Family businesses need special help

Published 10:35 pm Thursday, February 5, 2015

By Arie Korving

A family business is one way individuals build something of value for themselves and their family. Suffolk is a great example of a community where family-owned restaurants, hardware stores, gift shops, bike shops, jewelry, sporting goods, clothing and furniture stores line the streets.

Suffolk has its national chains, but its most recognizable businesses — in the pork and peanut industry — began as family businesses.

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These family shops often provide a comfortable living, as well as job opportunities for family members of the founders. Whether they stay small and local or grow into large businesses, there are challenges that everyone running a business has to face.

The first is competition. For every business, there is a better-financed competitor. The supermarket doomed the family-run grocery store. Walmart is a feared competitor for anyone selling groceries, clothing, furniture, electronics, toys, eyeglasses; now it’s even getting into banking.

The second challenge is a bad economy. Many downtowns were shuttered when local industry left. Businesses depending on housing have still not fully recovered from the crash of 2008.

Finally, most small businesses are very dependent on one or a few key people. If the children don’t want to get into the business when the parents are ready to retire, the business often closes. There is no guarantee a business can be sold when the owner is ready to retire. Unless the owner has prepared for this, the financial results can be devastating.

For all these reasons, family business owners must prepare financially for life after the business. Succession planning is critically important and should be part of the business plan from the moment the business is started.

If a business is a partnership, buy-sell agreements should be in place to avoid complications from the death of a partner. If a business is going to be passed along to children, the owners should be clear about the division of assets. Otherwise there is likely to be wrangling over who is entitled to what.

One of the most common mistakes business owners make is to invest too much of their money into the business. Family businesses are high-risk enterprises. Competition, the economy — even a change in traffic patterns — can bring a business to its knees.

Building an investment portfolio should go hand-in-hand with building a business. When most of your money is tied up in your business, you are making the same mistake as the investor who owns only one stock. Diversification reduces risk and provides a safety net.

In addition to the traditional savings and investment accounts, the tax code provides many ways for business owners to put money aside in a variety of tax-deferred accounts. As a business owner you can even set up a “Defined Benefit Plan,” which works much like a traditional pension.

Running a business entails many things beyond offering customers a great product or service. People who start a business are usually focused on this aspect of the business. But to ensure that the business and the family survive and thrive, business owners should seek the assistance and guidance of a team consisting of an attorney, an accountant and a financial planner.

They may be in the background, but they are critical for the financial success of the family business.

Arie Korving is a financial adviser and the founding principal of Korving & Co. in Suffolk. Contact him at 638-5494.