income and to provide value for the family after death of the owner. Following are a set of questions that are helpful in determining the answers to these two questions:

1. Will the business continue to provide sufficient income for the surviving spouse and children?
2. Is the business prosperous enough to afford professional management (including successors) and still make distributions to the family members?
3. If the owner is incapacitated, is there adequate disability insurance to meet the immediate needs of the business and the owner's family?
4. If the business needs to be sold to third parties, should that be done during the owner's lifetime or after the owner's death?
5. Is there a successor to the ownership and management within the family circle?

The next most important key to successful succession is the level of trust within a family. If the level of trust is high, succession planning is most likely possible given that the business is viable and profitable. If the level of trust is low, steps should be taken to build a healthy trusting relationship among family members before, during and after the succession planning process.  The answer to the following question will determine the level of trust within the system: Do the stakeholders act in a manner consistent with the best interest of all stakeholders and not act only in one's self-interest?  The degree to which any stakeholders acts selflessly, is the degree to which that stakeholder is trusted. 

If there is sufficient income and value together with a qualified successor and high trust among family members, the succession of ownership and management should be successful. If any of the ingredients is missing, more work must be done. There are many good consultants and advisers who can help.

Legislation Amends the Oregon Uniform Trust Code

The Oregon legislature passed several amendments to the Oregon Uniform Trust Code (OUTC) some of which are listed and summarized below:

1. Settlor cannot waive notice to beneficiaries that contain information relating to termination of trust.

2.  Among the current matters that may be resolved by nonjudicial settlement agreement will be added the following:

2.1 Modifying the trust including extending or reducing period of operation;

2.2 Allowing any interested person to file a settlement agreement and provides requirements for filing of, notice of and objections to the settlement agreement. The filing fee is $65 and the fee for filing an objection is $32.50.

3.  Makes clear that a trust is not a charitable trust if the charitable interest is negligible such as would occur in many estate plans where a charity(ies) is named as the final contingent beneficiary in the event there is no one living to take the terminating distribution.

4. An irrevocable trust may be modified or terminated with consent of settlor and all beneficiaries with the approval of the court. This is best practice and now is mandated.

5. A modification or termination of the trust may be approved by the court even without the consent of all beneficiaries if the court finds the trust could be modified if all the beneficiaries consented and the non-consenting beneficiaries' interests are protected.

6. A revocable trust remains a revocable trust even if the settlor becomes financially incapable.

7. Amends the report due to qualified beneficiaries.The trustee report is due 6 months from the date the trust becomes irrevocable to a qualified beneficiary entitled to a specific item of property or a specific amount of cash.

8. The terms of the trust instrument may appoint an adviser for the purpose of directing or approving decisions made by the trustee and absolves the trustee from liability for loss in following the advisers instructions if so required by the trust instrument. The trustee's actions in carrying out the adviser's instructions are administrative in nature. The trustee need not monitor the adviser. 

9. Other changes are mostly housekeeping in nature.

These amendments were sponsored by Committee on Judiciary at the request of the Oregon State Bar Estate Planning Section.