The End of 5 Family Businesses

The Vanderbilts

The Vanderbilts

Maybe leaving your money to your children is not such a good idea. Here are the stories of 5 multi-generational business empires that did not make it. This article is a quick read and a good reminder that with money comes responsibility.  Once a business is sold and the proceeds are distributed, it becomes each family member’s responsibility to manage their individual investments and lifestyle.

How do you teach your children and grandchildren about money, investing and philanthropy?

Posted in General, Succession Planning | Tagged , | Leave a comment

The End of the Fiscal Cliff: What it Means for You

Fiscal Cliff Resolution











As a small business specialist and IRS Registered Tax Preparer, here is my summary of what you need to know right now:

• For 2012, the AMT = Alternative Minimum Tax has been averted and fixed permanently by having it indexed to inflation.  Instead of affecting 34 million tax payers, it will be limited to 4 million higher income tax payers in 2012.  The delay for this resolution will affect everyone, since the IRS has to change their computer systems and won’t start to accept returns until mid-February.   The average refund this year is expected to be $3000 and your refund, a.k.a. your interest-free loan to the government will most likely be delayed until March.

• For 2012 and 2013, here in Washington State we can still deduct sales tax – make sure you organize your receipts for large ticket purchases such as cars, furniture and appliances.

• You will be paying 6.2% into Social Security again starting as of January 1, 2013.  It’s a retirement system that needs to be funded in order to work.  If you have employees, I encourage you to explain it to them in terms of forced savings rather than a tax.  They will recoup this money once they retire.  You might also mention, that you as the employer matched the full 6.2% for all of 2011 and 2012 while they only contributed 4.2%.   The social security wage limit is $113,700 for 2013.

• In 2013, there is no medicare wage limit, however, there is a new $200,000 threshold that adds .9% to any employee’s  1.45% medicare tax already in place for a total of 2.35%. This has to do with funding of Obamacare and I’ll provide special information for small businesses on this health care topic over the next few months.

• There is a new permanent top federal income tax rate of 39.6% starting in 2013. The threshold for the top rate is $450,000 of taxable income for married couples filing jointly and $400,000 for single filers.

• In 2013, the top capital gains and dividend rate will be 20%.  If you’re planning on selling your business or any other appreciated assets over $250,000, you’ll probably also pay the new investment tax of 3.8%.  It’s a new tax for 2013 and beyond, designed to pay for Obamacare.  Meanwhile, the 15% rate will continue to apply to taxpayers in the 25%, 28%, 33% and 35% income tax brackets, and people in the 10% and 15% brackets will continue to have a 0% rate on capital gains and dividends.  Please speak to your tax advisor to strategize about shifting investment income to lower wage earners such as your children.

• For your business, be aware that lawmakers passed a 1-year extension of the current “bonus” depreciation rules, which allow businesses to deduct up to 50% of the cost of a wide variety of property and equipment, excluding real estate.

• The estate- and gift-tax exemption will remain $5 million or more per individual – indexed to inflation and the “portability” rules will be permanent.  If your estate is more than $5 million, you’ll need to plan for the new 40% estate tax.

Permanent extensions include:
• Expanded dependent care credit.
• Expanded adoption tax credit and other adoption assistance.
• The 2001 modifications to the child tax credit.
• Expanded Coverdell education accounts.
• Expanded benefits for employer-provided education assistance, expanded student loan interest deduction and scholarship tax exclusion.
• Marriage-penalty relief for the standard deduction, the 15% bracket and the earned-income tax credit.

Temporary extensions include:
• IRA charitable contribution. This highly popular provision allows IRA owners 70 1/2 and older to contribute up to $100,000 of account assets directly to a charity and have it count as part or all of their required minimum distribution.
• According to the Senate summary, many individuals who took a distribution in December 2012 will be able to contribute that amount a charity and have it count as a rollover. (Two years, through 2013)
• The American Opportunity Tax Credit. For many taxpayers this credit is worth up to $2,500 per child in a 4-year college and is therefore the most valuable education benefit. (Five years, through 2017)
• The teachers’ classroom-expenses deduction of up to $250. (Two years, through 2013)
• Tax relief on canceled or forgiven mortgage debt. (Two years, through 2013)
• Deduction for state and local sales taxes in lieu of income taxes. (Two years, through 2013)
• Deduction for qualified tuition-related expenses. (Two years, through 2013)
• The 2009 modifications to the child tax credit. (Five years)
• Third-child Earned Income Tax Credit. (Five years)
• Parity for employer-provided mass-transit benefits with parking benefits. (Through 2013)
• Special rules for conservation donations. (Two years)

The most complicated part of the new tax law involves the Personal Exemption Phaseout (PEP) and the “Pease” provision, both of which lapsed in 2010. Both apply to married joint filers with $300,000 or more of adjusted gross income ($250,000 for singles). PEP will cut or eliminate the value of deducting personal exemptions for taxpayers above those income thresholds. In 2012 the personal exemption was $3,800 for most individuals. In 2013, the exemption will phase out completely at about $420,000 of AGI for couples. The Pease provision, named after former Rep. Donald Pease (D., Ohio), is a complex limitation on all itemized deductions—including charitable donations and mortgage interest—that will eliminate up to 80% of deductions for taxpayers above the thresholds. This phaseout’s net effect is to add about one percentage point to the top tax rate, including the top rate on capital gains, say experts.

The good news is, many tax issues regarding individual tax payers have been settled.  The bad news is that the spending cuts have been postponed by a couple of months to coincide with the time when the government will run out of money at the end of February.

If your business relies on government contracts, be prepared to feel the impact of some of the upcoming spending cuts.

Your questions and comments are welcome.

Posted in fiscal cliff, Succession Planning, Tax | Leave a comment

Advisory Board for Family Business: Top 10 Tips

Here are my top 1o personal tips for assembling an advisory board for a family business:

1. An advisory board makes a CEO or family business successor answerable and accountable to a third party.

2. Unlike a board of directors, advisory board members have no authority over your company – they offer advice – you can take it or leave it.

3. Create a board with a specific goal in mind and put it in writing.

4. Choose experienced entrepreneurs or advisors you trust who have pertinent subject matter expertise or have had experiences similar to yours.

5. 3 to 5 outsiders are typically the right number for a family business.  More than 5 people actually reduce productivity for a board of advisors.

6. Ask each advisory board member to sign a non-disclosure agreement.

7. Hold 3 to 4 meetings per year at a location without interruptions.  Each meeting should last no more than 3 to 4 hours.

8. Make sure you prepare your advisory board members at least one week in advance before each meeting with information, data, background information and updates you want them to review.  Have a written agenda for the meeting.  You may also want to keep your board updated on a monthly basis between meetings.  Note:  managing board logistics can take 10 to 20 hours per quarter and can be outsourced if necessary.

9. If you’re serious about attracting serious advisory board members, be prepared to pay a stipend or compensate them for their time.  Your advisors are not in it for the money, but compensation shows your commitment to be open to honest feedback and improve your business.

10. The focus of each meeting should be:  What’s the most important issue facing the family business  now? All other agenda items follow.

Posted in General | 2 Comments

2011 Washington Family Business Award Winners

Family Business awards, Peak Family Business advisorSeattle Business Magazine hosted a fabulous awards dinner and ceremony on November 3, 2011 to honor the recipients of the 2011 Washington Family Business Awards at the Columbia Tower Club in Seattle. This was the 2nd annual awards ceremony to recognize the achievements and contributions of multi-generational family businesses.  Several of last year’s winners were invited back to be judges for this year’s competition and to present awards.  Out of 80 nominations from all around the state, a total of eight award winners were chosen.  Awards could be earned in different categories of achievement.  Here is the list of winners:

Small Companies with less than 50 employees:  Hillcrest Bakery, located in Bothell since 1965, is now staffed by three generations of employees.  The family’s trade secrets date back nearly 200 years to a family business in the Netherlands before the founders immigrated to the United States via Canada. Runners-up for the award in the small company category were Ski’s Painting of Kent and the Dix Corporation of Spokane.

Midsize Companies with 50 to 150 employees: Tacoma-based Rainier Connect, is a fifth-generation, century-old telecommunications company that provides comprehensive internet, cable and phone service in the South Puget Sound region. Runners-up in the midsize category were MacKay Manufacturing of Spokane and Metals Fabrication Co. of Airway Heights.

Large Companies with over 150 employees: The winner was Hotstart , a 69-year-old Spokane-based manufacturer of engine pre-heaters that improve the reliability of generators, locomotives, large trucks, heavy machinery and oceangoing vessels. Rick Robinson accepted the award on behalf of the family and its 170 employees.  Runners-up were last year’s keynote speaker, Bartell Drugs of Seattle and Sprague Pest Solutions of Tacoma.

Community Involvement Award: Dick’s Drive-In Restaurants, a Seattle-based chain of six fast-food restaurants known for its great burgers, fries and shakes as well as the good wages and benefits it offers its employees.  Dick’s recently opened its newest location in Edmonds as a result of an innovative campaign that allowed Puget Sound residents to vote on the best location for Dick’s latest restaurant.

Best Practices Award: Nelson Legacy Group is a Redmond-based owner and developer of commercial property.  The family has a broad-based governance process, a strategic plan and a family code of conduct to ensure that the enterprise survives as a legacy family business.  Their core values are education, strong work ethic and Husky football.

Business Transformation Award: Mercer Canyons Inc. is a Prosser-based grower of farm crops and owner of vineyards.  The 125-year-old history of the family encompasses a variety of businesses that have been operated with an eye toward environmental responsibility and sustainable farming.

Leadership Award: Wallace Properties is a full-service commercial real estate enterprise in Bellevue that has given generously to charitable endeavors while also contributing tirelessly to many regional development projects.  Bob Wallace accepted the award on behalf of the family.

Legacy Award: Stemilt Growers is a Wenatchee-based farmer and packer of apples, cherries and other fruit. The company dates back to 1893 and has emerged as a leader in sustainable agriculture.  The business was also one of the 2011 Washington Green 50 award winners.  The Mathison family more than just works at the business, they also meet weekly to work at being a family.

One of the highlights of the evening was the keynote address by René Ancinas, CEO of Port Blakely Companies.  Rene described his unlikely rise to the presidency of the fourth-generation owner of forestland and real estate as well as his recent real-world experience as part of the succession planning process for a substantial family-owned company.

Posted in General | Leave a comment

Family Business Statistics in the US

family business statisticsHere are some interesting facts about family business in the US: 

  • Approximately 90% of U.S. businesses are family owned.  They range in size from small “mom-n-pop” businesses to the likes of Walmart, Ford, Mars and Marriott.
  • Family businesses employ 62% of the U.S. work force
  • There are more than 17 million family businesses in the United States that as a whole represent 64% of our gross domestic product.
  • 35% of the businesses that make up the S&P 500 are actually family controlled.
  • If success is measured by return on assets, family businesses are significantly more successful than non-family businesses, since the annual return on assets for family businesses is 6.65% higher than for non-family firms.

Global Family Business Statistics:

  • According to a recent PricewaterhouseCoopers survey of more than 1,600 family-owned or managed businesses around the world, 27% expect to change hands in the next 5 years
  • 47% of the companies surveyed had no succession plans in place;
  • 34 % of companies based in North America expect to bypass their families altogether for succession and sell to key employees or outsiders.

The challenges and resistance around succession planning in many family businesses, have resulted in some more unfortunate family business statistics:

  • Only a little more than 30% of family businesses survive into the second generation, even though close to 70% would like to keep their business in the family.
  • By the third generation, only 12% of family businesses in the US are typically still viable.  Globally, this number is 15% according to a U.S. Trust, Bank of America Private Wealth Management study.
  • By the fourth generation and beyond, only 3% of family businesses continue to exist.

If you have a family business, you are part of the entrepreneurial fabric of this country and of our economy.  You worked hard for your success and you owe it to yourself and future generations to explore every possible avenue to transition your business successfully.  Plan early, work with a team of advisors from different disciplines, learn to delegate and mentor the next generation.  It’s all about planning, people and patience.

Posted in General, Succession Planning | Tagged , , | Leave a comment

Precision Iron Works Celebrates 20 Years of Success

Interview with Isabella McPeakSteve Leighton, the president and general manager of Precision Iron Works, still has the first invoice from 1991 on his office wall.  This July, the company celebrates its 20th business anniversary.  Over the course of 20 years, Precision Iron Works has grown to be one of the top 5 steel fabrication shops in Washington State handling 3000 tons of steel per year and some of the biggest regional projects such as Sound Transit, the Montlake Cut Tunnel infrastructure near Huskey Stadium and the Bellevue Transit Center. 

As an inspiration for other business owners, Steve was kind enough to share his journey and his top 5 business lessons as part of an interview with family business advisor, Isabella McPeak.  In response to the question what inspired him to start a steel fabrication shop back in 1991, Steve told the story of how his father had a steel fabrication shop where Steve spent his summers helping and learning to weld starting at age 13.  Since he always enjoyed building things, he decided to work with and for his dad after high school and get his college education at night.  In the late 70s, his dad sold the original shop and Steve continued to work with his dad on other companies’ projects for another 10 years, learning project management and estimating skills along the way.  After a period of moonlighting and doing projects on the side, he felt ready to open his first own shop in Kent in 1991 with 3 people and a part-time bookkeeper.

From there more work was bid and Steve transitioned into estimating full-time with 4 employees in the shop and expansion into structural steel.  By 1996, there were 8 employees in the shop and the company relocated to Puyallup along with a full-time bookkeeper and administrative assistant.  From there the expansion continued to 45 employees and 2 locations in 2006.  At that point, the company purchased its current location in Pacific, WA and consolidated all its operations with enough acreage to allow for future expansion.  So far, three buildings have been added along with a crane system.  Over the years, Steve learned a lot about running a successful business.  Here are his top 5 tips for entrepreneurs:

1. The Right People
Assembling the right people, training them well and treating them well has been the main key to success for Precision Iron Works.  Retaining key employees for 10+ years provides continuity for clients, projects and the management of the company.  A great team consists of people who believe in the same core values as the owner. 

2. Know Your Numbers
Bookkeeping, accounting and accurate estimating has been vital for the company since day one.  In an industry that relies heavily on progress billing and commodity price fluctuations, knowing your numbers is an absolute must and a competitive advantage when done well.

3. The Right Core Advisors
Make sure you surround yourself with quality advisors who understand your industry.  The company’s CPA firm and bankers understand the industry and the need to finance projects at times.  The company’s attorney specializes in construction law and protects the company contractually with liens and escalation clauses to insulate Precision Iron Works from fluctuating steel prices.

4. Work-Life Balance
The first 15 years of the business were really tough with long hours.  For Steve, family is #1 and it’s been a tough balancing act in order for the business not to become all-consuming.  For the past 5 years, it’s been easier for Steve to get away.   A great team has helped Steve free up some of his time to spend with family and coaching baseball in the community.  In Steve’s opinion, having built and retained a great team has given him the confidence to delegate and hand over day-to-day operations of the business.

5. Train the Next Generation
Of Steve’s two children, his daughter decided not to become active in the business after spending 3 summers working there.  Steve’s college-age son now shows some interest.  Steve is looking forward to this summer, when he will get a chance to train his son on estimating like he was trained by his father.  Children should be given the opportunity to get exposure to the family business early on so they can make an informed choice whether they want to be groomed for succession or pursue other interests.

When asked about the future of Precision Iron Works, Steve has exciting plans for expanding the geographical reach of the company into Alaska, Guam and Hawaii.  He is proud to have achieved AISC certification in 2010 which makes him one of only 10 companies in Washington State that is certified for federal contracts.  There are also plans to expand the machine shop with a beam liner and potentially add another building to accommodate the expansion. 

Congratulations on 20 years of business success!

Posted in Interview, Leadership, Management consulting, Succession Planning | Tagged , , , | Leave a comment

Solving the Family Business Owner’s Retirement Dilemma

Family Business RetirementThere’s a fatal flaw in the retirement of many small business owners: After pouring a lifetime of sweat, time and capital into building the business, their rough-sketch strategy is to sell out someday for a ton of money… then settle back and enjoy a financially secure retirement. Many business owners are so sure this will happen that they don’t bother to make any other retirement plans.

Who is this person who, at just the right moment, is going to show up with cash in hand to buy the company… and pay a fair price? For thousands of small business owners each year, no one steps forward. Perhaps the business is too specialized or is tied too closely to the owner’s unique personality and skills. Or perhaps possible buyers equate retirement sale with distress sale and make only low-ball offers. Whatever the reason, many owners find that their company has suddenly become a white elephant that nobody wants.

One Possible Solution
Groom your own replacement, someone who will buy your company when you’re ready to retire. Maybe this person is a current co-owner (but be careful if he or she is about the same age as you, who will be counting on retiring around the same time.)  Or it could be a son or daughter active in the business, or a younger key employee.

Business Owners Who Successfully Groom Their Own Replacements Leave Nothing to Chance.  You need to realize that there is no room for error at the point of your retirement. Here are some examples of steps you might take:

  • You are cautious.  You make sure your heir apparent is the right person in terms of temperament, personality, competence and personal goals.  It is wise to work with a qualified advisor and use professional assessment tools to find the ideal match for a successor.  You as the owner, may be too close to the situation and an objective outsider can injects reality into the situation.
  • You set up a probation period so you can terminate the relationship if you find this person simply will not work out. During that period, you keep everything informal, strictly verbal. At the same time, even when you go to a formal agreement, they make sure it contains a termination provision.
  • You fashion golden handcuffs and incentives to ensure that their replacement stays until the baton is passed. An ambitious successor needs and deserves gradually increasing authority and benefits. Options include deferred compensation or the opportunity to acquire partial ownership prior to your retirement. This provides both parties with something to win by sticking to the agreement… and something to lose if it falls apart.
  • You put it in writing, along with the help of your attorney—locking in who does and gets what, and spelling out all details and caveats, including how to establish the final valuation of the business. This formal buy/sell agreement protects everybody.
  • You build in a funding mechanism. This is crucial. No matter how good the terms of the buy/sell agreement, it will be worthless if the money is not there when needed to carry out the plan. Under one option, the successor may be able to purchase the company from ongoing profits. Other options include setting up a sinking fund or allowing the successor to simply borrow the money. These options may work but they leave much to chance. Instead, consider a funding vehicle that protects your family in the event of your disability or premature death, such as life and disability income insurance.  Talking to a qualified financial planner is essential to understand some of the more creative funding options available.
  • You have a back-up plan. As a business owner, you know that very few things go exactly as planned. What if your business hits tough times or your successor dies, becomes disabled, or — all too common—leaves because of a personality conflict? Or what if there simply is no heir apparent waiting in the wings? Sometimes, it’s simply best to dismantle the business.

Whether or not you have a possible successor for your company, you should begin mapping out your succession and retirement strategy today. Talk to a family business advisor and start assembling a team of professional core advisors who can help you develop this kind of business strategy.

Posted in General, Leadership, Retirement, Succession Planning | Tagged , , , | 1 Comment

The 3 Fundamental Drivers of Achieving Excellence

ExcellenceExcellence is one of my top values and I tend to attract family businesses that strive for and are aligned with that same value of excellence.  Many business leaders tell me they are perfectionists.  The problem with perfection is that it often leads to frustration for the current leader as well as the next generation.  One of my favorite sayings is that “Excellence is a journey vs. perfection is an impossible to reach destination”.  So I encourage you to take the road to excellence.  Continuously strive to accomplish the very best for your business and your personal life.

Excellence does not happen by accident.  I am in full agreement with John Spence who writes in his book “Awesomely Simple” that excellence requires 3 specific drivers:

1.  Focus
To achieve excellence in business or in life, it is vital to create a clear vision of what excellence truly means for you.  Idealize it, visualize it, verbalize it and focus on your vision with intent every day.  Get clarity around the impact you want to make on the world, what you hope to accomplish and the legacy you want to leave.  Focus is your philosophy of excellence.

2.  Discipline
Once your vision is clear, you need to have the discipline to take the steps to achieve results.  In order to achieve excellence, you need to remain curious about what it takes to get to the next level.  Ask yourself:  What new skills do I need to learn to achieve my vision?  Who do I need on my team to achieve my vision?  How and where do I find the people and the information that will help me achieve my desired level of excellence?  Complacency is the enemy of excellence.  The journey of excellence requires that you keep moving and improving.  It is often said that you are the average of the five people you spend the most time with.  Choose those people wisely.  Surround yourself with mentors, friends and employees who know more than you do.  Only when you stretch yourself regularly, will you keep moving forward on the path to excellence.

3.  Action
As with many things in life, a little bit of effort will only deliver minimal results.  Only  massive action that is focused and disciplined will give you exceptional results. Nothing happens without taking action.  Your progress on your journey of excellence is directly proportional to the amount of focused and disciplined action you apply.

The whole concept of excellence can then be simplified into a single formula:

ExcellenceExcellence = Focus  x  Discipline  x  Action

If any one of these individual drivers are missing, the outcome will be mediocre at best.  Since you attract what you are, I encourage you become a magnet for excellence rather than a magnet for mediocrity.  Remember:  “Successful people willingly do what unsuccessful people are unwilling to do”.  What do you need to do today in terms of focus, discipline and action to make your life and your business truly excellent?

Posted in Leadership, Management consulting, Succession Planning | Tagged , , , , | Leave a comment

The Boss’s Daughter

Women have made enormous progress in the workforce since the Equal Pay Act of 1963, but the stubborn fact remains that four-and-a-half decades later the basic goal of the act has not been realized.  The wage gap has narrowed, but it is still significant. Back in 1963, women earned 59% of the wages men earned; in 2008 they earned 77% of men’s wages on average.

The gender wage gap problem does not just exist in the US, but world-wide. Many reasons are cited why the wage gap continues to exist and few reasons for change are well documented.  A recent study by Michael Dahl, Cristian Dezso and David Ross documents an interesting discovery:  When a male CEO has a daughter, he moves to close the gender pay gap at his company.

This conclusion is backed by research including 6,320 private firms in Denmark with 734,200 workers from 1995 through 2006.  During that time period in Denmark, the gender wage gap was 21.5%, not adjusting for rank or hours worked.  The birth of a daughter to a male CEO caused that gap to narrow by .5%.  If it was the CEO’s first daughter, the gap was closed by .8% and if the first daughter was also the first child, the gap closed by 2.8 percentage points.   There was no detectable change in the wage gap when female CEOs had children.

My mission is to encourage daughters to run their fathers’ business.  In line with this mission, it would be interesting to do a follow-up study as to what happens to the daughters in the Danish study in the years following their birth. 

Despite all this progress, there still appears to be real reluctance to let daughters inherit the family business. Over the years, worldwide surveys have shown little change in regard to female succession.  Only 11% of daughters are actively involved in their families’  businessSons are five times more likely to be involved in the family business and to succeed the chief executive than their sisters

Personally, I think it’s time for change:  let’s train, encourage and empower daughters to run the family business.

Please comment and share.

Posted in General, Leadership, Succession Planning, Women in business | Tagged , , , | Leave a comment

Why Succession and Transition Planning is Critical

According to several national studies, 50 percent of all business owners and leaders are within five to ten years of retirement.  If you are part of the vast majority of business owners who have not identified a successor to manage and lead your enterprise, it’s time to get started.

• What would happen to your business and your family if you became incapacitated tomorrow? 
• Could your business run without you?
• What kind of financial resources are available to provide for your family and the financial health of your enterprise?

Without a plan in place to ensure an orderly transition, the chances of your business surviving are very slim.   The first step is always the hardest.  Here are some of the benefits you get from taking that first step and actually initiating a succession planning process:

1.  The right people will be identified over time to fill leadership roles
2.  Future leaders will be prepared for assuming management roles
3.  You can transition specific responsibilities over time to make sure each aspect is handled to your satisfaction
4.  You have the opportunity to educate yourself on tax, estate and financial options to optimize your exit all around
5.  The valuation of your business will increase because you are ensuring the continuity of your enterprise.
6.  You’ll be able to sleep at night knowing that your family will be taken care of and your legacy will be preserved.

Although succession issues are often raised when owners are approaching retirement, succession planning, like retirement planning, is most effective when done sooner rather than later. An early start allows for more flexibility and the time to evaluate alternatives, secure financing options and incorporate succession as an ongoing component of your strategic business planning.  Since the thought of giving up control of their company is a highly emotional issue for most business owners, it is wise to use an independent family business advisor to facilitate the process, overcome obstacles and ensure progress.  In order to make this long-term collaboration successful, you should pick an advisor not just based on experience, but also based on personality and overall chemistry.

At Peak Business Coach, we have been helping businesses prepare and execute their succession plans for over five years. We combine succession planning with the practical aspects of management succession and business continuity. We believe in the concept of building a core advisor team with integrated tax, estate and financial planning considerations. Our approach is holistic when addressing succession, along with our passion, knowledge and friendship to help you achieve your personal and business goals.

Your comments are welcome.

Posted in Leadership, Succession Planning | Tagged , , , , , | Leave a comment