“There isn't a mistake that my family business hasn't made in 150 years, and we're still kicking,” says McComas Fuel Co. Shareholder William A. McComas of the company that has endured generational changes and the divestment of a number of assets.
At the Baltimore Smart Business Dealmakers Conference, McComas said having professional advisers in the estate and trust area is important for those who run a family business. For example, he says with if a will is not taken care of, there can be many owners who have a fractional interest of stock, which can cause issues in the transition to the next generation — it can mean the company will use the proceeds and working capital to pay off family members.
He also suggests having advisers who can handle other aspects of running a business, such as dealing with regulators.
“Having a professional adviser when the regulators show up is probably the best sound practice to have,” he says. “Whether it's an expert, in this case, the EPA or a lawyer who's skilled in the EPA, having the conversations rather than the CEO having a conversation with the EPA and the regulators, because the regulators are there for one thing: to find flaws. And if you volunteer information, it’s going to be used against you. And it's just no different than a criminal case. You want to have a lawyer there as quickly as possible. And so anytime regulators show up — whether it's the IRS, the EPA, and any of those big agencies — you probably want to make sure you're fully protected on it.”
One thing he says they did right is when they divested an asset, they did a change of control agreement. For the key incentive people, sometimes there's a decision as to whether to pay all out at closing, or as is the case in the oil business, there are earn outs based off of retained gallonage. In that case, payouts can go out three or four years. So in their change of control, they went out beyond that in order to keep the same team there so the sellers and the team could profit from it.
A mistake his company made during an internal sale after the passing of a family member was with key man life insurance. That can be used to repurchase the shares of the deceased. But if professional advisers aren't coordinating that, it turns out to be basically life insurance.
“Family members that are not in the business end up retaining those shares, but the proceeds go to the family as well,” McComas sats. “It's a double whammy. So, you want to make sure that if you're intending to keep it within the family, that if you're using key man life insurance, that it has properly been vetted through to make sure it works the way that you have, because I don't think my family business is the only exception here. We've had clients in the firm that have had issues with this. I would encourage you, if you're going to try to retain it within the family, look at what the mechanisms are which you're going to bring it down to the next generation.”
Often there needs to be lot of coordination between various professional advisers. Much of that is going to fall on the owner to be that coordinator because the professionals often don't know which other professionals are involved.
“I would encourage you, if you're the owner of a family business, that you work with professionals, and to a certain degree, have them talking,” he says. “If you're not going to facilitate it and take ownership of it, help facilitate the professionals talking with one another so you don't have blind spots like we have.”
