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.

by Shel Horowitz

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:

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