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WPG
Articles : Asset Protection |
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The Perils of Prosperity |
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By Ray Chodos, February, 2003 |
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 For most working Americans the concept of owning their own business and
becoming prosperous is an ideal often yearned for but rarely achieved.
For the families that have developed successful businesses affluence has
rewards and great gratification. Freedom from chronic financial concerns
allows a family to strive for enjoyment, cultural enhancement and often
philanthropy not otherwise possible. So where is the difficulty with
prosperity? Challenges rise from new situations for which the family is
unprepared. Anyone having come from humble beginnings places a high
priority on never going back to the tough times. Maintaining a successful
life requires security in the knowledge that revenue and resources will
not evaporate lest we backslide into a “work to live” mentality. The
perils that face affluent persons are often not obvious to them and they
have little experiences from the pre-affluent past to draw upon.
Business management
Family business owners are keenly aware of the importance of key
employees in order to maintain and grow a successful company. Key person
compensation, perks, and stock ownership incentive issues are often
addressed on a trial and error basis. The best employees predictably
would like to own their own business or at least a part of the one they
are key to. How and what to do to recruit and retain high quality
personnel is a challenge every business faces. Small businesses have
limited resources and must compete with large established companies for
the best employees. Many small businesses are started by employees that
were well trained by their former employers against whom they now
compete. Departing employees may attract customers and other employees of
their former employers to come with them. After all, they have intimate
knowledge of all the business practices and profit structure. Business
operator succession is also a problem in family owned businesses since
there are generally no “backups” for key people as a large business would
have. An unexpected death, disability or departure of a key person may
impact the business severely. In extreme cases the business may be lost
to disorganization, debt, taxes, and predatory competition.
An irreconcilable dispute between business co-owners may dismantle a
successful business for the want of a well thought out written agreement
to address shareholder disputes and succession issues. Bringing younger
generations into a family business may be a blessing or nightmare to the
other partners as well as employees depending on circumstances. Owner
divorce and ensuing property settlement may severely impact the viability
of a family business. For these reasons as well as many others, few
family businesses endure multi generations despite the successes reached
by their founders.
Litigation explosion
The alarming rise in civil litigation has changed the way American
companies do business. The US is host to 95% of the world’s law suits,
over 50,000 filed each business day. The U.S. tort system cost $205
billion in 2001. This is a 14% increase over 2000 and averages $721 per
American citizen. When you consider the risk exposure facing a family
business, it becomes obvious that likelihood of not being involved in a
law suit is minimal. Contracts, sales, leases, loans, consumer
complaints, employment practices (discrimination, wrongful termination)
company vehicles, employee injuries and a myriad of other potential torts
form a minefield for owner to navigate through. Just one law suit may
cost the defendant family upwards of $100,000 even if they win. A single
large judgment may cause the family business to be lost by legal
attachment. Many risks are not insurable and those that are may be
exceeded by a, claim, judge or jury verdict. Most family businesses have
no retained legal or risk management specialists. Venders and salespeople
often have a vested interest in promoting products and services while
only a modest understanding of the business’ overall risk exposures. No
internal financial professionals or board of directors to confer with.
The family is largely left to react to events after they occur.
Oftentimes the damages in cost and effort could have been marginalized or
avoided by professional advisers in advance.
Deep Pocket Hunting
Our legal system (unique in the world) permits litigation representation
on a commission basis. Contingency compensation suits promote litigation
against those with the most assets rather than for the wrongdoing they
may have committed. Any displeased person may sue even the most powerful
and wealthiest with little to lose. “Lawsuit lottery” has shifted the
fortunes of many Americans. Lawyers will generally not pursue a case with
little likelihood of financial reward no matter how egregious the tort
circumstances. Family business owners are perceived to be a prosperous
lot by society and therefore an appealing target for litigation.
Consumers seem to have an inherent distrust of businesses as well as a
sense of entitlement when things don’t go as they expected. There are
numerous pre-emptive steps available to insulate assets from claimants
and become a less attractive target. There are lawful means by which to
control and enjoy the major assets accumulated over a lifetime without
hiding or giving them away. Few business owners or other affluent
families are well schooled in asset protection or estate planning
designed to minimize taxation while maintaining control.
Business Advisers
Due to cost restraints family businesses tend to make do with minimal
professional overhead including consultants and advisers to fend off
problems the owners may not perceive. Few if any well established large
company would consider operating without internal as well as retained
outside legal counsel. Nearly all family businesses do so daily. The same
holds true for accounting, human resources, risk management, safety and
market development. There are local CPAs in abundance as there are
lawyers available to assist business owners on an “as needed” basis. The
experience of local practitioners is generally limited to the client
services they routinely perform on a reactive and fee conscious basis.
Few national or regional consulting firms (legal or accounting) are
affordable or interested in most small businesses due to the limited
prospect of fee generation.
Occasionally progressive advisers form planning teams with other
specialists for the business owner to confer with periodically. It is
useful to have the team meet, gather data and recommendations from the
other members before presenting to the family. It is helpful to have a
team leader to contain costs and assure coordination and execution of
recommended strategies. By meeting without the owner present candid
debate and open discussion may lead to a team consensus of direction
without the risk conflicting views or inexperience on any member’s part
influencing decisions. Wealth Preservation Group, LLC was formed for the
purpose of networking professional advisers into teams and cross educate
advisers to serve the unique concerns of family owned and operated
businesses.
How Does WPG Work?
A local practicing CPA or attorney may select among the WPG members those
that may form an exploratory team to interact with his/her most
successful business operator clients. A preliminary meeting among the
team members exchange views based on the leaders gathered data and client
documentation. The leader presents an overview of the group’s
recommendations as well as cost and time estimates for all segments of
the programs and strategies. Those agreed to by the owner will be
implemented by the team and overseen by the leader. As relationships
evolve there is good likelihood that future periodic meeting and
consulting will continue.
Each team member is interested in pleasing the leader and thereby the
client to insure invitation to future meetings as well as additional
clientele. Cost efficacy and client responsibility is in each
participant’s interest. Since the members are themselves professional
practitioners, the client need not be interfaced with frequently rotated
inexperienced entry level staff as is case with most large consulting
firms. Large staffs and layers of management typically require heavy
overhead and commensurate large fee schedule geared to large public
companies.
Summary
The challenge for many professional advisers is to educate and motivate
business owners to behave in a proactive fashion so as to permit informed
decisions to be arrived at. Business owners are generally quite receptive
to organized systems designed to avoid surprises and strife. Business
owners place a very high priority on retention of the major assets they
already have. The need is great and the supply of highly skilled asset
protection professionals if limited. Many professional advisers (CPAs,
lawyers) often are also receptive to team approaches since it tends to
cover more bases than any one adviser typically has experience and
expertise in.
For all parties concerned it is preferable to invest energies into
preventing and solving problems rather than searching for qualified
advisers and prospective clients on a trial and error basis. Most
business owners are not aware of how to locate and engage specialists to
solve problems they do not yet perceive. |
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Ray Chodos and Adam Chodos, Esq., CPA are members of
the Wealth Preservation Group LLC, a Greenwich, Connecticut based planning
organization specializing in wealth preservation, business succession,
executive benefits, interacting with the legal and accounting communities.
Find more information at www.WealthPreserve.com. |
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Impact of Litigation on Small Business |
 Most
companies used business assets to pay the damages. However,
in the case of employee complaints, insurance covered some
of the damages. Owners mentioned that the payment of
damages nearly put them out of business, which affected them
for a long period of time as they worked to rebuild the
business and recoup their losses. |
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While sitting at a traffic light
waiting for the green light, you are slammed from the rear by a
drunk driver who never saw you and didn't even attempt to stop.
Clearly, you are an innocent victim with no fault in the accident.
