From the October 2010 issue of Investment Advisor • Subscribe!

October 1, 2010

When Business is Personal

Clients need help separating business matters from personal

When it comes to employing relatives, having rules in place--such as a family constitution-can help the family business run professionally. But how many family businesses have these kinds of agreements in place before they are needed? Even a simple set of guidelines for handling requests for loans from relatives can help to keep the peace at those moments when business intersects with family. Affluent family businesses often represent a large portion of an advisor's clientele. These clients bring a broad range of complex planning needs that require a balance between business best practices and an appreciation of family dynamics. As one owner said, "It's a family business and the business is the family."

However, many advisors know that owners often postpone discussing advanced planning issues, such as succession planning and buy-sell agreements, in order to tend to the day-to-day running of their businesses. Even the most forward-looking business owner can be diverted by everyday things: a problem with deliveries, production snafus, closing deals and so forth.

Separating the business from the personal

One thing that distinguishes successful entrepreneurs is the almost total entanglement of personal finances with business finances. While this kind of behavior is also seen in the committed executive, it has more implications for the business owner--and his or her advisor. When a nephew asks for a loan to start a business that sounds like a good idea, should the money come from the business or personal accounts? How should a daughter working in the business be compensated versus a son not in the business?

For families with sufficient assets, one possible solution is a family office, which helps to separate true family issues from business issues. Even without a full family office, a family constitution or protocol can delineate between the two by outlining roles and responsibilities, requirements for employment in the business, family values, and long-range strategies. It can also address how non-family members can help guide family decisions. The constitution, which should be reviewed every year, evolves as do circumstances and the family situation. Like the U.S. Constitution it should be written inclusive enough so alterations are more tactical than strategic. You don't want to have a family debate every year or so analyzing the purpose and value of the constitution--just discussions about fine tuning following established written procedures.

Many families--or at least the matriarch or patriarch--often follow some unwritten version of a constitution or rules. Every family and family business is different, but a constitution or protocol would include some version of these topics:

1. Personal and family visions and goals

2. Philanthropic goals

3. Voting and financial participation amongst family members (present, future, divorced, etc.)

4. Role of the family "administrator"

5. Roles and responsibilities for:

? Family members discussing and deciding family issues

? Family members involved in the family business

? Family members not involved in the family business

? Who keeps all family members (especially those not working in the business) informed about news and developments, including those related to benefits and income?

Family Administration

1. Procedures for individuals to present financial requests or questions to the family

2. Steps for decision making

3. Modes of communication that are appropriate for the family (e-mail, texting, in-person meetings, personal calls, conference calls, annual family retreat meetings, etc.)

Family Compensation

1. Details about requirements to be employed by the business (see more details below)

2. Compensation for informal administrator, if any

3. Dividend/distribution of income, if any:

? Same for everyone or adjusted up for working in the family business?

? Adjusted based on role/years in the family business?

? Extra portion for family member doing community service, such as teaching, full-time volunteer work, etc.?

Family Board

1. Family board to oversee the family office or informal administrator

2. Independent advisors to help the board

3. Rules about non-bloodline family members joining the board

4. Voting system (simple majority, weighted voting, etc.)

Family Investments

1. Asset allocation strategy

2. Investments in new businesses proposed by family members or others (as distinct from family loans)

3. Decision process on family investments

4. Policy on advising family members on personal financial matters

Employing family members

One of the more challenging aspects of any family business that entangles--and often compromises--emotions and pragmatism is the employment of family members. For properly educated children with a true understanding of the business and devoted to seeing a business succeed, the issue resolves itself. The real-life running of a family business usually isn't that simple. A business can end up employing more family members than it needs--especially if they don't have the specialized skills required of regular workers. In other situations, unprofitable lines of business are kept more as employment vehicles than strategic components of the bottom line.

A large, international private education business created a very detailed document about the employment of relatives, although the business only employed about 10 family members as of a few years ago. In the rules and potential situations considered in the document, advisors will recognize many of their own clients or prospects. These kinds of challenges confront business owners, regardless of the size of the business. Here is an adapted, shortened version of this family's policies:

Family Employment Policy of the Family Business

The driving force behind our decisions should be the best interest of the organization and not that of individual family members.

A job at the family business is neither a birthright nor an obligation for family members.

Once hired, family members will be treated as all other non-family employees.

There is no guarantee that family employees will be promoted to top management positions simply because they are part of the family.

Family employees are expected to set the example as far as dedication, performance, and conduct.

We cannot afford to carry individuals, whether family members or not, who do not make a full contribution.

Prerequisite Qualifications

Educational Requirements: A university degree is required for employment in any position within the company.

Family employees joining with no outside experience will go through an initial training of about six to 12 months.

Age Limit: The company should not be considered a "shelter" for family members in search of a job.

Compensation

Compensation and benefits of family employees will be based on their position, responsibilities, qualifications and performance, and will be comparable to that of non-family employees in the same position and with similar qualifications.

Source: Adapted from SABIS(R) Family Employment Policy, IFC Family Governance Handbook

Other instructions include a career development plan for family members, performance reviews, advancement, grounds for dismissal, internships for younger family members, and supervision and working with relatives.

By understanding the family dynamics that business owners confront--and offering practical guidance of a family constitution and employment rules--advisors can further demonstrate their unique value to this important client group.

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