Survey findings and insights from The Northern Trust Institute underscore the need for effective governance among family business owners

Northern Trust (Nasdaq: NTRS) announced today the results of its inaugural Business Owner Benchmark, a survey of more than 100 business owners conducted by The Northern Trust Institute in the first quarter of 2021.

The survey, which measured business owners’ greatest perceived challenges, illuminated key areas where business owners are most concerned: minimizing tax impact, ensuring smooth leadership succession, balancing family and non-family employee incentives, and maximizing the efficacy of boards of directors.

Prioritizing Tax Resiliency

Tax resiliency is a leading concern among business owners, with 45 percent of respondents having considered a relocation of their business headquarters, primary residence, or both, to reduce tax impact.

Notably, owners of businesses exceeding $50 million in annual revenue were twice as likely to consider relocating their business headquarters in comparison to their smaller counterparts (32 percent versus 15 percent). When considering the top reasons to transition their business, 59 percent of all respondents cited tax concerns.

“In light of the potential for short-term corporate tax rate reform, and with many revenue streams permanently altered by the pandemic, now is an opportune time for business owners to revisit their entity’s structure,” said Eric Czepyha, Director of Business Services. “Conducting business operations as an LLC, partnership, or S corporation, for example, might be more beneficial for tax planning than continuing as a C corporation, depending on one’s broader goals.”

Planning Transitions to Protect the Business

Seventy percent of business owners have a succession plan in place. Within this group, however, 50 percent are concerned about their successor’s ability to maintain and grow the business over the long term. Sixty percent are concerned that a transition will result in family conflict.

A robust transition plan helps maintain agility in negotiations or liquidity events, such as selling a portion of the business ahead of a potential capital gains tax increase. It can also keep institutional knowledge retained in the family business, such as when to run a longer sales process and which transaction structures might be preferred.

“A well-orchestrated succession plan can ensure family business continuity without sacrificing harmonious family relationships,” said Czepyha. “Succession is not a single event. It is a multi-year process, with several leadership transition elements and tax efficiency strategies to follow. It is never too early for business owners to start laying the foundation.”

Incentivizing Family and Non-Family Employees

Two-thirds of business owners confirmed that family members work in their business, with children being the most common type of family employees. Within this category, almost 50 percent of respondents do not have formal policies in place to help govern their family’s employment.

“Developing and communicating formal employment policies, such as job descriptions and defined criteria for promotion, compensation, and termination, has two major benefits,” Czepyha continued. “First, it ensures family members are suitably qualified for their roles. Second, it reassures non-family employees that they are receiving equal treatment and career progression opportunities, which is essential to attracting and retaining high-caliber talent.”

Almost 90 percent of business owners use at least one incentive to help motivate non-family employees. Among this group, 87 percent find these effective. Incentive examples for non-family employees include employee stock ownership plans (ESOP), granting stock options or appreciation rights for management, and providing certain employees a customized compensation arrangement that offers financial protection if the company is sold.

Building Effective Boards for Businesses Growth

Business owners with succession plans in place are also twice as likely to believe their board of directors adds value to the business, compared to counterparts without succession plans (98 percent versus 53 percent).

Business owners maintain seven board members, on average, with an average tenure between four and ten years The average number of independent board members from the same or different industry is four and three, respectively, and family members serve on 63% of the boards represented by the survey.

“A strong board of directors can be a real value-add to help a company, for instance, reevaluate its long-term strategy, address significant business issues, or leverage board member contacts to recruit for senior management positions,” said Czepyha. “As we emerge from COVID-19, and owners shift from maintenance back to growth, these findings underscore the need to regularly review one’s board composition plan to ensure it positions the business for optimal growth.”

To receive the full research report or speak with Eric to learn more about the survey findings and best practices for business owners, please contact media.relations@ntrs.com.

The Northern Trust Institute is a research center dedicated to advising affluent families. More than 175 experts collaborate across 34 areas of expertise to analyze behavioral patterns and identify the strategies that have been most effective for our clients — bringing the breadth and depth of our firm to each unique situation. The resulting insights position you to take action with confidence and achieve optimal outcomes with your wealth.

Northern Trust Wealth Management offers holistic wealth management services for affluent individuals and families, family offices, foundations and endowments, and privately held businesses. It is recognized for its innovative technology, service excellence and depth of expertise and ranks among the top 10 U.S. wealth managers, with $355.4 billion in assets under management as of March 31, 2021. The Northern Trust Company is an Equal Housing Lender. Member FDIC.

About Northern Trust

Northern Trust Corporation (Nasdaq: NTRS) is a leading provider of wealth management, asset servicing, asset management and banking to corporations, institutions, affluent families and individuals. Founded in Chicago in 1889, Northern Trust has a global presence with offices in 22 U.S. states and Washington, D.C., and across 23 locations in Canada, Europe, the Middle East and the Asia-Pacific region. As of March 31, 2021, Northern Trust had assets under custody/administration of US$14.8 trillion, and assets under management of US$1.4 trillion. For more than 130 years, Northern Trust has earned distinction as an industry leader for exceptional service, financial expertise, integrity and innovation. Please visit our website or follow us on Twitter.

Northern Trust Corporation, Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A., incorporated with limited liability in the U.S. Please read our global and regulatory information.

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