Empower Your Kids to Manage Money, and Make Them Ready to Lead Your Business One Day

What will happen to your family business when you are no longer able to manage it? Is your business prepared? Money management skills should be taught earlier to future family business managers.

Though it was a five-hour program, the night slipped by almost too quickly as Pat and Paul Frishkoff led an informative and entertaining presentation to the Family Business Center, “How to Make Your Kids Furious, Your Business Unmanageable, and Uncle Sam Your Principal Heir.”

Pat Frishkoff is founder and director of the Austin Family Business Program at Oregon State University in Corvallis, while Paul is a business administration professor at the University of Oregon at Eugene. They also run a consulting firm, Leadership in Family Enterprise. Both grew up in family businesses–Paul’s successful, Pat’s struggling.

Early on, attenders knew this wasn’t going to be a typical program. The Frishkoffs distributed envelopes to everyone containing $300,000 in play money and three squares of differently colored cardboard (colors varied from one envelope to another). Then came the assignment: pair up with a partner, and end up with all the same color plus as much money as you can.

The floor buzzed with activity as we tried our hand at commodities trading. Audience strategies included buying, selling, barter, and gifts. Many people were able to match the colors quickly, but those who also accumulated wealth were harder to find. Nonetheless, the winner had $950,000.

But money, the Frishkoffs are quick to point out, is only a symbol. It’s not an end in itself, but a means to such goals as passing on your business, acquiring nice things, making the world a better place, and so forth. And its role in a family business, says Paul, is “intricate and usually not explicitly stated.”

Yet instilling values about handling money is vital; kids who have more money than they know how to handle can get into serious trouble. As Pat put it, “Money in trust for children is because you don’t trust them” to make intelligent decisions. She quoted Richard Pryor: “Cocaine is God’s way of telling you you have too much money.”

If a family communicates openly about money, the Frishkoffs believe, children will learn, first of all, that money can be talked about–even in a culture where many people are “more comfortable divulging sex habits than net worth.”

Paul related how as a child, his brother had never lived down the day he wildly overtipped for a haircut–but no one had ever given him the tools to know how much was a fair tip. But if the values–and pretty accurate estimates of the dollar amounts involved–are transmitted, then the kids can learn to spend and save wisely, have a good sense of what things are supposed to cost, and support causes that are important to them. “We’re great believers in letting people make mistakes,” he said, but it’s better to start early and learn from small mistakes than to be thrust without training into the pitfalls of potentially huge mistakes. “The best way to learn about money is practice.”

Strong believers in the concept of stewardship–protecting resources and growing them for the generations to come. One tool they suggest is using kids’ allowances as a learning tool. Start them around age 5, but have an agreed percentage go directly to savings. (Their child is required to bank 50%, and gives that portion to charity when it hits a certain figure.) The allowance should be within the family’s affordability level regardless of peers, and the part beyond savings should be the child’s to spend as long as the decision doesn’t impact the family. For instance, the Frishkoffs restrict their son’s spending on sugar because they, as parents, are the ones who pay dental bills. And the allowance is not about compensation for work, or about reward or punishment. Said Paul, “I’d rather pay separately for chores–or pay someone else instead.”

Give kids their own credit cards at about age 12–but with, say, a $50 credit limit. And when they’re older, let them have significant, but nonthreatening monetary decision power. One company, for instance, let the children allocate $5000 out of the $100,000 annual corporate charity fund–but they had to document why their choices were appropriate and in keeping with the family’s and business values. Demanding the documentation, Pat notes, helps the children learn how not to get taken.

Even more important than transmitting the values, though, is setting up appropriate wealth transmission methods. A buy-sell agreement, Pat says, is “more important than a will.” It’s worth spending some money to protect against what you’d lose if you don’t have the mechanisms in place. Estate tax is as high as 55%, “but it’s an optional tax–with careful planning. Is the federal government your favorite charity? If not, please take care of it.”

Paul demonstrated this dramatically by borrowing a $100 bill from someone in the audience. He ripped it in two and asked, “which half do you want to give to the government?” Then he returned it with a comment that it would still be usable, with tape.

A good buy-sell, however, will not necessarily come out of an objective of screwing the IRS, Pat pointed out. Understating the value of a business is a common and dangerous mistake. If the alternative is wrecking the family, “It’s better to pay the tax and not screw surviving family members. Assure it works in the worst of circumstances.” Buy-sells need to cover such contingencies as partners’ deaths or their bankruptcy or mental incompetence, as well as retirement.

Marriage and divorce also have to be factored in. As Paul put it, “Whom do you never want to be in the partnership? Your ex-son-in-law’s new spouse?” Check old documents to make sure you’re not setting up such a situation. In fact, every major life transition, including not just marriage and divorce, but birth, leaving home, retirement, and death, can impact the way your business–and accumulated wealth outside of business assets–will be divided up.

Make sure to create a manageable structure. For example, a 50/50 ownership plan only makes sense as long as the partners agree. Otherwise, it paralyzes decision-making. A better structure would be 48/48, with a 4% share going to a designated tie-breaker.

Similarly, if many family members, including both those involved and not involved in operations, have a significant stake, the absentee owners might block growth moves because they haven’t been convinced of the need to spend ‘their’ capital. But there are plenty of alternatives to pass wealth on to noninvolved family members:

  • nonvoting stock
  • giving other assets, such as real estate
  • letting those who’ll be running the company actually buy it–either in full or at least a 51% controlling share
  • transfer wealth slowly over time through annual givingThough she noted that 75% of family business owners want their business to survive past their own involvement, only half have written their estate and succession plans. “If you want the business to continue in the family, set it up!”

    Over a lavish and tasty buffet dinner, the audience wrestled with a case study: a family where the son used his bonus from the business to buy his wife a fur coat–his sisters, who didn’t work in the business–and in fact, had both married doctors and moved out of the area–got jealous and demanded coats from their mother.

    The audience saw this situation as confusing business with family roles. As Pat said, “Seeming money issues are not always about money.” The real issues here might have been control, quality time with family members, the daughters’ need to assert a claim to wealth they didn’t create, etc. If the mother bought the coat, the demand cycle would keep growing–perhaps the next year they’d demand sports cars. But perhaps what they really wanted would be a trip alone with the mother…money to seed a business of their own…the right to contribute as an employee…even therapy. Giving them coats would not address the underlying issues.

    Then the Frishkoffs threw out a challenge: “Where’s the mink coat case in your situation? What are the money issues that trigger anger, aversion, fear, and so on–that make you tense?” They divided the group into older and younger generations and facilitated an extensive brainstorm.

    Here are the unedited results.

    First, the younger group:

  • When will stock distribution plan be finalized?
  • When do you plan on retiring?
  • How much income from business do you need for your retirement?
  • Have you done an estate plan?
  • Where do grandchildren fit in the business?
  • Who do you intend to run the business next… family or non-family?
  • Who determines family members’ income/salary?
  • Are you willing to step down if your vision does not match that of the upcoming generation?
  • Can the Board of Directors be reduced to only family members?
  • How much of your income can I have when you retire?
  • Where is the key to the safety deposit box?
  • When can I have that BMW?
  • Are you willing to form a Board and actually follow its decisions?
  • How are other family members compensated?
  • When can we make decisions from head and heart and not just heart only?
  • Who controls Asset Development?
  • When can we meet with lawyer, banker, accountant?
  • When are you going to stop funding “The Black Hole”–outside investments?
  • Are you willing to relinquish power/authority?
  • When are you going to get rid of the “Deadwood” you hired? …after retirement?
  • How are Buy-Sells funded?
  • Where do you hide the money from the IRS?
  • Are you going to give me time and opportunity to learn the business?
  • What do I need to learn before you retire? When are you going to take the time to teach me?
  • What other position can you take on?
  • What happens when you’re no longer competent to lead? Who determines your competency?
  • When do I get my mink?
  • Do you trust me to do your job?
  • Can you be seen and not heard? What role will you play if not the top dog?
  • What will you do with your free time?Next, founders/seniors
  • Sign bank notes and get me off.
  • Decide how much family members are going to be compensated.
  • Will younger generation give priority to family or business?
  • How do they suggest that they take care of other siblings who don’t have stock?
  • How do we split bonus between family and non-family members?
  • What’s the split between reinvestments and dividends?
  • At what age of younger generations should distributions be made? 30? 40? 50?
  • Who’s going to run the business if there is more than one child?
  • Are the children willing to buy the parents’ portion?
  • How are the kids going to fund the parents’ retirement?
  • How much debt should the company be able to take on?
  • When should the company stop growing, or should it make a heavy investment?
  • If one sibling gets a perk, should they all?
  • How can estate taxes be funded in preparation for catastrophe?
  • How do you set salaries for future family members?
  • If we can’t agree, what provisions for liquidating? …avoid IRS.
  • How would siblings respond to an outside CEO/an outsider to the board, and how would you compensate?
  • How do you make siblings comfortable who choose not to be/aren’t wanted in the family business?
  • Should siblings or cousins of approximately equal age be paid equally? Does seniority or performance affect this issue?
  • Should owners/parents have an annual appraisal of their children’s performance?Though the answers came up in part because of how she phrased the question, the list led Pat to ask, “Where were the thank yous, where were the ‘I love you’s? The bottom line is those are most important. Don’t get caught in all of this and forget those.”

    Still, they suggested looking at these issues with outside help–and they suggest strongly that the younger generation seek out their own advisors, just as they’d have their own doctor. Criteria should include knowledge of estate law and other relevant specialties, familiarity with family businesses, knowledge of your industry, and the ability to explain things in everyday language.

    But business owners will get more out of these expensive meetings if they’ve already examined five principal areas: 1] how will your family maintain its lifestyle without you? 2] could you afford to retire? 3] are your existing documents fair? 3] would your plan work in the worst-case scenario? and 5] could your family afford the estate taxes?

    The Frishkoffs concluded with two more participatory exercises covering values clarification and goal setting, then had everyone throw their goals into one big pile, to be read out loud by someone else in the group.

    Shel Horowitz is Director of Accurate Writing & More, a family-owned firm in Northampton, MA, offering low-cost marketing strategies for businesses. His latest book is Marketing Without Megabucks, published by Simon & Schuster. He can be reached at his web site http://www.frugalfun.com. This article originally appeared in Related Matters, the newsletter of the University of Massachusetts Family Business Center.