FAMILY GOALS____________________________________________________________

Compensating Family Members in the Business – What is Fair?

BUSINESS GOALS____________________________________________________________

Family Business Longevity Examined in a New Light

OWNER GOALS____________________________________________________________

Hiring and Firing Family Members

Letter from Partner

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2 ST IRRING EMOTIONSThis month’s newsletter contains two articles sure to stir some emotions: “Hiring and Firing Family Members” and “Compensating Family Members in the Business”. There is nothing like jumping into the fire feet first with two topics, that Family-Owned Businesses have struggled with since the beginning of time!

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3 COMPENSAT ING FAMILY MEMBERS IN THE BUSINESS - WHAT IS FA IR?The age-old question and dilemma for family business owners – what do I pay my kids who work in the business, and what to do about those that don’t? The owner(s) will ask –”How do I be fair, and not play favorites? How do I keep my other employees loyal and happy? How do I show my kids I (we) do love them and want to give them the best in life?”

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6 FAMILY BUSINESS LONGE V IT Y E X AMINED IN A NE W L IGHTIn this issue, we celebrate the longevity of America’s oldest family businesses—companies that have been continuously owned by the same family for 155 years or more. Sustaining a family enterprise for more than a century and a half is a truly remarkable achievement.

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8 HIRING AND F IRING FAMILY MEMBERSImagine you are the owner of a small business faced with the daunting task of having to make some aggressive cost-cutting measures including laying off employees. Or imagine you have an insubordinate employee who has been given every opportunity to change their behavior, to no avail. In both cases the employee happens to be a close family member. Talk about being stuck between a rock and a hard place.

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STIRRING EMOTIONSBY DAVID KRAJANOWSKI | MANAGING PARTNERdkrajanowski@singerlewak.com | 949.261.8600

This month’s newsletter contains two articles sure to stir some emotions: “Hiring and Firing Family Members” and “Compen-sating Family Members in the Business”. There is nothing like jumping into the fire feet first with two topics, that Family-Owned Businesses have struggled with since the beginning of time!

The first article, “Hiring and Firing Family Members”, was written from a real life scenario where the author’s wife was asked to join the family business. Her perception was that she was be-ing asked to help on a part time basis. At the same time, another sibling was becoming resentful that she was not giving 110% to the business. From how this misunderstanding played out,

comes a great bullet point recap of things to consider when hiring and terminating family members. The key is that there should be no difference in your hiring poli-cies whether it is a family mem-ber or someone from the outside, if you want the employment to be successful. Clear communi-cation about the expectations, duties and responsibilities includ-ing what success would look like three, six or twelve months after employment begins, is crucial. When an employment situation goes sour and needs to be termi-nated, both parties say goodbye and never have to see each other again. Unfortunately in a family scenario, the next gathering of the family is usually just weeks away!

The second article has to do with the age old question of how to fairly compensate fam-ily members in the business. If you remember nothing else, remember this – FAIR IS NOT EQUAL. Compensation should be paid on someone’s worth, not on family relations. Paying someone other than on this basis only brings resentment both to family members and other employees outside of the family. There are other ways to get mon-ies to family members who are in need, whether it be by gifts, dividends if the business is doing well, etc. Too often, families put the proverbial golden goose(the business) in jeopardy by failing to address the issue of compensation head on.

The partners of SingerLewak are well experienced in dealing with these matters and as always, are ready to discuss these important family owned business issues with you at any time. Please give us a call if you would like to dis-cuss your particular situation.

There is nothing like jumping into the fire feet first with two topics, that Family-Owned Businesses have struggled with since

the beginning of time!

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COMPENSATING FAMILY MEMBERS IN THE BUSINESS - WHAT IS FAIR?BY STEPHEN P. CARTER | PARTNERASSURANCE & ADVISORYscarter@singerlewak.com

The age-old question and di-lemma for family business own-ers – what do I pay my kids who work in the business, and what to do about those that don’t? The owner(s) will ask –”How do I be fair, and not play favorites? How do I keep my other employees loyal and happy? How do I show my kids I (we) do love them and want to give them the best in life?”

Well, how about starting with an interesting concept that all good business owners employ any-way – basing compensation on a person’s worth and contribu-tion to the business based upon skills and performance? In other words, at Fair Market Value! Let’s discuss this concept and the im-pact it has on the Company and all the players.

I. Effect on Family Members

When compensation is based on performance, there is no better tool for advancing productiv-ity. This is no less true for family members than for non-family

members. In my experience, I have seen many cases where family members know that their compensation is completely dependent upon their perfor-mance, and I assure you their performance is greatly enhanced. In addition, their security and confidence grows significantly because they realize that they are not “handcuffed” to the family business; i.e., they could move to the outside and obtain the same compensation for the same services. Likewise, I have seen situations where the concept that “all siblings need to be treated equally” have taken over. This results in an effect no one wants — it reduces the incentive for

everyone! The stronger family members feel that there is no reason to “push” since their com-pensation is known to be fixed and equal to lesser talented or “lazy” siblings. The weaker family

members have gotten what they wanted and for the most part, will work to an even lesser level than their capacity.

The business obviously suffers; true team work is lessened and incentives lost. But the real sad-ness is that the family members themselves are forever in limbo – or “no man’s land”! They are tied to the family business be-

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When compensation is based on performance,

there is no better tool for advancing productivity. This is no less true for

family members than for non-family members

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cause they cannot see themselves earning as much elsewhere, and they become deeply insecure in their employment flexibility. The business becomes the be-all and end-all and any change in that business; i.e., sale or restructure, is fought against. Obviously, this may not be in the best interests of the family member or the business.

II. Effect on Non-Family Mem-bers

The effect of market value com-pensation for family members on non-family members is excellent. They feel that they are on an even playing field and a true member of the team. While they recognize a “difference” between their sta-tus and that of family members, they also recognize that it is kept to an absolute minimum. If they make a larger contribution to the business, they are going to be rewarded. They also have a much greater respect for the family members than they would where the “all siblings are equal” com-pensation system takes over. As a result, they don’t resent them and they are helpful to them. In short, the morale throughout the business is enhanced.

III. Intra-Family Relationships

It is quite evident that the fam-ily business’ long-term success often depends on how the family

members “get along.” One of the major problems with the family compensation system is that once the senior family member passes on, there is no one to lay down the law with regard to what the compensation should be. As a result, family members begin in-fighting, and the stronger con-tributors resent any equal sharing of compensation with their fam-ily members. Thus, the “system” that is based on “all are created and to be paid equal” rather than market value compensation falls apart at the worst possible time for the family business. And too, because all family members are compensated at a very high level (or an extraordinarily high level for their value to the business), they never leave, causing ad-ditional stresses on the business. This could lead to the demise of the business! One of the beauties of the market value compensa-tion system is that when it is done right, including careful, routine and regularly-scheduled evaluations, it is not dependent on a strong senior family mem-ber for its functioning. Because it provides for lesser compensation for those contributing less to the business, it will often result in the weaker family members leaving the business, which creates a less-er strain on the business in tough times. Conversely, the stronger family members — those who are contributing more — find

themselves rewarded and in turn, are incentivized to contribute even more. Finally, the benefit at the death of the senior family member is clear: the compensa-tion system continues, and the dislocation which occurs at the death of the senior family mem-ber is kept to a minimum.

IV. Effect of the Market Value System on True Profitability

Family businesses are known for masking profitability. Masks can be either positive or negative. Below-market lease arrangements on family owned buildings or equipment can inflate profits. Much the same occurs with compensation. Where family members’ compensation is based on “all are equal”, one often sees the parents’ compensation be-

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One of the beauties of the market value

compensation system is that when it is done right, including careful, routine and regularly-scheduled

evaluations, it is not dependent on a strong

senior family member for its functioning

ing excessive and the children’s compensation being much less than their fair market value. This could give an inflated picture of the Company’s profitability, or drag it down if the parents’ com-pensation is radically inflated. In other situations, the children’s compensation is excessive, often based on housing and family needs of the family members as opposed to their worth to the business. This would give an un-realistically low portrayal of the profitability of the business.

The system where market value compensation is the rule helps in many ways. We are well on our way to establish the true profit-ability of the business. This has significant effects on decisions of family members to stay in the business and further pro-vides fairness in the payment of dividends by the business which can, in turn, be used to benefit

those family members not active in the business. If fairness can be achieved in this regard, one finds that family members are not working in the business to “protect” their investment and do not become a drain on that busi-ness. Where family members stay

in the business, it is because they are making a contribution, that contribution is recognized, and they too are being treated fairly.

The market value compensation system is designed to enhance

the longevity of the business, and reduce the conflicts both intra-family and intra-business, that can and will occur. If you don’t have such a system already in place, be careful and go slowly to implement such a system. Build consensus, and emphasize the benefits to the family, other employees, and the business. Outside advisors can be brought in to manage the transition since a key element of its success will be the evaluation system, which must be objective — i.e., not family oriented.

As with many things, one need not make this change overnight. The long-term benefits of paying market value salaries to family members are so great that easing in the program — to be sure that it does become adopted — will be worth the effort and the wait.

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The system where market value compensation is the rule helps in many

ways. We are well on our way to establish the true

profitability of the business

FAMILY BUSINESS LONGEVITY EXAMINEDIN A NEW LIGHTBY BARBARA SPECTORFAMILY BUSINESS

In this issue, we celebrate the lon-gevity of America’s oldest family businesses—companies that have been continuously owned by the same family for 155 years or more. Sustaining a family en-terprise for more than a century and a half is a truly remarkable achievement. But does that mean family companies that last for only two or three generations are a failure? Should we consider families who have exited their businesses as less accomplished than those who continue to oper-ate the legacy company—even if those who sell their businesses use the proceeds to create new, and greater, wealth? Why is busi-ness longevity so often viewed as the only meaningful measure of an enterprising family’s success?

A three-year study conducted under the auspices of the Family Firm Institute—a global associa-tion of researchers and advisers—aimed to reframe the view of family enterprise from a focus on operating companies to an assess-ment of value creation over time. The “FFI/Goodman Longevity Study,” completed in 2010, was

conducted by Robert Nason, who was then at Babson College and is now pursuing a Ph.D. in entre-preneurship at Syracuse Univer-sity, along with two European researchers: Mattias Nordqvist of Jönköping International Business School in Sweden and Thomas Zellweger of the University of St. Gallen in Switzerland. The study was funded in part by attorney and FFI member Joe Goodman. It will be published in a forth-coming issue of the field’s aca-demic journal, Family Business Review.

Putting Statistics in Context

The investigators re-examined frequently quoted statistics from a 1987 study by John L. Ward, now at the Kellogg School. Ward’s nearly quarter-century-

old report said that only 30% of family companies survive through the second generation, and just 13% make it through the third. Ward himself has acknowledged the limitations of that study, Nason and Nor-dqvist noted in a presentation at FFI’s 2010 annual conference in Chicago. Ward surveyed just 200 companies from only one state (Illinois) and only one industry (manufacturing).

Moreover, the researchers noted, Ward’s family business findings should be compared with longev-ity statistics for companies in general. Based on an assessment of U.S. Census data on start-ups founded in 2000—both family and non-family businesses—50% to 60% of all companies failed in the first five years, and only 25% lasted a decade. “[Ward’s] oft-cit-ed survival statistics are low, out of context and not generalizable,” Nason and Nordqvist asserted in their presentation.

The FFI/Goodman team circu-lated an online questionnaire to senior family firm executives and

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received 541 responses, which they winnowed to 118. About 70% of the respondents were from the U.S. The survey partici-pants’ annual revenues ranged from less than $1 million to $3 billion; the enterprises ranged in age from less than 20 years to 384 years (the mean was 60 years).

Challenging Traditional Assumptions

The study found that just 10.6% of the family enterprises owned only one business. The average number of companies controlled by these families was 3.4; 21.3% controlled five or more. Over the history of the participating families, they had owned an average of 6.1 firms. The investi-gators noted that research in the field has traditionally centered on firms founded by families and has not sufficiently addressed companies acquired through M&A; the families in their study added an average of 2.7 compa-nies via acquisition.

Nason notes that since nearly 90% of the families in the study population own multiple busi-nesses, shuttering one family-owned company would not spell the end of those families’ wealth-creating activity. “They’re divest-ing underperforming assets and redeploying them,” Nason notes. In other words, these successful families have business “failures” in their history.

The findings, the investigators pointed out, indicate that the key

wealth creation vehicle is not the firm but the family.

Moreover, the researchers noted, companies can be old but not entrepreneurial. A number of the historic firms on the Family Business 100, for example, have survived but not grown; in fact, several have contracted over the years.

The FFI/Goodman team noted that previous studies have not adequately addressed the im-portance of innovation and risk taking to family firms’ entrepre-neurship and longevity. Another important component is what they call “transgenerational entre-preneurial orientation,” or “deci-sion making with the success of the next generation in mind.”

In a 2002 article (Family Busi-ness Review, 15[3]: 223-38, 2002), researchers Timothy G. Habbershon and Joseph Pistrui wrote, “Families committed to transgenerational wealth must understand that markets inevi-tably change and that all asset-dependent advantages erode over time... Transgenerational wealth, therefore, embodies an implicit

assumption that the family own-ership group will develop entre-preneurial change capabilities in line with the inevitable need to shed or redeploy assets once its value-creating properties ap-proach exhaustion.”

Habbershon and Pistrui contend-ed that a “prevailing stereotype” exists in the family business are-na: “diversifying assets through a sale (even at a premium) or utilizing traditional growth strategies—going public, form-ing a strategic alliance, merging, leveraging the company—can be viewed as a failure rather than a step toward continued wealth creation.”

In other words, Nason says, the focus of family business own-ers and their advisers should be on sustainability of the family’s wealth, not on longevity of a particular operating entity.

Families with a transgenera-tional orientation view the legacy company broadly rather than narrowly. Though they lovingly tell their children tales of the original business model and the town where it first took root, those aspects are just part of the family story. They place their emphasis on the founder’s entre-preneurial spirit, attention to the marketplace, flexibility and sense of stewardship. This perspective raises the odds that the family will prosper as an economic unit over many generations, no matter what form its wealth-creating entities take.

They place their emphasis on the

founder’s entrepreneurial spirit, attention to the marketplace, flexibility and sense of stewardship

HIRING AND FIRING FAMILY MEMBERSBY JEROME VERMEULEN, CPA | SENIOR MANAGERjvermeulen@singerlewak.com

Imagine you are the owner of a small business faced with the daunting task of having to make some aggressive cost-cutting measures including laying off employees. Or imagine you have an insubordinate employee who has been given every opportunity to change their behavior, to no avail. In both cases the employee happens to be a close family member. Talk about being stuck between a rock and a hard place.

Business owners/operators may look to family members to help run a company in order to help a family member profit financially or professionally. Benefits to hir-

ing family members may include trust, loyalty, and dependability in helping the business succeed. However, employing a fam-ily member also poses a variety of risks that should always be considered before employing. Compensation, management and discipline of a family member are just a few of the potential factors that may strain family dynamics and relationships.

Below are some simple sugges-tions you may want to consider before agreeing to hire on family members:

Only hire a family member if they are qualified for the position. Never inflate a family member’s qualifications in order to place them into the company.

Additionally, if the company ever outgrows the qualifications of the family member, require ad-ditional training to update their qualifications.

Set expectations upfront. Before you hire family, be extremely open and honest in communi-cating expectations. Let them know exactly what they are to do and how their performance will be judged. Make it very clear to them that they will be treated the same way as any other employee. If you set the tone from the start and let family members know their employment is subject to the same terms and requirements as other employees, they may be less likely to expect special treat-ment.

Have a written contract in place. Consider a written con-tract that clearly defines their role and responsibilities to the com-pany. Having a written contract in place can make their job less personal and more professional. Poorly defined roles and respon-sibilities may place a limit on accountability and efficiency.

Compensation, management and

discipline of a family member are just a few of the potential

factors that may strain family dynamics and

relationships

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Establish clear boundaries between work and personal life. Agree to keep family and business life separate and do not discuss business related issues at family gatherings or at home. This is easier said than done, however if maintained you will convey an important message to all employ-ees that in the workplace, busi-ness goals come first.

Avoid showing favoritism in the workplace. If your company has an employee handbook or other conditions of employment, be sure to hold family members to the same standards as the other employees. Manage your family members, appraise their per-formance and compensate your family members as you would any other employee. Consider having the family member report to somebody apart from you which will eliminate the look or feel of favoritism. Showing favor-itism to family members could

cause resentment among other employees and contribute to high staff turnover.

Terminate gracefully. If the need arises to terminate a fam-ily member, do so as gracefully as possible to minimize causing family conflict. Give them ample

notice to find another job and prepare a clear and logical list of reasons for the termination. Offer to assist them in their job search and to give them a writ-ten recommendation for future

jobs. An exception would be if they committed a grievous of-fense, such as misappropriation of funds, then the termination should be immediate.

Be firm with the termination. Do not give the impression that your decision is negotiable. Be prepared for an onslaught of pleas, not only from the family member being terminated but from other family members as well. Do not be swayed by your sense of loyalty to your family, instead, do whatever is in the best interest of your company.

Family members in the work-place can greatly benefit a com-pany. The key is to clearly com-municate beforehand the roles, expectations, compensation and any other elements of the busi-ness pertaining to that family member. Communication from both parties will help provide for the best success and retention in hiring a family member.

The key is to clearly communicate beforehand

the roles, expectations, compensation and any other elements of the

business pertaining to that family member

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THE SKILLS YOU NEED. THE SERVICE YOU EXPECT.

OUR FIRMENTREPRENEUR-OWNED BUSINESSESSingerLewak knows the importance of relationships to excel and meet the needs of entrepreneurs and their businesses. Our client service relationship stresses client strategy and sound advice in all aspects of business - including the transfer to a new generation, the sale, or the operation of the company in perpetuity.

FAMILY-OWNED BUSINESSESFamily-Owned Businesses have been the drivers of our economy for a long time. We understand the significance of the family business structure, as well as the day-in, day-out efforts that have made an economic impact on both your local and the national community.

We understand the inter-relationships between the Goals of the Family, the Owner and the Business. Any one of these may impact the others in a significant way. We represent this with our FAMILY BUSINESS GOALS MODEL:

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