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THE METRONOME METHOD
A Fun Approach to Succession and Estate Planning for Family Enterprises
By Hugh Macdonald iUniverse LLC
Copyright © 2013 Hugh MacDonald CPA, CA, CLU, TEP, FEA
All rights reserved.
ISBN: 978-1-4917-0081-5
CHAPTER 1
Early Lessons
The Fire
I learned at the age of seven what happens when you almost lose everything.
It was January 6, 1959. My family lived in a small town in Pictou County, Nova Scotia. We owned the general store that was, for the most part, the central meeting place for the town of Ardness. I had seven brothers and sisters at the time; Mom ran the store, while my Dad ran a lumber company. The store sold just about everything from soup to nails. It was the heart and soul of the community. Everyone would stop to chew the fat, while sitting on benches around the counter. Mom would have a pot of tea on the stove and fresh biscuits to pass around.
Our house was just across the street. It was a fairly modern new home with a big veranda and beautiful yard overlooking farm fields right through to the Northumberland Strait. Sitting on the veranda in the summer you could almost see the lobster fishermen pulling traps up into their boats.
But on that cold fateful day in January something happened that taught us a lesson we will never forget. Around two in the afternoon an electrical fire broke out in the stairwell, and quickly spread to the rest of the house. My teenage sister, Joan, happened to be home from school that day. She spotted the fire and went into action. She raced through the house and got everyone out, including my Mom and two babies. Coming home from school, as I approached our home, I saw my sister with the babies and my Mom without any coats on the coldest day of the year rushing towards the store which was just across the street from our family home. I could also see two men on the roof and thick black smoke streaming out of the upstairs windows.
First Important Lesson: You can always replace your stuff, but you can never replace your family
Over the rest of the day, we watched the fire completely consume our house and everything we owned, including family pictures, and most distressing to me at seven years old, all of my toys, especially my hydraulic truck. It is not possible for me to adequately communicate how I felt at the time, but surprisingly, I found the whole experience quite interesting. It was fascinating to watch all of our possessions go up in smoke, with kind of a dispassionate detachment. Looking back I realize that I felt this way because we did not lose our most important possession, which was our family. That's the lesson I learned, that you can lose every material possession you own, but if you have your family, it doesn't really matter. That's what my Dad said as he was doing a head count: "You can always replace your stuff, but you can never replace your family."
In the months and years following the great fire, our family weathered many other ups and downs. We actually ended up living in the store, and never rebuilt the family house across the street.
In this way, our family and family business (which had been in my father's family since the late 19th century) became virtually one and the same. We were living right inside our business twenty-four/ seven.
Second Lesson: Pre-mature death of the owner triggers tough decisions for the family and the business
In March 1970, my Dad had a heart attack and died right there in the store while telling one of his famous stories to his friends. My Mom took over running the place and we helped her out. My Dad's lumber operations, including a saw mill and woodlands, which had supported the family for over half a century, were unfortunately liquidated at fire sale prices. Suddenly the store was responsible for generating all the money needed to support the family of nine kids, five of whom were still living at home. Just recently, as I write this book, my Mom passed away peacefully at the age of 91. She left behind nine grateful children and many fond memories for us to cherish. Sadly, though, the store, which had been in my father's family since the 1890's, is no longer in operation. My Mom closed it in 1993.
The Importance of being in time and in tune
Fortunately, through all of this, my siblings and I have stuck together. Although we all have different personalities and often disagree, there is a strong bond between us. We know that no matter what happens, on a basic level, we are all on the same page when it comes to family values especially when it comes to discussing issues such as money and family business. I call this being in time and in tune with each other.
I was able to experience the positive benefits of a Family Agreement when I acted as Executor of my Mom's estate which was distributed equally just a few years ago to nine siblings without any disagreement or conflict. The primary reason was that my Mom realized that death could come at any moment just like what happened to my Father and you must have your affairs in order and have those intentions communicated as a regular course of business at least once a year. This was a Family Agreement in action that provided certainty and guidance for many years to the family as to what will happen when the ultimate transfer of whatever wealth remains at death to all the beneficiaries.
These seminal experiences of my youth have an important impact on my work as a professional advisor to business owners and their families. I can relate to their struggles and aspirations for their companies and their families. I also know first-hand that the so-called dileneation between the business and the family is an artificial boundary. They are usually one and the same. That's why planning the future of a family business, including succession and estate issues, must address important relationship concerns and not just focus solely on the financial and legal agreements. Without incorporating this human element into the discussion, serious problems can disrupt the harmony of the family, and ultimately the fate of the business.
I've also observed that many entrepreneurs do not adequately prepare their family for the ownership transfer at death and do not take time to figure out who will own and control (not just run) their business after they die. That's because they don't talk about death, and they don't really think they are ever going to die. Many of them when asked will say that they care what happens to their business after they are gone, but their actions or inaction speaks differently and some owners simply believe that magically things will somehow work out. They don't realize that this attitude is going to really hurt their family, not just financially, but could destroy the family relationships that took a whole lifetime to build.
The Metronome Method®
If you want your family to stick together and carry on the success of your business, you need everyone to be in time and in tune. I use this phrase because I am also a musician. Music was very important in our family. We had a huge upright grand piano in our house, and someone was always playing it. Kids would come into the store, and head for the piano. My Dad could often be heard bashfully playing sweet waltzes on the fiddle near the piano. The wooden portable radio in the store was also always on, playing Scottish music for the local fisherman and farmers who were hanging around the store.
These days, I play the piano, tenor saxophone and accordion. I'm not a professional, but I enjoy playing with family and friends. Recently, I had an insight that there is a connection between my musical interests and my advisory work. For a long time, I've contended that the families are more successful if they are in time and in tune with each other. I realized that everyone needs something to keep generating good vibes or rythms. For musicians, this is accomplished by using a metronome. This device sets the tempo for a piece of music so that the musicians can stay in time. For practicing musicians, whether they are in a symphony orchestra, rock or jazz band, the metronome is an essential tool. It sets the rhythm and keeps everyone playing together at the same tempo. As in music, this coordination is very important in a family that owns a successful business. This kind of business is more than bricks and mortar. It is also about passion, feelings, and hopes and dreams. There is a lot of baggage and unspoken resentments that may go way back to childhood. They need a metronome too.
That's why I developed The Metronome Method®. It is a quick and fun way to secure the future of your family and your business. I emphasize quick because you don't want this kind of process dragging out over many years. It is essential to interact positively with your family and clear up any issues that are festering and this can even be a fun way to do it. The great part of this process is that it helps pull everything together once and for all so you can enjoy your life and prosper while running your business.
Taking the musical analogy further, the process helps you and your family stay on the same page of music.
We figure out:
1. What song you want to sing and have sung by others after you are gone
2. Write the sheet music
3. Turn on the metronome
4. Practice the song together with all the key members of the band.
After a few rehearsals, you and your family will be ready to perform on your own. Experience shows that this performance will be replayed over and over for many years, even if you change conductors.
Central to this model is what I call The Family Accord(r). This is an important family agreement that is the missing piece in traditional succession and estate planning for family owned businesses. It describes and outlines the steps of what happens to your business and family when you are not there. This vision is the missing piece that provides the framework for everything else. It is the sheet music that each family member will sing from no matter who holds the baton.
This book was written as a professional approach to this subject. In each chapter, I will give you direction on what to do, and examples on how other families have done it. Think of it as a music school for your family succession and estate planning. You will take a few lessons, practice a few things, and learn how to make great music on your own. I will simply act as the metronome to keep you in tune and in time. Enjoy!
CHAPTER 2
The Rothchilds and the Vanderbilts
Consider the Rothschilds and the Vanderbilts, two famous business families from history. If you go back to the 1800s, both of these families were titans of industry, one in Europe and one in America. The Rothchilds were Europe's bankers, and the Vanderbilts were the American transportation family, owning railroads and steamships. While they were both amongst the world's wealthiest families at the time, the long-term fate of these families could not be more different.
In 1973, the Vanderbilts had their first family reunion. You would have thought it would be a swanky affair, but in fact it was reported by Arthur Vanderbilt II "When 120 of the Commodore's descendants gathered at Vanderbilt University in 1973 for the first time, there was not a millionaire among them". This was not a particularly close family. They had only gotten together once in almost 100 years.
Across the ocean, the Rothschild story is a dramatic contrast. They continue to grow and flourish today as one of the world's wealthiest families. They have also stuck together through thick and thin.
How these two families dealt with inter-generational succession and the transfer of their money will be discussed in more detail later in this book. The important thing to realize at this point is that your business and your family are at cross-road like the Vanderbilts and the Rothchilds were at in the 1800s. You have to ask yourself, how do you want things to really work out?
CHAPTER 3
IT'S NOT ALL ABOUT THE NUMBERS
You can't expect your family to play in time and in tune if you don't invite them to the practice sessions.
This is very common with small to medium-sized family-owned businesses. The owner/founder typically makes all the decisions, and the family is left out of the equation. This can result in a lot of acrimony in the family, and the demise of the company. There are hundreds of examples of this outcome.
The owner/founder often thinks they have done all the right things. They've met with their accountants, their lawyers, their life insurance person, and sometimes many other financial advisors.
They've put together a plan to deal with the tax and legal issues involved in succession and estate planning. This gives them a false sense of comfort, an illusion that everything has been covered. But that's not usually the case.
Charlie's Story
Let's consider Charlie. He's 60 years old and has been operating his manufacturing firm for 30 years. He started it with $100 that he borrowed from his father. Now his company is worth $10 million. His son Tom is a key person in the business, and his daughter Lisa is going to university and works part-time in junior roles. He has another younger son, John, from his first marriage. John is a carpenter who builds cabinets.
Although Charlie knows he is the key person in the business, he has forgotten that he is running a family business, and that his family needs to be part of his planning. Charlie became acutely aware of this reality two years ago when he contemplated selling his business. Charlie met with his CA and had a valuation done of the business. That's when he learned that the company might fetch up to $10 million. Charlie was excited by this news, and began to dream of retiring to Florida with his wife Susan. He started to put the wheels in motion and entertained offers from potential buyers. He did all this without consulting his kids. He didn't even tell Susan.
Charlie realized later that he had made a huge mistake. Through the grapevine, his son Tom, who was the most senior employee in the company, heard about the impending sale. Outraged, Tom phoned his sister Lisa, and was shocked when she said "all businesses can be sold at any time without notice to anyone, including family." Lisa, for her part, wondered why Tom was so surprised.
Later that night, Charlie has a big blowout with Susan who was also angry that she had not been informed either. He was in the dog house for weeks.
Although Charlie's family had never been close, and had experienced some problems during the divorce and his subsequent marriage to Susan, they had always been cordial with each other. But now things went off the rails. It seemed like everyone was arguing with everyone else about the company, its assets, and what would happen if Charlie were to sell it, or if he were to die prematurely. It got so bad, that Charlie and Susan took off for Florida for Christmas because nobody wanted to come over for dinner.
Charlie had been making the sale of his business all about numbers. His CA, his lawyers, and other advisors, had done very little to dissuade Charlie of this idea. Although the accountant and other advisors had mentioned family dynamics, it was done in a cursory manner with little emphasis on doing anything substantive about it. They gave Charlie the notion that the family dynamics were "soft" issues and by implication less important issues and the money was the key to everything. It is like a fitness coach who gets you to do push-ups and cardio everyday and mentions off-hand that you should also watch your diet, but doesn't offer any further expertise or help on eating better.
Charlie put his plans to sell his business on hold indefinitely. His relationship with Tom is cordial, but a little frosty. His daughter Lisa no longer works at the company because she said it's not fun anymore. Two of the key employees quit and went to work for the competition, and to top if off, his accountant told him that his business valuation has dropped by two or three million. Now the bank, which has a covenant on some of the company's assets, has called Charlie in for a meeting. Moreover, his son John, the cabinet-maker put a call through his lawyer, who sent Charlie a letter demanding to see the financial statements for the company.
Charlie's story, which is a composite of many families we have all read about or encountered over the years, is very common. Obviously, if Charlie were to do it all again, he would take a different route. He would bring the family into the discussion, and work towards a shared vision for what happens to the business and all of the assets when he is no longer owning and operating the company.
The Immortality Trap
Another typical problem with human beings is that we logically know that we are going to die, but emotionally we really don't think it is going to happen to us any time soon. I call this affliction the Immortality Trap. As a result, we don't do enough to prepare our family for our inevitable demise. It goes without saying that having an up-date will and adequate life insurance are minimum requirements to ensure our affairs are in order for the owner of a family business. However, if you are the owner and founder of the family enterprise, more advanced planning is required which focuses not just on the numbers but the important family relationships. This lack of planning can create chaos for the family, the business, the employees, and everyone else in the community who depends on that business.
(Continues...)
Excerpted from THE METRONOME METHOD by Hugh Macdonald. Copyright © 2013 Hugh MacDonald CPA, CA, CLU, TEP, FEA. Excerpted by permission of iUniverse LLC.
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