Year-end planning is never an easy task, especially for small businesses with limited time and resources. For family-owned business, year-end planning is more complex because oftentimes it involves an intersection between personal planning, estate planning and business planning.
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Business planner Matthew Erskine said this junction of personal and business finances is hard to avoid when it comes to a family-owned company, no matter the size.
"When you are dealing with a family-owned business, you have a lot more issues with control than you would have normally," he said.
Erskine is a fourth-generation member of his-family run legal business, and has seen the importance of such planning firsthand.
"Many times this planning is neglected. You need to make sure these plans are in sync and you don't have control of the company blow up."
Here are five areas Erskine said family-owned businesses should examine going into the New Year:
No. 1: The family's role in the business. Many small, family-owned businesses often nurture family values, and this notion should be passed on to new generations of leaders, Erskine advised.
"Think about how you will nurture the next generation of the family," he said. "Are you bringing them into [the business] early enough? How will your next year's plans for the business be impacted by this role?"
Erskine also recommended family-run businesses implement a meritocracy method, if they haven't already.
This should be used exclusively for hiring and firing senior managers in the business, meaning that people are promoted and let go based on the work they do, rather than family connections.
"If not [implemented] you end up having people who are not family, but are very talented, probably feeling slighted," he said.
No. 2: Business ownership. "When you get larger, you need to take a look at how you are structuring the family's relationship with the business," Erskine said. "We usually see them go into a holding company with a portfolio of businesses underneath it."
Take this time to examine family members' stake in the company. If someone is looking to get out, or move to a new investment within the business, this is the time to offer the opportunity. "You can't force people to love what you love," he said. "Take a look at this every year."
No. 3: Governance. Now is the time for a family-run business to consider implementing an advisory or governance board that strategizes a long-term view of the business’ direction.
Visiting this area of planning also allows the business owners to look ahead and develop a portfolio strategy for the year to come, Erskine said.
No. 4: Wealth management. Family businesses require closer coordination across the family's wealth than non-family-owned businesses. Erskine stressed that it’s important to ensure that estate plans for different members of the family are understood, and their impact on the ownership of the business has been modeled.
"Ownership of shares of the company have a huge financial impact on [the family's] wealth."
"In both their worth and taxes, you need to coordinate so that you don't end up having something that might make sense from a short-term point-of-view, but no sense in the long-term control of the company."
No. 5: Values. Sum up ethical values and activities from generation-to-generation, Erskine recommended. Be sure there is a focus on monitoring, evaluating and learning from philanthropic investments, and pass that on throughout the business to determine your societal impact in the long-term.
"What's different in a family business and a private business is that it will have the family's values," he said. "You need to express to the next generation who you support and how you make charitable contributions."