Adding value to the family business: business succession requires addressing the risks that threaten family businesses.

CPAs can help clients create more value in their businesses. Closely held businesses are particularly ripe for this service. This was the conclusion of Robert Pulliam, CPA, speaking at the AICPA Business Valuation Conference in New Orleans, November 17-19, 2002. Pulliam is managing director of Pulliam Financial Group, Winston-Salem, North Carolina. He presented the first of a two-part session entitled "Keeping Family and Business Together During Succession." Although Pulliam was speaking to an audience of valuation analysts, he focused much of his presentation on guidance that would help CPAs help clients create more value in their family businesses.

Pulliam started his presentation by emphasizing the pitfalls of a family business's failure to plan for succession. He cited the experience of Krispy Kreme Doughnuts. The business was begun by the Rudolph Brothers back in the 1930s. Pulliam said. "They had what I would term a very successful permanently small business." The business gave the families what they needed and met their objectives. Upon the deaths of the founders, however, "the company suddenly gained a third partner that no one had ever thought about--Uncle Sam," Pulliam said."They absolutely could not keep the business going and pay the estate taxes." The moral of Pulliam's story is, "Learn that problems result from not looking ahead."

Assessing risk to improve strategy

Pulliam spent much of the session discussing the elements of family businesses. Valuation analysts need to consider these elements to assess the risks associated with the business and their impact on the businesss value. However, an understanding of the elements not only would help CPAs to assess the value of a family business, but also would help provide value-added services by recommending strategic measures that would help ensure business growth and continuity.

Organization charts: culture and complexity

Pulliam cited the complexity of family businesses. Often, the firm's culture is based on the "intertwangling" of the family and the business. Each family business, Pulliam said, had four organization charts:

1. Stated business organization

2. Real business organization

3. Stated family organization

4. Real family organization

   As the terms stated and real suggest, the official charts do not describe the actual organization of business or family. In the real family organization, for example, the wife of the owner is usually a silent partner in the business. She is the...