Family Business Center

For some years, there has been conflict among members of the Bettencourt family, principal owners of the L’Oreal cosmetics empire. A not uncommon story unfolded: older matriarch acquired younger friend/companion, and lavishes much money and many gifts on him. Her daughter objected, starting a family feud. Claims of mental incapacity and coercive behavior reached as high as the leaders of the French government, some of whom benefited from political contributions from the family. Concerns were  expressed that the efficient governance of the business was being undermined.

A possible solution has now been offered. After various people were indicted or arrested, disinheritance threatened, and pressure brought to bear by stockholders and government officials, the matriarch’s seat on the board of directors has passed to her grandson, who apparently gets along with both sides. But this 25 year old man has some knowledge of fashion and cosmetics and none about running a large business. So perhaps the saga has another turn to take. And in the background is the second biggest stockholder, Nestle, which might have plans to expand its influence in the business.

A recent artice in Registered Rep magazine summarizes briefly three mistakes that can doom succession planning. They are:

• Building the wrong bench. Having people work in the business who aren’t helpful in the process of transition.
• Turning succession into a horse race among children and other successors.
• Acting out of fear.

What conclusion does this lead to? Plan way ahead, and consider the long term effects of the choices made, on the business and the family.

An interesting article appeared in the New York Times on April 15 about serious trouble at Archie Comics. Archie Comics, as everyone knows, has long published comic books about the fun and intrigue at Riverdale High among Archie, Betty, Veronica, Reggie and Jughead. It appears that ownership of this publishing empire was divided equally between two families. Eventually, co-CEOs from the two sides found themselves with widely diverging views of the future of the business. The result was lawsuits, acrimony and a much lowered morale among employees. As one outsider quoted in the article said, “I have to wonder how much of a succession plan was in place…Two CEOs can be a recipe for disaster…” This is an ongoing situation and it’s unclear whether it will be resolved or the business, one of the last-remaining family businesses in the comics world, will have to be sold.

Many businesses were harmed by the recession that seemed to extended for a very long time. But one family business made lemonade out of its lemons. Kohler, the well-known multi-generation family business in Wisconsin, used its excess capacity created by the recession to expand its business in China. Apparently, as wealth has grown in China, so has the desire for high quality bathroom fixtures. Kohler was able to tap into the middle income market in China, including offering its highest end product, the Numi, which offers remote control, leg-warming porcelain, a built-in stereo system and three bidet settings. Yankee ingenuity.

Saul Ewing will present the fourth in its popular series of webinars on family business topics. On April 23, at noon, a webinar will be presented, titled “Succession Planning While Building Next Generation Leadership”. The speakers will be Saul Ewing partners Bob Louis and Jeff Glaser, and they will be joined by Louis E. Sapperstein, CPA/ABV, CVA, of RS&F. They will discuss challenges in the business succession process, including planning for senior generation members who want to remain active, leadership training for the next generation and using new entities to satisfy tax and economic goals. You can register at this web address: www.saul.com/events-seminars-892.html.

The Family Firm Institute has concluded a three year study on why family businesses don’t continue in existence. The statistics are that only 30% of family businesses last to the second generation and only 13% to the third generation. The study showed that almost 90% of families studied owned multiple businesses, Ending one business didn’t necessarily mean an exit from all family businesses owned. Instead, it was better to think of the family rather than a particular business as the wealth creation vehicle, and it was suggested that advisors to families in business should focus on the overall family wealth rather than one particular business venture.

A recent article in Smart Money asks why people put money offshore. The author suggests there are two reasons. First is the litigation risk. Assets are placed overseas to avoid having them lost to lawsuits. The second reason is political risk, the idea that because of political turmoil, the need for tax revenues, etc., people’s wealth might be depleted. So it’s not just the improper reason of evading taxes that prompts people to move assets, but legitimate concerns about wealth being taken by capricious juries or taxing authorities.

A recent article in the New York Times returns to a familiar theme, baby boomers exiting from their business. The point of the article is that baby boomers aren’t planning their exit from business, nor are they paying attention to the larger topic of retirement planning. The writer suggests that an exit plan be compared to a will- write it once, then go back and update it periodically. Another good idea suggested is to find a mentor and allot a certain amount of time each month to working on the exit plan. Whatever the technique chosen, attention must be paid, to avoid later disappointment.

President Obama has released a blueprint for his next budget that contains many changes in income, estate and gift taxes. Some of these changes, if enacted, would change the ways in which people can transfer wealth to the next generation including, importantly, interests in family businesses. Many of them might never become law and, of course, there is much uncertainty because this is an election year. We will shortly issue an Alert on the proposals, which will be posted in this space.

An unusual saga of the passage of wealth ended in 2011, 92 years after the death of one of America’s wealthiest businessmen. Wellington R. Burt, armed with a drive to succeed and an impressive name, used some of his wealth to benefit the Saginaw, Michigan area in which he lived. But when, just a few years before his death, the town raised the real estate assessment on his home, he changed his will to delete several civic bequests.

But the biggest surprise was for his family. His will provided for modest payments to his children (a slightly larger amount to his “favorite son”), with the bulk of the wealth to remain in trust until 21 years after the death of his last grandchild living at his death. This is the familiar period of the common law Rule Against Perpetuities. Over the years, efforts were made to get funds out of the trust, but without much success. Then, in 1989, the decedent’s last grandchild living at the time of his death died. So the 21 year period began then, and ended toward the end of 2010. Now, 12 great-grandchildren, great-great-grandchildren and great-great-great grandchildren will divide up in excess of $100,000,000. It’s difficult to see any sort of thought-through estate plan that would have this result- nothing for generations, and then a bonanza for those who happen to be alive 92 years later. The lesson from this story: think about what your estate plan will actually accomplish, and whether it makes sense; and don’t try to extend your dead hand of control into the dim future.