A family affair: now more than ever, family-owned businesses must craft solid succession plans to develop enterprises that grow and prosper. (Entrepreneurship).

FOR GENERATIONS, FAMILY-OWNED BUSINESSES HAVE BEEN the cornerstone of the African American community, propelling many black families to reach their American dream. The greatest part of American wealth lies in family-owned businesses and, according to Family Business Review, family firms comprise 80% to 90% of all business enterprises in North America. But running a family business is no picnic. Besides the intricacies involved in separating the personal from the business relationships, there are the everyday details of running a company and the responsibility of preserving the business for future generations.

Having a succession plan is the key to the survival of any family-owned businesses, experts say. Yet results of a 2002 survey by the Family Firm Institute (FFI) of 800 family-owned businesses reveals that insufficient estate planning, failure to prepare for the inevitable transition, and the lack of funds to pay estate taxes are the leading causes for the failure of most family-owned businesses. FFI, a Boston-based organization that assists and educates members of family-owned businesses, adds that in 47% of the cases, the ultimate collapse of the firm was precipitated by the founder's death. Therefore, for African American family businesses, survival means crafting a solid succession plan, whether it's passing on the company to the next generation or selling the business altogether.

BUILDING ON A PARTNERSHIP

Trina and Avery Byrd say the key to a strong and successful partnership--whether it's in business or their personal life--is recognizing your spouse's skills, work habits, and work style. Trina, 38, is the president and CEO and Avery, 39, is the director of Freehold, New Jersey-based Bradford & Byrd Associates, a provider of industrial cleaning, hospital-grade cleaning, office cleaning, floor-care maintenance, and event cleanup (such as concerts and sports) services firm with $2 million in annual revenues.

"Trina wears six or seven different hats per day," says Avery, who also works as a senior Wall Street financial executive and is the "macro visionary" of the business.

"I couldn't do her job," he admits. "I don't want to be on her turf." Trina's "turf" includes handling the daily account management activities for clients such as New Jersey Transit, U.S. Army Corps of Engineers, Sprint, and Fleet Bank.

The Byrds say setting work and personal boundaries are essential, particularly as it relates to rearing their 5-year-old daughter, Autumn. Trina recalls many times before motherhood when she would work 20-hour days. But her daughter has brought more balance. "Home means relaxation to me. I can't work at home. And that's made [me] be more efficient. I have no time to waste during the day," she says.

Avery, however, boasts of his perennial love of work. "I wake up at 3:15 a.m. everyday, getting only about four hours of sleep per night. But Trina likes her downtime. And it's important that I respect her habits. I know that if I want to discuss a serious business matter with Trina, I have to do it before 9:30 p.m. After that, business is over."

Another important ingredient: communication. This, the Byrds say, may even require training. "I work on a trading floor. It's a very gruff environment, and my wife doesn't respond to that in our business. I realized that if my job was to stimulate my CEO, then I needed to change my style," he says. Avery recommends Brian Tracy's audiobook The Psychology of Achievement (Simon & Schuster Audio, $17) and says he even enrolled in seminars on personnel management. "It's worked," says Avery, and he considers this to be his biggest lesson learned in working with his wife. Trina attributes enhanced productivity and a successful joint venture to Avery's change in style.

With a change in style came a change in thinking, particularly when it involved making preparations for the future and crafting a succession plan. But initially, Avery wasn't a willing participant. "It's a very difficult thing to do. I canceled the first couple of meetings. You're talking about giving up your life's work to someone else. I thought, `Who do I love? Who are my beneficiaries? Who's going to run this?'"

In the event something happens to both of them, the Byrds have asked one of Avery's long-time colleagues in the financial industry to serve as their executor. "He's a business associate and he's my friend. And he's a person who will follow my orders objectively and in an unemotional way," says Avery, whose son, Avery Jr., a Morehouse College junior, has expressed interest in running the company one day.

They are also reviewing the possibility of transferring some ownership to a few key junior managers as long-term incentive compensation. Such measures are consistent with executive incentive compensation plans offered by many public companies to help retain key employees, says David T. La Velle, a certified financial manager at the Merrill Lynch U.S. Private Client Group in Los Angeles.

The Byrds also have a key man life insurance policy that would pay twice Trina's salary (which is more than $100,000 annually) in the event she dies and twice Avery's salary should he pass away. This twice-the-salary formula accounts for expenses Bradford & Byrd Associates might incur in attracting qualified people to fill either position. The policy also allows the company to continue operating until succession plans are implemented and estate tax payments are covered.

La Velle suggests business owners also secure a trust company for estate matters. "A trustee must perform a variety of specialized functions, including the maintenance of records, preparation and filing of taxes, and dealing with the needs of the beneficiaries," he says. "Serving as trustee can be burdensome if the chosen individual is unprepared for the task." The Byrd's attorney, Corey Kupfer of New York City-based Kupfer, Rosen, serves as their trustee.

THE NEXT GENERATION

Paul C. Hudson, 54, president and CEO of Los Angeles-based Broadway Federal Bank (No. 11 on the BE 100 BANKS list with $179 million in assets), is following in the footsteps of his father, Elbert Hudson, 81, and his late grandfather, Dr. H. Claude Hudson, a former dentist who saw the need for an institution that would help African Americans finance home ownership. Paul's sister Karen, 52, serves as marketing director and also does interior design for the bank's four offices.

Paul's preparation for eventually heading the company came in 1981 when he joined the firm as a teller. "It was the old model of starting on the ground floor, learning all aspects of the business and working your way up," he says. It was Elbert's wish that his "heir apparent" come through the ranks of the business as opposed to taking the helm just because he is a family member.

And Paul agreed. "I was open to starting as a teller. I thought it would build respect among the other employees. It also builds confidence in the staff that you are really qualified. I had to balance my books everyday like every other teller and I felt an obligation to work harder and to be better. I didn't want anyone to think I was getting any favors," he admits.

Another key to a successful succession, says Elbert, is making sure that the child actually wants the job and has proper preparation. "[Paul] did all of the various jobs: teller, loan services, savings department, and the loan department. He was pretty well schooled [in the business]. It took him almost 10 years to be ready."

But that doesn't mean that things always worked smoothly. Patti admits, "I find that most of our disagreements result from the fact that I didn't communicate something to my father, like a large pending loan or a new product. You don't want your father to hear of a big issue for the first time at a meeting. Surprises equal problems. Frequent and open communication is required."

Ascending to the top is also a question of timing. And Paul admits that there were times when he became impatient with his father's succession plan. "The young person usually wants to takeover before the parent is ready to step down. As I look back, had I been made CEO when I wanted to be made CEO, I would have probably made a lot more mistakes. You have to be able to talk through your strengths and weaknesses. There needs to be a transition when you're given more and more responsibility as opposed to a big leap from not much responsibility, to hands-on operational experience, to taking over the business," Paul says.

And making a change isn't simply a matter of telling everyone, Elbert warns. "Announcing a transition is one thing, but implementing the management changes is another. The parent needs to make sure he [or she] is still alert. Get out while you are still capable of making good decisions, and can advise the new leadership in a positive frame of mind."

Another tip: "You can't continue to micromanage the company after you step aside."

Paul acknowledges that he hasn't thought of a successor. "If you have children, you can't guarantee that they are going to go into the business. You can't force them. That's a recipe for disaster," he asserts.

Family-owned businesses will continue to be an important cornerstone of the American business landscape. But to assure a smooth transfer of wealth and the viability of the enterprise after the founder retires or passes away means establishing keen estate planning and succession strategies. They're critical.

RELATED ARTICLE: Protect Your Assets.

when it comes to discussing succession, many business owners would rather change the subject. Death, which is inevitable, is a topic they would rather avoid. "There's the thought that if I make a will or make estate plans, I'm going to die. No one wants to deal with the issue of death. There is emotional pain associated with it so they tend to shy away [from it]," says Los Angeles-based attorney Samuel L. Hart, who specializes in estate planning for the wealthy.

He also points out that structuring a business as a sole proprietorship is the worst thing an entrepreneur can do. "The assets of the business are tied in personally with the founder. There is no independent entity that can be valued and sold and there is no distinction between the owner and the business." Therefore, Hart strongly recommends that a business be incorporated, thereby forming a separate legal entity in which the founder could own 100% of the stock. "The assets are separate and distinct from the individual." The goal is to protect the wealth of the owner through a variety of means to maximize the transfer of wealth to the heirs.

Hart explains the difference between the two:

                       INCORPORATED ENTITY

Founder's Death        In the event the founder dies, any contracts
                       the business has will be valid and continue,

Worst-case Scenario    Business assets are in jeopardy.

                       SOLE PROPRIETORSHIP

Founder's Death        Contracts are with the individual owner and end
                       upon his death.

Worst-case Scenario    Personal assets are in jeopardy.

PRIMARY SUCCESSION PLAN FACTORS

Another topic that should be of concern is minimizing estate taxes, says David T. La Velle. One strategy: irrevocable life insurance trusts. "In this situation, the owner pays insurance premiums and if he or she dies, the heirs can file a claim and the policy pays the estate taxes. The assets would pass on to the heirs uninterrupted," he advises.

* Risk Management: Key man life insurance policy covers overhead in the event the founder or primary person dies, estate tax insurance, and family limited partnerships to protect assets.

* Business Succession: Personnel in place who can take over leadership positions within the company in the event the founder dies or retires.

* Executive Incentive Compensation: Pay scale that allows for the retention of key personnel in the event management changes. It prevents mass exodus of executives to competitors.

* Comprehensive Estate Analysis: Purpose is to determine how much of the estate is tied to the business. For most entrepreneurs, the number is 100%.