US Debt Downgraded - What do I do now? by Dan Thill

On Friday, August 5, the United States’ debt was downgraded from the highest rating of AAA to AA+ by Standard & Poor’s (S&P). The downgrade was announced after the market closed on Friday. Stocks had already been under pressure and as a result of the downgrade and investors being overwhelmed by the numerous opinions of talking heads over the weekend, the following Monday experienced investors exiting the market en masse. Subsequently, equity markets came under heavy pressure and unease mounted about the strength of our economy. The timing of the downgrade may have been a bit of surprise to some, but S&P had put the US on notice for a downgrade months in advance. Contrary to the doom-and-gloom view of the media, the downgrade, in and of itself, is a fairly manageable issue. Economically, it changes very little in the short run as witnessed by increased demand for Treasuries that Monday.  No one is suggesting that the United States will be unable to pay its current obligations.  However, the downgrade served to further damage investor sentiment.  Volatile days in the market may bring to mind the dark days of the Financial Crisis of 2008-2009.  Then, investors were grappling with a potential collapse of the entire banking system.  Fortunately, the problems we currently face are not as dire as then.  The downgrade may cause interest rates to rise, but no one is suggesting that the banking system is poised for failure.  Corporations have had healthy earnings growth over the last several quarters and have deleveraged their books so that they remain in strong fiscal positions.  This is good for both the equity issues of those corporations as well as their bonds.  And it is worth reiterating, no one doubts the United States’ resolve or ability to pay its current debt obligation.  Stock market turbulence serves to remind us that what goes up can come down -- and that overall risk is as important a variable in the investment equation as overall return.  The value of a disciplined asset allocation process that focuses on both risk and return becomes even more important, especially to the serious, long-term investor.   One of the key reasons why we employ not only traditional stocks, bonds and cash, but also alternative investments is to dampen volatility in times like these. Past performance is no guarantee of future results and diversification does not guarantee a profit or protect against loss.  We believe that in any market environment, investors should be diversified across a variety of asset classes.  As you react to the news and volatility of the market, please keep the following in mind: • Panic is not an investment strategy. • Diversification can dampen volatility. • Don’t make short-term decisions that may jeopardize your long-term goals. • Regularly review your goals and time horizon. When we work with clients to develop diversified asset allocation recommendations, we base our recommendations on a discussion of the client’s investment time horizon, investment goals, and tolerance for risk.  If these remain the same today as when we originally developed the portfolio, short-term market volatility should not have a major impact on the portfolio’s long-term performance.  If these factors have changed, then a review of circumstances should be conducted to modify the portfolio accordingly.  As succession planners, we are committed to helping our clients prosper in the years ahead.  Please call if you have questions or would like to schedule a meeting to review your current situation.  We can help ensure that your portfolio is properly diversified and that your financial plan supports your long-term goals, time horizon, and risk tolerance.

Should I Hire People I Do Not Like?

Of course not.  No. Never. Roy Reiman, publisher and philanthropist, writes and speaks about the virtues of hiring people you like and the positive impact that has on building or sustaining an accepting culture. Hiring people you do not like almost certainly leads to problems down the road, and those can be expensive in terms of energy, time and money.  To read the end of this blog, click here.

How to Overcome the Curses of a "Control Freak" Culture

A thorough succession plan addresses the organizational and family issues that can impact the continued success of the business through the next generation of owners and managers.  A control freak at the helm significantly complicates two components of the Succession Matrix: successor identification and development and management teamwork and synergy. Notably, the control freak represents a barrier to the development of successors and supporting managers who have the confidence and competence to operate the business when the control freak inevitably loses his/her physical or mental ability to drive the business.  To read the end of this blog, click here.

Business Structuring & Family Harmony – Part 3

Below is the final part of Jeff Faulkner, one of my partners', series on how to structure a business in a way that promotes family harmony. I hope you've enjoyed and learned from this series, as it's always easier to do it right the first time than undo the mess that was made from poor planning. A third family I’m working with also has some Business Structuring issues that could wreak havoc on family harmony if not dealt with. Though this is a relatively simple issue, it is one that could have a profound impact and another example of what would typically be considered good tax-driven planning, but not necessarily good succession-driven planning. The tax-driven planning accomplished in this case is particular to the client’s state of residence. Similar to the situation in my previous post, this one involves an operating family business and business related real estate, with two children active in the business and one not. The typical structure is to have a lease agreement between the operating business and the entity that owns the real estate, thereby generating a long term and reasonably dependable source of income for the owners of the real estate. Many business owners establish such a structure to provide them with retirement income once they decide to leave the business. Others, as in this case, use this type of structure as a way to create equality between their children, with those active in the operating business paying rent to those not active in the business, and giving the actives the option to buy the real estate. Not perfect, but it works in a lot of cases. In this particular case, however, the owner did not set up a lease agreement between the two entities; rather, he established a joint venture between the operating business and the underlying real estate to avoid paying sales tax on the rent transaction. The way this works is that the real estate and the operating business share the net profit of the business. Makes sense, huh?  Except that in this most recent economic downturn, the operating business lost money a couple of years in a row, thereby generating no profit to share with the real estate. Rather, the operating business, which thankfully was well capitalized, loaned money to the real estate to pay its share of the income taxes. Now, the real estate (inactive child) owes money to the operating business, with no other source of income to pay the loan. The actives could buy the real estate, but then it would be a reduced figure due to the loan that would be due them. Obviously, this is not a great deal for the inactive child. Unwinding the joint venture is not going to be an easy thing to undo. But for the sake of family harmony in the long run, that’s what this family has chosen to do. In sum, when structuring your business and your acquisitions of other businesses, real estate, etc. that you make along the way, please keep in mind that someday you will likely be in a position of leaving it all to your kids. Always ask yourself, “What impact will the decisions I’m making now have on the long term continuity of the ‘golden goose’ and the maintenance of family harmony?” You owe it to yourself and your family to make these decisions as wisely and with as much foresight as possible. It impacts more than just today.

Please! What Is Succession Planning and Why Do I Need to Involve Outsiders?

The process of succession planning is significantly different for a privately-held and/or family owned business compared to a publicly held company.  For our purposes today, we’ll be dealing with the privately held because most businesses fall into that category. Depending upon your advisor’s field of expertise, the definition of succession planning takes on a variety of meanings.  For some, succession planning is all about wills, buy/sell agreements, trusts, and estate planning.  For others, it’s about business performance and for another set of advisors, it’s all about family harmony. To read the end of this blog, click here.

The Control Freak Culture and It's Impact on Successor Development

As I expressed in my previous post, the deployment of a succession plan should address the organizational and family issues that can impact the continued success of the business through the next generation of owners and managers.  Assuming a control freak has been at the helm, activities would include assessing the impact of the control freak and development of plans and processes that can discontinue the inherent handicaps to the continuation of success. The most prominent curse of a control freak is that the next generation of owners and managers have not been allowed to make mistakes. The concept that “success is based upon the failures you learn from” is null and void. Further investigation should confirm that a major characteristic of the predictably productive environment is that here have been few if any mistakes or wasted resources. To read the end of this blog, click here.

Business Structuring & Family Harmony – Part 2

Below is the second part of my partner, Jeff Faulkner's, three part series on finding family harmony through business structuring. I’m currently working with a blended family business that has two children from each side.  Two of the four children are actively involved in the business, one from the dad’s side and one from the mom’s side. Both active kids want to be able to run the business at some point, but the entire family has strongly suggested, if not warned, against the two active kids working together. Here’s the problem, the business is made up of five different franchises underneath one corporate umbrella. That’s right; all five businesses are inside the same corporation.  And, the bulk of the family’s net worth is the operating business. What’s a family to do? Well, you could start by forcing the kids to grow up and learn to cooperate with each other, so they could work together. On the other hand, if the family is right in that there is absolutely no way to make this happen, we’d then be setting them up for failure and family disharmony. So, why not build in some flexibility? An IRS Section 355 divisive re-organization, or tax-free spin-off, of the separate businesses is in order. While this will most certainly be a costly initiative that is dependent on IRS approval, it will create the flexibility for the active kids to remain in business together if they show that they can mature beyond their sibling rivalry issues. In the event they cannot, well, we then have the flexibility to divide the businesses up and allocate one or more to one child and one or more to the other child. Further, we will also segregate the real estate that each business is sitting on into separate entities to provide additional planning flexibility, not to mention, much needed additional liability protection. While this environment is not perfect by any stretch of the imagination, it most assuredly creates an environment that is more conducive to the maintenance of family harmony in the long run. For the final part of this series, please read "Business Structuring & Family Harmony – Part 3."

When is the Best Time to Give Someone Feedback?

Life seems to be full of “Goldilocks” moments.  You know, the time when whatever is going down is just right.  So, when it comes to giving family members, employees or partners the benefit of your counsel, when does that magic feedback moment actually occur? Before we talk about the timing, however, let’s mention one or two things about the nature of the feedback.  If it is constructive criticism it may actually have more weight than positive reinforcement.  While positive comments may be good for morale, they do not appear to have much influence on actual performance.  It seems that we pay more attention to criticism than we do to “wonderful, wonderful.” To read the end of this blog, click here.

Do You have a "Control Freak" Culture - Can Your Business Survive In the Future?

Every day as I interact as a succession planner with family-owned businesses, I encounter control freaks. Unfortunately, control freaks do not want to be known as such and try to disguise their attitude and management style. Therefore, as I assess what is going on relative to the family and the business, I look for signs that help me understand how the family and business works. By doing so, any control freaks are almost always revealed. In this process, it is important that I be sensitive to these signs because a control freak generally handicaps, or even curses, a succession planning initiative.  As a succession planner, I must be aware of, and address, the organizational and family handicaps that may have been accumulating over many years. I must also be prepared to develop plans and processes that will manage the curses and discontinue negative affirmations that can handicap the continuation of success through the next generation of owners and managers. However, let it be said that, rehabilitating the control freaks that I encounter is a stretch because they are so devoted to their comfort zone of behavior,  attitudes and affirming the successes of their extraordinary controls that all we can hope to do is limit their exposure to those they handicap or curse. To read the end of blog, click here.

Business Structuring & Family Harmony – Part 1

One of my partners, Jeff Faulkner, has written a great three part series on how structuring a business can impact a family's dynamics. I hope you can gain some tips on keeping the peace in your family by properly planning your business's structure as your read Part 1 of the series below. Business Structuring is a critical component of succession planning that can have a huge impact on family harmony. In the next three posts, I’m going to describe three different family business situations that I’m currently involved with where Business Structuring is causing havoc. The first story is a highly complex 3rd Generation Family-Owned business which consists of a real estate and a separate investment business with 4 family shareholders. Two shareholders, father and son, are active in the operating businesses and two shareholders, sister and a sister-in-law, are not active but are financially dependent upon the business. The ownership of the separate entities add even further complexity to the situation in that, the operating businesses own a piece of the real estate,  numerous trusts own a piece of the real estate and investment businesses, and the operating businesses have multiple owners consisting of other entities that the family shareholders control. I have done my best to explain this situation as simple as possible, but due to the bizarre nature of ownership, I have likely confused you. When we got involved, none of the family members, or any of the family’s advisors for that matter, completely understood the structure.  And for a simple family, it didn’t make sense and was causing relationship stress. The two inactive family shareholders were growing increasingly frustrated because they could not predict their income stream with any reasonable accuracy and consequently, could not plan their lives accordingly. The son was growing increasingly concerned about his fiduciary liability with his siblings. This structure has worked under the father’s leadership because the daughter and daughter-in-law have believed that things are being done in their best interest. However, nothing could be further from the truth. To create dependence in any human being is never in their best interest. If these issues are not worked out with a new, simpler structure, the likelihood of the next generation living under these conditions is highly speculative at best, and more likely pointing toward volcanic explosiveness. Fortunately, all family members have come to understand the issues and are cooperatively working toward a straightforward structure that is easy to understand and that creates predictable and meaningful sources of income. The initiation of the process towards an uncomplicated structure, in and of itself, has created a more harmonious family environment. The inactive family members’ frustration levels have subsided, and the son’s fiduciary liabilities have been reduced, as they all see movement and growth toward independence. Click here to read the second part of this three part series, "Business Structuring & Family Harmony - Part 2."