For many financial advisors, the stakes seem higher when the client is a family-owned business. Not only do these advisors need to understand the fundamentals of the business itself and the family’s vision for its future, but they also need to work within the context of the underlying — often complicated and sometimes messy — family dynamics.
In a family business, ownership, management and family matters frequently intersect, which can lead to discord among the family members. For some, running a company next to spouses, siblings and/or children is a recipe for disagreements, squabbling and tenuous financial planning. In fact, family dysfunction and conflict are often the primary reasons most businesses fail to pass successfully to the next generation. A financial advisor must be able to navigate family dynamics, helping a business owner and his/her family think through complex issues and work together to ensure that the business and family goals are met. Here are key questions that every financial advisor should consider when working with a family business.
1. Which family members should be involved in process?
Each family business is unique in terms of the level of involvement of various family members. Some are deeply involved on a daily basis, while others spend less time day-to-day but are still a part of the decision-making process. Regardless of who is responsible for running the business, the financial planning process also needs to take into account those family members who are not, including spouses, children, siblings, etc., since wealth tied up in the business will ultimately benefit the entire family.
2. What is the goal for the business?
As an advisor, it is important to understand the long-term goals for the business and how those will impact the family. When the first generation is ready to exit, do they plan to pass the business on to the next generation or sell to a third party? If the next generation is to take over, will they buy out their parents or will their stake be gifted? Keep in mind that family members who are associated with the business may have been a part of it for a long time and even may have grown up in it. This can lead to both professional and emotional ties to the business that can cause another layer of family dynamics that need to be managed. Additionally, each family member may each have his/her own plans for the the business.
3. What are the individual goals, retirement dates, succession plans and options?
Realistic succession planning is the key to a smooth transition and should include retirement dates, future ownership structure, management plans (including potential outside personnel) and more. By outlining the objectives up front, you will be able to better define the scope of the relationship and set expectations for the entire family. While a family business owner may not be ready to face the tough questions, doing so early can prevent, or at least minimize, uncertainty down the road. It will be critical for the family to work with a financial professional who understands the complex issues that face family businesses, takes the time to uncover each family member’s individual goals and then presents a variety of options to achieve them.
4. What are the conflicts?
A financial advisor must view the family business within the context of broader family relationships, including any underlying conflicts (every family has them!), power struggles, issues of entitlement and a reluctance to give up control, to name a few. While it is not the advisor’s job to solve their problems, it is important to help organize the process, establish guidelines and lead the family through the procedure successfully. The more a financial planner can establish a relationship with the family as a whole, the more likely s/he will be seen as a trusted advisor.
5. Do we need to involve other professionals?
Even the most experienced financial advisor may not have all the answers to help a family business navigate the legal, tax and emotional issues involved. A good advisor will recognize when other experts may need to be brought into the process. Business valuation experts, attorneys, mediators and other experts can be important members of the advisory team and having a vetted network of outside professionals on call is invaluable. When handled properly, family-business succession planning can be a smooth and seamless process that keeps family relationships close during the transition and long into the future.
A Happy Ending
Take, for example, a family-owned masonry business client. The father established and operated the business, and only one of his three children worked in business. As part of the financial plan, the father wanted to ensure that his wife and two other children would be taken care of upon his retirement or death. He was not certain if the son who worked in the business wanted to run the company after the father retired. As the financial advisor, we established open communication lines among all family members, and determined that the son did not want the responsibility of running a business and was content keeping his position and getting paid out like his siblings. We discussed succession and exit options, and as a family, they decided to sell the business internally. They identified their top successors, determined their level of interest and whether or not the potential buyer was a good fit to take over the family business. We brought in other professionals from our network, including business valuation specialists, corporate and estate planning attorneys and accountants, to help facilitate the sale of the masonry business. Subsequently, we worked with each family member to develop a financial plan based on his/her individual goals, resources and risk tolerance. The internal sale was ultimately successful. The son continued to work in the business until his retirement a few years ago. The father has since passed away, but because of the plan we helped put in place, his beneficiaries have been taken care of. The best part was that the family remained close, because we were able to help prevent conflict by taking as much uncertainty as possible out of the equation.
Laurie Ingwersen, CFP, CRPC, CDFA, CBC, is a managing partner and senior wealth management advisor at The Harvest Group. She was recently named an Outstanding Woman of Family Business by the Family Business Association