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WPG Articles : Asset Protection
The Perils of Prosperity
By Ray Chodos, February, 2003
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.

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.
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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