Title: “When The Transition’s Done – It’s Still Not Done” [PART TWO]
Panelists: Rich Hirschen – Gray Gray & Gray LLP, Stephen Wilchins – Wilchins Cosentino & Novins, and Aviva Sapers – Sapers & Wallack
Host: Jeffrey Davis – MAGE LLC
Click here to read the transcript
Nathan Gobes (2s):
Welcome back Radio Entrepreneurs, listeners, and fans, two parts to this FBA, panel discussion. This is intended to be informational for all business owners, but especially a family business owners. As we discuss transitioning a family business, or a link to part one is in the description below. So head over there, if you haven’t seen that yet, I’ll quickly introduce our panelists. We have Rich Hirschen of Gray, Gray, and Gray, Stephen Wilchins of Wilchins, Cosentino and Novins and Aviva Sapers of Sapers and Wallack, I’ll now hand it over to Jeffrey Davis, our moderator and host.
Jeffrey Davis (37s):
Well, I’m sure my first question is going to be a feeling to all three of our experts, because it’s all going to relate to money. So these are my three many experts and you know, it always amazes me how I get a different perspective on this. One more than anything else. It’s really how transparent should parents and family B in discussing transition about the financial net worth and what the assets are because I, I see this debate, I see it, even in my own home, our, they mature enough to handle this. Are they responsible? Who do they tell? What do they do not tell a, do they understand the equity?
Jeffrey Davis (1m 18s):
You know, parents so many times are working in a vacuum. Steve, I know a you’ve come across this a lot. Rich, I know you have. Aviva, I know you’ve been part of it and you’ve seen it also. So I’m going to ask all three of you to weigh in on this one. It’s a big topic, you know, what do you share and when?
Aviva Sapers (1m 37s):
I feel, if it depends on you knowing your kids’ and knowing that they can, and can’t understanding what they’re going to do with that information. And if it’s just about the family business piece, it’s certainly worth. If you’re, if you’re a business is not doing well, a, a child who’s coming in should have some sense of what they’re getting into now. And the other hand, if it’s doing very well, and it’s a major asset that as a family owns a, there’s a lot of conversation to be had there about how that might get distributed to different siblings, etc. I think that the kid’s in the business of kids out of a business, which I’m sure he’ll probably ask this later, but I think that for this closure is good.
Aviva Sapers (2m 22s):
As long as the kids a mature enough to handle it in, you know, what they are going to do with that.
Rich Hirschen (2m 29s):
Yeah. I, I kind of agree Aviva. It depends on the kids. And I think it depends on what stage you’re at in this process. If I’m, you know, if the person is just coming into their business, depending on the role, they might not need to know exactly what’s going on with the company and the finances, but as they advance. And if one day you’re talking about this person taking over the company a then certainly at that point, I think they need to understand the business, the finances, it’s an important part of running the business. But I think the personal finances of, you know, the parents or that older generation or different than the business, I don’t think necessarily the personal finances need to be shared unless to the extent that the family is comfortable doing that.
Rich Hirschen (3m 10s):
I think it’s fine, but I don’t think it needs to be,
Jeffrey Davis (3m 13s):
You know, this whole money issue tends to be, you know, I think a difficult issue that gets in the way or the whole discussion, a knot that the discussion is that hard without it. But, you know, I hear, I hear comments about, you know, my parents have enough money. There’s no reason for them to hold on to the equity of the children, start making decisions about their parents’, which I don’t think is necessarily appropriate. You’ve got to stay out of that stuff. But I also know there’s always been a topic of how much let’s say, I’ll call it a dead this time, how much the dad be getting paid during this transition? How much money should be flowing out if you know, how involved should or, or how, what would the discussion be about this? Because parishes, we have their own perception about how they control the financial part of their transition.
Jeffrey Davis (3m 58s):
And children’s start to think as they get empowered, I should be in control of this decision. And I think it’s a point of resentment that I see that goes on between the two parties.
Stephen Wilchins (4m 9s):
I would agree with you Jeff. And I think the, I think that each person should be compensated based on the performance. I don’t think there should be entitlement in a sense, because I started the business or built it up to X that I should still continue to get paid. Why I think, I think the value, the business transcends every decision with regards to what you should be compensated in my opinion. And I think that the founding generation should understand that and pull back. So meaning the younger generation has performing, then they should be compensated additional Mt.
Stephen Wilchins (4m 54s):
And what that means they are, there should begin to be paid more, more than, than the founding generation. If the performance is there that only helps everyone. So I think that you, there should be some type of objective standards, not so much entitlement entitlement in starting the business and entitlement that I was born into the business. So I think that both, you know, all generations for you to understand that we protect the business and we fairly compensated our people based on performance.
Jeffrey Davis (5m 29s):
We will all benefit as time goes on, you know, Rich, a lot of times, I’m sure the parents come in, they are reviewing taxes. They don’t even bring their children who our equity participants and that children don’t know. So you see it from a different perspective. And, you know, I don’t know how forward you can be in terms of discussing these things with clients, but you see it from the other end, from Steve who’s planning the legal documentation.
Rich Hirschen (5m 58s):
And you know, that, I think, you know, the compensation is an important piece for a member is kinda the overall estate plan. And what’s some of the goals, our there with transferring wealth or the next generation in that state taxes and things like that. So I do think it’s an important consideration when doing this is to get your, a state attorney and your accountant as part of that to C you know, someone may feel they are entitled or deserve, or do you know when you get paid fairly, but it may run counter to what they were trying to accomplish within a state plan as well. So I think that’s important aspect to include.
Aviva Sapers (6m 32s):
I would maybe ask both of you just in, I’m not the one to ask them the questions, but how do you, how do we measure performance if your not in sales or you’re not doing who judges the performance, because that gets to be a bit of a sticky wicket among siblings among the generations, et cetera.
Rich Hirschen (6m 52s):
It’s tough. You know, it’s hard to measure performance. I think his having goals. So if each person has goals set out at the beginning of the year, the period that you’re evaluating, and then it’s measuring how you perform pursuant to those goals. So, but I do think it’s hard. I think having some outsiders outside of the family member or a compensation experts and so on a, it can be helpful in that regard.
Stephen Wilchins (7m 16s):
So do you compare yourself to the industry who comparable industry’s of your competitors, but I think it’s a very important to have some objective standard because yes, you may not be responsible for sales, but if you’re the CEO CEO of a company, you ultimately are responsible for the sales a day, so that if you’re not doing well for the company is taking a turn or the market is taking a turn, how do you react to that? And what happened? So therefore there should be standards and, and the outside compensation consultants would be of help as well as your board.
Jeffrey Davis (8m 2s):
So I’m not an attorney. I just play one on a daily basis as a consultant and a, this is not a commercial for Steve, but I’m a big fan of corporate governance in rules and structure because two, many private companies, and I would probably say over 90% do not have enough structure. And you can learn from public companies, they run their own world on a familiar model. It does not work, especially after a certain size of this familiar model for everything you need to have a board and outside board that’s run by proper objective people, not just always the accountant and the attorney is showing up for a, a, a dinner it should be run properly. There should be an operating agreement that there should be a matrix.
Jeffrey Davis (8m 48s):
A that says that the metrics for a business that said goals and standards, and that performance should be based upon business objectives, not based upon family needs. And the more you objectify the business to business and industry standards. I think the better things will run in a predictable way and you’ll get into less fights. The more you take away, all those rules and standards, the more you leave it up to subjective feelings and emotions, and people start fighting with each other as well. I would assume that you do because that’s, you make a living, you know, putting a lot of these documents in place. And, you know, and I don’t know if it’s out of context, but let’s talk a little bit about the documentation, because I think that’s important.
Jeffrey Davis (9m 29s):
You know, it’s a hard, you know, you and I once went through a case, Steve, where I took almost a year to get some documents in place. That we’re what I would consider somebody that could have been done within weeks. You know, I think documentation’s is important. How do you bring up the discussion, especially to an old family? That’s, you know, been run on a familiar model and it’s been sort of dad or mom’s way. And now you’re saying this isn’t the way it should be moving forward. How do you get that moving? It’s a hard discussion.
Stephen Wilchins (9m 58s):
Oh, Jeff, you did a good job convincing the first generation. And to see that formality is important, especially that other people are coming into the business that the younger generation and therefor having a shareholder agreement or having employment agreements are a very important, ’cause the employment agreements for the next generation as well, a delineates, what or what the responsibilities are for the employee’s, what, what they are or what their objectives are. And so there is some standard and a baseline to review what they’ve done and what they assume this responsibility rather than is such a great area where the next generation is running the business.
Stephen Wilchins (10m 48s):
But what does that mean for this one do marketing. There’s one do accounting because one do the internet, the etcetera. So I think it’s a very important to have employment agreements, a shareholder agreement, or maybe a code of conduct for the family to have a way to have an understanding and to meet regularly with this, with this documentation, because just having the documentation is one thing, but making sure it’s observed and adhere to what is even more important, any thoughts from either of you on that one?
Jeffrey Davis (11m 28s):
I don’t know if you had any of these things. And so I think that you did.
Aviva Sapers (11m 34s):
So I guess I’m putting on my adviser had for a second, a having my cell agreements or in any sort of a succession plan, because it’s not always happening when someone is alive, they accidents happen and heart attacks happen. And then the, the founder made a pass away. And this is having certain documents, structures, even if the preliminary idea of who is going to run the company and how that’s going happen is worth having, even if it gets amended or changed over time. But if someone dies or becomes disabled, those things should be in writing because it’s important that it doesn’t become just one big chaos or a chaotic situation when the founder’s gone so that during your life. And then it, if for some unforeseen circumstance happens as well,
Stephen Wilchins (12m 16s):
The corporate governance document, it should be tweaked every few years, as well as the estate planning documents. And they should be linked together. They need to be reviewed together and fairly regularly reviewed and tested to make sure that if Fitz, where they are at that point, the family and the company rich, I guess you see it also at the end result of that is the tax returns when things are done properly and organized. And I’m sure it’s a lot nicer when these things are planned out.
Rich Hirschen (12m 52s):
Yeah, absolutely. I mean, I agree with everything that’s, that’s been set of, you know, the governance and having things documented, and haven’t kind of the rules of engagement here and just having in writing so everyone can follow them. It makes things easier for everyone. And as a Viva said, unexpected things happen I’m. And so being prepared for that, a lotta we focused on this or starting a conversation. And during this period of time transitioning, we done over time. They don’t always work that way. Sometimes you wake up one morning and all the sudden it’s transition time and, and be prepared for that. So, you know, I think having all these things in places is a really good idea, right?
Jeffrey Davis (13m 29s):
I’m going to ask another question before we go. And I think that this is a tough one because, you know, hindsight is 2020. Do you always give equity to family members if they’re not in the business? How do you decide that one? Now, if you do, you have siblings who are not in the business and Steve you’ve seen both sides. I have two. And I think rich has also so that if I’m that one. So I think that to the extent what size the state is, and to the extent you can compensate and provide bequests to the non family members, to the family members that are not in the business, a, it would probably be better to provide most of that.
Stephen Wilchins (14m 13s):
You know, the non-business assets to those people who are not working in the business at the same time. There’s this thought that if the business is large enough, that the people that are not in the business, that family and that’s not in the business should get some compensation, should get some equity of some sort, a small amount to essentially ’cause. If the value of continues to grow, if it’s a fast moving business or a tremendous cash generation M because the problem is a lot of times the family can’t equalize the, of the, the, the state ’cause the business as the largest asset for the most part.
Stephen Wilchins (15m 1s):
So primarily the be the children or a family members that are involved with a business should get the bulk of the, the, a business equity. But I, but I’m not opposed to having non the other family members get a small piece.
Aviva Sapers (15m 21s):
My experience is if you can avoid it avoid, it is a wonderful tool we use called life insurance. That helps be the, the, the great equalizer of family assets. And you can even use monies from the company to help buy the insurance that the other kids benefit from. M not always the case, but oftentimes it’s a great way to provide other assets that you, the parents may not have to give to other siblings. But I agree if you can avoid it, you avoid it. Ah, if there are ways or if there’s real estate in the business, but the business is a different entity than sometimes having other members of the family owned part of the real estate that’s being run in essence as its own acid in his own, a business with certain agreements and leases and all that stuff in place a, but I find you a better harmony family-wise when they are aren’t siblings on the payroll that don’t work there.
Aviva Sapers (16m 14s):
And other types of things that happen where they think they have a say in how to run the company, that they’ve had no part of a, and they find that that, that causes a lot more anxious than some good planning,
Stephen Wilchins (16m 26s):
Right? I want to just provide some clarity to that. A, I think V you said some good points, but there’s, you know, depending on the size of the business and depending on the type of business will also depend on whether there should be equity to members that are working in the business or of members that are a, of the family there or not working in the business, but also having a piece of real estate that leases to the business. I mean, they’re linked. I mean, so to the extent that the business wants a ten-year or a low, low value of lease the, the, the shareholder or the owners have the LLC, then owned the building, they are going to you no, have their value of depressed because they’re supporting the business, but they don’t own the business.
Stephen Wilchins (17m 16s):
So it’s not as easy as one thing. So it depends on the type of business, depends on what the value of the business will depend. And, and I think life insurance is a good way, too. So, you know, to get a non-business non-fan my family members that, or not in the business or additional value, the only issue is, is the person in insurable. You, no, they should be talking to Aviva way before they, they have the conditions of before that, you know, their 70 years old, 80 years old in there trying to equalize see a state at that point, if they spoke to the Aviva of 30 years ago, and then as they continue to get older and the business grows, the equalization is a lot easier to deal with.
Stephen Wilchins (18m 5s):
So again, it’s planning, planning for the future.
Jeffrey Davis (18m 9s):
I like the planning. I like the concept of depends a, because I think that really works. I mean, earlier in my career, as an employee at a large family company, Johnson and Johnson Johnson’s have equity and they have a channel to work in the business if they can perform. But I also like in the smaller, privately owned businesses, that if you’re not working in the company, you really don’t want to be able to interfere with the company. And I think that that’s an important concept. Its if you work and you perform and it’s a performance-based system, then you should have participation, but if you’re not working and you’re not performing, there were other ways to compensate you that it can be equitable within the family so they could get, that was a, a good, a good segment.
Jeffrey Davis (18m 56s):
Nathan Gobes (18m 57s):
Thanks Jeffrey. And thanks Aviva, Rich, and Stephen. I want to remind everyone that this was just part two of three. So there is another segment yet to come. So be sure to subscribe to Radio Entrepreneurs and click the bell button to get notifications when the next segment goes live as well as all of our other recordings, you can also find us on iTunes, Facebook or LinkedIn, Google play many other podcasts platforms as well. And we want to catch you in the next segment after this short break.
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