Planning for Success(ion)

My wife and I had our first child late last year. As any new parent quickly discovers, having a baby comes with an impressive list of things to worry about. Some are immediate and often. Is he eating enough and when did he last eat? Why won’t he sleep? Why is he crying? Does he like me? Is having the TV on really that bad for him? 

Others are considerably less immediate, but much more uncomfortable. What happens to him if something happens to me?

Just in Time for the Holidays: A Nostalgic Review of Famous Toys and the Patents That Protect Them

During this holiday season, I recall the adage that it is better to give than to receive. But being completely honest, most children really enjoy getting presents too. And not just any presents, but often the hottest toy, the newest fad, or the trendiest clothes. In A Christmas Story, young Ralphie famously wants “an official Red Ryder carbine-action 200-shot range model air rifle,” and goes to great extremes to make sure his parents, his teacher, and especially Santa Claus know. Toy companies are well-aware of these desires. Marketing efforts are devised to penetrate the subconscious thoughts of children leading to a manic frenzy on Black Friday for an Xbox gaming console, Pokemon cards, or a Tickle Me Elmo doll that have become “must haves.” Not surprisingly, given the great demand for these items, entrepreneurs who invent toys and the companies who work to market them will ensure that their toys, games and dolls are adequately protected by intellectual property rights to prevent cheap knockoffs and grow their market share. Even Ralphie’s Red Ryder air rifle was patented by Daisy Outdoor Products on October 2, 1888 as U.S. Patent No. 390,311, titled “Spring Air Gun.”

The Truth About the Tooth Fairy: Inflation Stinks

This week my child lost a tooth. You know the drill: sneak into their bedroom, pretend to check on them, and then carefully swap the tooth for money without trying to wake them up.

If you have experience with this, then you have inevitably asked the question: how much should I pay? One dollar is what my child received for their tooth, which happens to be the exact amount I received for one tooth. Is that fair? It’s the same amount I received decades ago; if today’s children got wise, they would realize they are getting a raw deal compared to previous generations. This is all due to inflation.

Entrepreneurship in the Classroom

Earlier this month, a fellow entreVIEW author told us the tale of how his entrepreneurial-minded daughter recently launched a baking business. While I won’t fail to at least briefly acknowledge how much I love hearing about female-led startups (probably even more than I love baked goods!), this post is about why entrepreneurship should be taught in schools at an early age.

I don’t believe entrepreneurship is genetic or inborn. Instead, I believe an entrepreneurial nature can be fostered through imagination, creation and innovation. I, like Dan's daughter, am lucky to have grown up encircled in entrepreneurial sprit. I grew up on a farm and had no better friend and mentor than my Grandpa, a farmer. I followed him everywhere and learned a lot about what it takes to be an entrepreneur, including work ethic, risk management, the impact on reputation and business longevity of keeping a handshake promise and more. In a lot of ways, I view farmers to be the ultimate entrepreneurs. Not everyone is as lucky to be inherently surrounded by entrepreneurship from a young age, which brings me back to my original premise: entrepreneurship should be taught in schools at an early age.

Unless my memory fails me, I did not have a single class on entrepreneurship from elementary through high school. For those without an inherently entrepreneurial home life, school may be the only exposure a young student has to entrepreneurship, especially in rural areas. As with all other fundamental subjects taught in school — math, science, music, etc. — entrepreneurship as a school subject would encourage students to engage with the world around them and imagine what could be different, brainstorm creative problem-solving ideas and scale-up innovations.

A Global Pandemic — Why Not Launch a Business?

You can probably think of lots of reasons why not to launch a business during a global pandemic. If you’re my 13-year-old daughter, you see nothing but opportunity.

Why? Maybe because she’s the daughter of a lawyer who spends his days working with risk-taking entrepreneurs? Maybe because she’s easily bored? Maybe because she just has a lot of entrepreneurial drive (and a bunch of time on her hands)?

The real answer is that it’s because her New Year’s resolution was to turn her love of baking into a “neighborhood” business. Unlike many of us (remember those resolutions to stop snacking or to go to the gym more?), she actually took action: she put together a detailed list of everything needed to launch the business and started checking things off. Items included everything from branding and recipes to registering our kitchen under the Minnesota Cottage Foods Laws.

Of course, then things like life and COVID-19 got in the way! With time on her hands (8th grade distance learning only took her about 1.5 hours a day), she renewed her enthusiasm for the idea after we returned from our one-day trip to Ecuador (which was supposed to be a 10-day spring break trip to the Galapagos Islands…). 

But, like any good entrepreneur, she needed to be able to adapt to a rapidly evolving situation. Instead of trying to go door to door in the neighborhood, she contacted the New Brighton Farmer's Market and secured a bi-weekly space for the summer. About three weeks ago, she officially launched Zizzy Baked GoodZ and sales have been booming! She sold out her inventory her first week at the market (half way through the day) and almost sold out twice as many items the second week — including her “Rainbow Pride Cupcake” (complete with Fresh Pineapple Buttercream), pictured above. She’s even already filled several custom catering orders!

Black Out Tuesday: Resources for Learning and Reflecting

I had originally planned to write this post about cooking trends during COVID-19, but that topic feels insignificant in the wake of the recent killing of George Floyd. Since his death, millions of people, including many entrepreneurs, have taken to the streets to protest police brutality and unequal justice. I’m writing this post on Black Out Tuesday (#blackouttuesday), a social-media initiative that was started by record-industry executives Brianna Agyemang and Jamila Thomas to amplify black voices, to support the Black Lives Matter movement, and to promote policy change. “Take a beat for an honest, reflective and productive conversation about what actions we need to collectively take to support the Black community,” Agyemang and Thomas urged on their #theshowmustbepaused website.

So, instead of musing on the surge in quarantine baking and the best banana bread recipe, I’d like to use this space to share with our audience of entrepreneurs some resources during a time to reflect on the challenges our society is facing. This is by no means an exhaustive list, and I am merely learning myself. My Facebook feed is flooded with recommendations today, but maybe you aren’t seeing the same content or maybe you’re looking for a another perspective. Either way, I hope these resources provide some helpful ways to engage with others during this time.

Books to Read 

The staff at Wild Rumpus, the wonderful children’s bookstore in Linden Hills, has posted a reading list on their website of recommended books for talking about racism and justice. The list is organized by age with a section for young kids, middle grade readers, young adult readers, and adult readers. Wild Rumpus will donate a portion of the proceeds from the books on this list to Black Lives Matter Minnesota. Their no-contact curbside delivery option makes it easy to pick up one of these books.

Films to Watch

In a New York Magazine article, “12 Documentaries You Should Watch About Racism and Police Brutality in America,” Jason Bailey compiled a list of documentaries, which includes the following films:  

• Let the Fire Burn (2013)
• Let It Fall: Los Angeles 1982–1992 (2017) / LA 92 (2017)
• Whose Streets? (2017)
• Copwatch (2017)
• 16 Shots (2019)
• Do Not Resist (2016)
• The Force (2017) / Crime + Punishment (2018)
• The Death and Life of Marsha P. Johnson (2017)
• 13th (2016)
• I Am Not Your Negro (2016)

Make Time for Lemonade

It was steamy hot this weekend in Minneapolis. The blow-up pool was out on the back lawn 24/7, Saturday required a morning and evening shower, and I thought maybe if I buzzed my head things would be better.

In the midst of this rainforest weather, my young daughters (3 and 5) ran a lemonade stand in the front yard. As I watched over their business operations, it occurred to me: a lemonade stand provides a perfect introduction to entrepreneurship.

Now our kids had it easy as my wife and I did not demand repayment for the costs of their inventory or require a lien on their toys, but they still sold product, served customers, and practiced counting their precious coins (and bills in some cases from generous customers). More importantly, they gained self-esteem and inspiration to plan more for next time.

Meanwhile, the older (9) girl next door stepped it up a notch with a friend. They bought their own supplies (lemons, cups, napkins, sparkling water, watermelon, and cookies) and established a posh stand down on a busy street and, as they say, made bank. Lemonade was 75 cents, but you could make it sparkling for 25 cents more. Want a cookie or slice of watermelon to go with it? That’s another 50 or 75 cents, respectively.

The Importance of Name and Brand

One of the most important early decisions of a small or emerging business is what to call itself. For startups, however, branding can take a backseat to other considerations, such as product development and funding. That is a mistake.

A name and brand is a company’s face to the world. It is how others will perceive the business and hopefully create long-lasting associations and goodwill. Your name can become your most valuable asset.

To Work with Family, or to Not Work with Family?

Working with family members can be a double-edged sword. It may seem easier to start a business with family members because you already know and trust them, but if things go awry, the disputes can be even more personal and intense. Think about it–if things go bad, instead of losing a business partner, you may ruin a relationship with your sibling, cousin, or in-laws. I’ve even seen situations where siblings sue each other and children sue their parents when the business isn’t as successful as planned. Family members shouldn’t have to turn to litigation to resolve their business disputes. So, what can you do to prevent the worst from happening?

Below are a few suggestions from Andreas Scott (a financial advisor at Total Wealth Advisors, LLC) and me regarding common issues faced by family businesses. Andreas has extensive experience in advising family businesses and his goal is to help his clients create and control their total wealth picture.  

Ownership vs. Management

Ownership and management are two different functions that are often lumped together. When including family members in your business, consider if they would be more effective as an employee, a member of management, a board member, and/or an owner of the company. Each of these roles provides the family member with different responsibilities and rights to the business. For instance, if you give the family member an equity interest in the company, consider if it should be a non-voting equity interest. This would give the family member the benefit of having economic rights, but prevent the individual from having governance rights. Also, if a management transition is necessary, we recommend having open conversations with family members to discuss your future involvement in the company and how that would impact their economic and governance rights and roles within the company.

Going External

A significant decision that many successful family businesses will face is whether to bring in external management. When a family business reaches the second, third, or fourth generation, there will be differing views on whether it is appropriate to bring in professional external management or to continue to keep all management within the family. It may be beneficial to have an independent party weigh in on important decisions, but it’s important to understand the implications of bringing in external management from an estate, wealth, and ownership standpoint.

Differences in Generational Views

It may seem obvious, but the first generation and the third generation will have different views of the family business. If left unaddressed, opposing views can cause significant tension within the family. If Grandpa doesn’t believe his grandson has the same respect for the business that he does, it could cause challenges not only at the dinner table, but also when it comes time to run the business and do the estate planning. To resolve these issues, it’s important to work with professionals (e.g., an attorney, accountant, wealth manager, etc.) who are both subject-matter specialists and who understand the underlying family dynamics.

Although it may seem easier to work with family members, remember to tread carefully because conflicts in the work place will inevitably follow you home.

What’s New in Town?

In my younger years, my parents always encouraged me to try new things, such as sports and after-school clubs. Although I resisted at first, eventually it became somewhat addicting.  Now, aside from bungee jumping and skydiving, I’ll try almost anything. In the past year, I’ve discovered just a few pretty cool things to do in the Minneapolis area: 

FootGolf. Rumor has it Tiger Woods’ fall from greatness has caused golf to suffer: Courses struggle to fill tee times, and the sport isn’t gaining popularity among younger generations. For a while, glow golf (nighttime golf with an illuminated ball) and snow golf (played with a 6 iron and a tennis ball) was all the rage. However, the newest craze is FootGolf, which is a combination of golf and soccer. Until this past summer, I hadn’t even heard of the sport; now, no doubt in big part to the 2014 World Cup, there are 10 FootGolf courses in the state, and I’ve played three of the eight in the metro area. It’s played on a golf course, where you kick off from a tee box and attempt to get the soccer ball in a 21-inch diameter cup using the fewest number of kicks. It’s a great sport for both children and adults, and it’s a nice little moneymaker for a golf course: Prices run around $1 per hole, per golfer, and soccer balls rent from $3 to $5.    

Whirlyball. Whirlyball is probably one of the most unique activities there is. The facility is in Maple Grove, where you play inside a converted movie theater. It contains two enclosed basketball-like courts with an elevated backboard at each end. Players (five per team) drive their WhirlyBugs, aka bumper cars, while simultaneously using scoops to pass a whiffle ball amongst teammates and attempting to score points by tossing the whiffle ball onto the elevated backboard. Essentially, it’s a combination of basketball, lacrosse, hockey, and bumper cars, and it’s incredibly fun. And, with the maximum speed of a WhirlyBug reaching 3-4 mph, there’s little risk of injury. It’s become so popular that courts book up months in advance, and they now offer leagues. It runs about $20 per person. We’re hosting a Whirlyball event next month for some of our entrepreneurial clients so (if you’re smart enough to be one of those) look for an invite soon!

EscapeMSP. The other day, fellow entreVIEW contributing author Dan Tenenbaum came by to tell me about a new activity he had recently tried. When the first words out of his mouth were, “You’re locked in a room for 60 minutes with up to 10 other people…,” I was very skeptical. Why would I voluntarily pay someone to lock me in a room with people I may not know for an entire hour?! But, as he went on to explain, I quickly became intrigued. Escape MSP takes four to 10 people and locks them in a fully themed room with the goals of (1) collecting a hidden asset and (2) escaping the room before the time expires. The current “mission” tasks players with “gathering incriminating evidence from the office of Mr. Dupree, an international businessman, prior to his return.” These entrepreneurs developed a profitable venture: At $30 per person, it’s on the spendy side, but discounted tickets are available if you look in the right places. 

Next up on my list, after EscapeMSP?  Well, I hear there’s a snow golf tournament in Wayzata in the winter….

THE WORLDWIDE VILLAGE AND THE CHILDREN WE’RE RAISING

It’s been said that entrepreneurs have to think globally to survive locally.  This statement is more true today than ever before, as the competition (large, multinational corporations) is looking overseas to improve cost efficiencies by reducing overhead. Unfortunately for the local “mom and pop” establishments we have come to cherish, the economics make staying in business harder to manage.

One thing I love about Minnesota is the emphasis on “locally sourced” products, as this instills in us a tremendous sense of pride in the collective sweat equity of our state’s workforce.  My wife and I believe that patronizing local businesses is a great way to show our appreciation, and we are both attuned to the benefits of local entrepreneurship and how such establishments can make or break the character of a particular neighborhood.

This has inspired me to take a more in-depth look at what “globalization” means, how it impacts other countries, and whether it is the type of villain that should be taken on by the agents of S.H.I.E.L.D. (which is one of my favorite shows now that this season of Scandal has concluded). The fanciest definition I was able to find (on Google®) is “increasing integration of economies around the world, particularly through trade and financial flows,” but it is easier to comprehend globalization as the movement of people (labor) and knowledge (technology) across international borders. 

In other words, globalization stimulates free trade that motivates American corporations to move operations overseas to developing countries so that they can circumvent union activity and take advantage of cheaper labor opportunities. Quite often these countries are located in third world developing countries like Asia, Africa, and Latin America. These countries have also historically suffered from high unemployment, political instability, corruption, and little—if any—government interference or regulation.

Because of this, the word “globalization” has become an ambiguous and emotionally charged term—a mixed bag of acceptance and rejection. Some see it as leading to positive free trade that leads to healthy competition, higher productivity, and economic prosperity for both the developed and developing country. Others see it as enabling a negative trade system that exploits developing nations. Whichever way you see it, it is widespread and it is here to stay.

 American corporations easily find that they can contract out their raw materials to overseas factories in countries like India, Indonesia, Pakistan, Mexico, China, and Brazil because unemployment is high and many of the people are willing to compete with each other to work for less. Economists and politicians have referred to this as “downward leveling” or a “race to the bottom.”  Developing countries pit themselves against each other to see which can offer multinational corporations the cheapest labor.

Accordingly, some see globalization and the rise of multinational corporations overseas as creating substantially increased demand for child labor in developing countries.  While companies say that they do not condone the use of child labor, the reality is that these corporations “sub-contract” out their work to smaller companies that do use child labor as a way of competing with other companies to lower labor costs substantially.  

Look, I get it: globalization ushered in free trade and open markets, which in turn encouraged multinational corporations to look for the cheapest labor markets. Who isn’t guilty of trying to save a buck here and there? But let me step onto my portable pulpit here for a moment.  Shouldn’t we be tying the protection of children to free trade and the prosperity of developing countries?  The progress, success, and wealth of a nation are dependent upon the education of its children. Multinational corporations have a social responsibility to live up to high standards that value children first over profits.

Nostalgia: An Open Letter to My Family and Cookie Monster

In honor of cookie monster’s birthday, I started to think about the things that may have shaped me in my childhood. I LOVED Sesame Street, and I honestly think it taught me a lot about life.  In the modern era, cookie monster is more of a fruit monster, with cookies as a “sometimes food.” When I was growing up, he (and others from Sesame Street) was a great source for learning little lessons and preparing me to be an adult.

Sometime ago, I posted about how to instill entrepreneurial spirit in your children. Teaching kids to do what they love and succeed as adults is a difficult task; it takes a bit more than Sesame Street, I suppose. Well, I think my parents did something right. I might be biased, but I think my siblings and I took a little bit of Sesame Street, a little bit of Clarissa Explains it All, and a lot of my family’s influence, and all really ended up with a similar spirit. 

Even though the three of us do vastly different things, we have a similarity—we figured out how to live as productive adults, in careers that require an inner drive to succeed, and to do what we really love.

My brother, Greg, is a filmmaker. He’s the artist of the family.  He isn’t necessarily Steven Spielberg yet, but he writes and directs independent films and submits them to festivals. He also manages a local movie theater, as his "day job.” He has to make some money to support his real passion, a necessary component that he has never questioned. He continues to operate in a way that always assumes he will do what he loves and then whatever it takes to keep being a self-sustaining productive adult. 

My other brother, Mike, is an assistant superintendent at a well-known private golf club. He has spent his entire life (since age 12) working on and around a golf course. He is a scratch golfer, and loves to work to make golf courses beautiful. He has never considered anything else.  Getting the degree was a necessary evil to get to do what he loves but, like Greg, he never really considered another path.

I think drive and commitment are necessary elements to a successful entrepreneur. That, and plenty of good mentors, and examples to keep you going. My family apparently did some things right. Whether that was watching Sesame Street or not, we all ended up with that internal drive necessary to be productive entrepreneurial adults. 

Or it could be the reason I eat cookies without taking a breath…one of the two.

 

The Twelve Days of Year-End Gifting

Christmas in the estate planning world always triggers thoughts of year-end gifting. I wish that I could say my family participated in this tradition, but nonetheless, many of my clients are considering the opportunities available for passing money or assets to other family members or charities this time of year. 

As some general background, this country has a gift tax system in place that will tax the donor of a gift over a certain amount. The current gift tax rate is 35%. Gifts are not taxed unless they exceed the “annual exclusion” amount—a de minimis amount determined by the tax code each year—and then the donor has a lump sum lifetime total gift exemption to run through before the donor is taxed. Currently, the annual exclusion amount is $13,000 per year, per person, and the lifetime gift exemption is $5 million per person over that person’s lifetime.

These exemptions do not apply to charitable gifts or gifts to spouses (unless the spouse is not a citizen), but they do apply to gifts to children. This is a common misconception. If you are providing more than $13,000 per year to your children ($26,000 per year if you are married), you are supposed to report those gifts on a gift tax return and you chip away at the total $5 million you can give away during your life.

This year and next year are special in that the lifetime exemption of $5 million is unusually high. In prior years, the gift exemption hovered more around $1 million and it is set to go back to that level in 2013. As a result, there are some unique opportunities to gift assets during the next two years.

With all of that in mind, this is my version of the Twelve Days of Christmas, in the twelve simple ways to gift at year-end:

1.       Give $13,000 checks under the tree for each child ($26,000 if you are married, and $52,000 if they are also married).

2.       Gift $13,000 to a 529 plan for a new grandchild (or up to $65,000 if you want to “front-load” the 529 with 5 years of annual exclusion gifts).

3.       Transfer the family cabin to an LLC, and gift units of that LLC to your kids or other family members.

4.       Transfer non-voting interests in your business to children and grandchildren, which is a great way to start the business succession process now without transferring control.

5.       Buy that Lexis for someone with a big red bow (but then report it on a gift tax return).

6.       Pay off a child’s mortgage or student loans and provide the child with an intra-family loan or mortgage instead at a current 30-year minimum rate of 2.8% (or 0.20% for terms 3 years or less, or 1.27% if between 3 and 9 years).

7.       Forgive the interest on the loan you made to your child last year.

8.       Or, forgive the whole loan you made last year.

9.       Equalize gifts to your children by offsetting loans to other children with cash.

10.   Transfer an insurance policy to your children.

11.   Provide a child with a down payment on a house.

12.   Provide a child with the capital to start a business.

*Be sure to contact your attorney and/or your accountant to discuss the nuances of gifting specific assets, and be sure to file a gift tax return next April if necessary.

Can Successful Entrepreneurs Use Incentive Trusts To Help Their Kids?

In his article, "Should You Leave It All to the Children?," Richard Kirkland quotes Warren Buffett for having said, “The perfect amount of money to leave children is enough money so that they would feel they could do anything, but not so much that they would do nothing.” In that same article, Minnesota native and famous entrepreneur, Curt Carlson, was quoted as saying, “There’s nothing people like me worry about more—how the hell do we keep our money from destroying our kids?”

Incentive trusts are a type of trust, often for the benefit of children, that make distributions or allow for withdrawals based on defined incentives. For example, if a child graduates from an Ivy League college, they can withdraw 10% of the trust principal, or if a child earns up to $100,000 per year, the trust will match that income.

Often, first generation wealth holders—or, in many cases, the entrepeneur that built the business—want to use incentive trusts to protect the money they intend to pass on to their children and impose some kind of control after their deaths. Incentives may seem like a good way to inspire your children to act and participate in society the way that you would want them to after your death, but often incentive trusts don’t work or may even backfire. Evidence suggests that money is helpful in controlling people, but not necessarily internally motivating people. Individuals subject to incentives will rarely go beyond the incentive benchmark.

For example, if you match income up to $100,000, very few people would ever strive to earn more than $100,000 or would ever start a business where the earnings may be more uncertain or less than $100,000 for a period of time. In addition, what might seem like a good incentive, like attending an Ivy League school, doesn’t actually ensure that the child will graduate or do anything with the degree. Some children may view the incentive as impossible, so they never try. In other cases, the trustees end up spending years in litigation with the child who demands distributions from the trusts that are outside of the incentives. This may be good for lawyers like my colleagues who handle these types of claims, but it is rarely good for the child or the family. Finally, drafting a trust agreement that perfectly insulates the trustee, yet makes the incentive clear and enforceable, is difficult if not impossible in most circumstances.

The bottom line is this: Trusts don’t develop values on their own. Incentives don’t usually work in the way we want, and may unintentionally cost the child ambition and potentially drain the trust in litigation fees. Try your best to impose good financial habits, charitable inclinations, and financial sense during your child’s life. If you can’t, and you are worried about how your children may spend their inheritance or manage a business in their trust, limit the amount they receive or ask your estate planner to give a professional trustee (a non-family member) unfettered discretion to make and withhold distributions.

How Can We Pass On Entrepreneurial Spirit to Our Kids?

It is estimated that 80% of family businesses fail in the transition from the first generation to the second, not to mention the slim margin that actually makes it to the third generation and beyond. The reason many family businesses don’t transition well from the first generation to the second is often because entrepreneurs don’t pass on that same “spirit” to the next generation. If the kids have no desire or passion for running a business, they aren’t going to want to run yours. If the kids don’t have the financial sense to run a business, they aren’t going to run yours for long.

How does someone fix this? Can you pass on entrepreneurial spirit? Do we make every child spend the first ten summers of their lives running lemonade stands? I will first say that I don’t know what the answer is. I do, however, know a few things that I think might work, and some things that I know don’t work. After all, Lindsay Lohan claims she “was not raised to lie, cheat, or steal.” Right, we believe that.

It doesn’t work to ignore the issue. Try not to allow your kids to grow up in an environment completely different from the one that you—the entrepreneur—grew up in. If you have your creativity from performing dance routines in the backyard, your determination from trying out for the baseball team all four years of high school before you made it, your resourcefulness from running for student council, or if you learned to save when your parents made you pay for your first car, those experiences likely shaped your entrepreneurial spirit today. Likewise if your parents helped you build the bleachers in the backyard and sew the costumes so you could charge admission to the theater production for the neighborhood, helped you collect canned goods for your first food drive, and helped you clean up when your first invention didn’t go as planned, provide those experiences for your children. Not all experiences require money to fund them nor do they require you to withhold money or privileges to teach the lesson.

Also consider teaching your kids to take calculated risks. Every successful entrepreneur needs to experience calculated risks that sometimes pay off and sometimes fail. Give them a small account to pick stocks, and let them make the good and bad decisions with a little bit of real or fake money. Give them a weekly allowance with the option of spending it now or saving it for a month and you will double it at the end of the month if it is still there. Let them be creative, and try things that they might fail at. Let them create their own summer jobs. These experiences teach children that they won’t succeed at everything, but that they also won’t succeed at anything unless they try.