November 16, 2018

“Preserve and Protect” Family Business Stock in Trusts

Robin Coady Smith

Robin Coady Smith
CEO & Co-Founder/Privatus CI30

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When it comes to intra-family transfers of a business, the primary objective of the founder is to preserve and protect this asset. A founder/owner contemplates a transfer of the business stock in trust. The transfer is a technical transition. Yet there are real emotional interests to be addressed as the founder- G1 (benefactor), G2 (beneficial interests) and advisers have different views of this. Clarity and consensus of founder wants for the business is high value with contribution to the business bottom line.

 

As founder/owner, can you answer the following emotional interest-based questions?

 
  • What is your objective in gifting your business stock in trust?
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  • What is your understanding of the ‘beneficial ownership’ duty of your trustee?
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  • Does your trustee understand your intent?
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  • Specifically, how will your trustee, as beneficial owner preserve your business?
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Key points of pain around the technical transition and emotional interests:

 
  • Lack of Direction: no clear intent or purpose, the reasoning or what success looks like
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  • Inconsistent Communications: advice is unclear or conflicted, language is not clear
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  • Poor Execution: plans not followed as discussed or not implement at all
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  • Indifferent Employees: terms, concepts, language not explained
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  • Another Decision Layer: trustee, not preserving revenues or the bottom line
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  • Limits on Founder/Owner Decisions: breach causes inclusion back to owner

Challenges

 

The founder of a 3-generation family owns a construction company with annual revenues in the lower-mid six figures. (G1) Founder wants to transfer the business to his three adult kids (G2). None work in the business. His intent is to pass along 60% of the net revenue stream to (G2) with a 40% net revenues plus net profits to incentivize a new management team. (G1)’s advisers urged him to consider trusts. It sounds easy according to his attorney, advisers and the trust company. Yet the language of the trust agreement is foreign. What does this mean in plain English? What does a trustee do? How does this preserve my business? (G2) had little interest in running the business or having a trustee in between them and the business. The transition was in danger of stalling when the Founder reached out to Privatus CI3O for an independent, neutral voice.

 

How we helped the owner to achieve his objective to preserve, protect and transfer the business to G2 members and all parties to have clarity.

 

To achieve consensus and move the family toward common ground, Privatus CI3O recommended and orchestrated specialty consensus-building workshops: These include the following:

Workshops

  • Participation in creating a powerfully aligned mission, purpose and a set of values – both individually and as a family – these are the foundations for sustaining business success and an enduring legacy
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  • Inputs from the “Relevancy Conversation” workshop help to produce a roadmap of what a family agrees is important - thus, consensus emerges that enables alignments and safeguards against future potential dispute or conflicts
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  • The “Liquidity vs Legacy” workshop helps founder, family and trustees to understand the tradeoffs in control, legacy, adequacy of cash flow - this helps all involved to get on the same page in deciding to keep or sell the business
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The family-centric aspects to a successful transition of the business transfer

 
  1. Aligning family values to the end-game of the business transfer
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  3. Aligning advisers, trustees and their firms to the founder’s (benefactor) intent
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  5. Promoting more cohesive and robust thinking – strategic, technical and people – on how to sustain business revenues and bottom line value while this asset is held in trust
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The non-traditional business aspects to a successful transition of the business

 

Privatus CI3O performed the following actions for the c-suite of the business:

  1. Engaged founder and (G2) in strategic planning of the business transfer
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  3. Identified and executed upon value drivers and risk enhancements post-transfer
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  5. Identified and executed upon improvements to governance and risk management practices post-transfer
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  7. Recommended annual strategic planning for the business
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  9. Proposed reshaping business strategy to address their business issues of today
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How they achieve more

 
  • Cultivate a new competitive edge for the business, its new leadership and its defined objectives
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  • Arm the family, their trustee and trust company with the knowledge of business risks and its relationship to business value, and how both perform over time
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  • 3X contribution to the business bottom resulted from enhancing equity value and managing risks in the business - the 24 months post-transfer
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  • Bond family members together through a more strategic, cohesive approach
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The result of our efforts

 

We add value and when appropriate, contribute to a business bottom line. This owner and family acknowledged: “What a relief! We have greater harmony of family and advisers and fuller awareness of our trustee’s duties and needed support. Our family and our business remain intact. Robin identified gaps we did not know about and helped us to keep our business healthy while it's held in trust.”

For an owner, family and their advisers, we are a facilitator, a keeper of confidences, a mentor and an independent voice.

Comments? You can contact me directly via my ExecRanks profile.

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