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Here's why.
According to one recent survey, 39% of family-owned businesses expect to experience a change in leadership due to retirement or semi-retirement in the next five years. As time passes, this number will increase as more and more boomers reach retirement age each year. The problem is that few businesses are prepared to manage this transition.
A Gallup poll reveals that:
o Seventy-two percent of family-owned businesses do not have a business continuation plan.
o Forty-seven percent have done no estate planning.
o Of family business CEOs due to retire within five years, 55% have not yet chosen a successor.
In spite of those facts, 81% of family business owners say they want the business to remain in the family. Clearly, planning does not reflect expectations. The question to ask is, "Why not?"
There are many reasons why individuals with substantial wealth hesitate to plan for its eventual disposition. Reluctance to face one's own mortality is certainly one of them. Procrastination is another. Family dynamics and their resulting tensions, however, are often the real cause. Nowhere is this more striking than in those situations where most of the wealth resides in the family-owned business.
Most estate planning and wealth transfer challenges center around issues of "fairness" and "equal treatment" for all family members. In large estates that consist mostly of cash and investments, this problem is solved relatively easily. Simply dividing the value of the estate equally among beneficiaries often accomplishes the estate owner's goals. When a business is involved, however, things become more difficult.
The problems are two-fold. First, a business is generally non-liquid, meaning it is not easily divided among multiple beneficiaries. The business interest is usually not marketable and seldom has other value such as dividend payments. To many beneficiaries in this situation, it is a classic good news, bad news scenario. The good news is you are now a business owner, the bad news is the business is not marketable and may not generate any income for you. So much for fair treatment.
The second problem is that business management must be handed over to new leadership. That means someone in the succeeding generation of the family must be able to step into the shoes of the retiring leader. If that person could be any one of several beneficiaries, the stage is set for a classic confrontation of interests. The managing family member typically wants to grow the business by reinvesting profits while the non-business family members generally want income in the form of dividends or other forms of compensation. This is the stuff family feuds are made of.
An obvious solution is to leave the business to the next generation of leadership intact and leave non-business heirs cash or other assets. Life insurance, trusts, and other financial devices can be used to develop a solution that meets the expectations of everyone in the family. And therein lies the real challenge -- how to determine the expectations of everyone involved.
The key is to approach the development of the new wealth transfer plan as a process. Once wealth transfer planning is perceived as a process, it can be visualized as a series of steps and phases. The entire process can be illustrated as a circle with nine distinct steps and three phases (see below). The center of the circle, or the hub of the process, is you, the business adviser, playing the role of process architect and facilitator. You are the wealth transfer specialist.
In Phase One, you examine the objectives of the individual family members by conducting extensive interviews and evaluate any existing plan. This is a critical phase because it is during this phase that the family interviews are conducted.
To ignore the needs and concerns of other (non-managing) family members in the business succession planning is to set the plan up for failure. The easiest way to find out what the various family members think about the future of the business and their role in it is to ask them about it. This means an in-depth interview of all family members -- including spouses. The only effective way to interview all the family members is to meet with each individual or couple privately. Generally, individual family members are not going to be honest and open about their innermost feelings if other family members are present during the interview.
If you complete Phase One with thoroughness and attention to detail, you will have the information necessary to construct a new wealth transfer plan that will meet the needs of all family members.
Phase Two involves developing the new wealth transfer plan. It's in this phase that you meet with other trusted family business advisers to gather their input.
Phase Three is the presentation and implementation phase. Here you unveil the new wealth transfer plan to the entire family in a retreat setting and assist in its implementation. It is at this point that you ask the family to adopt the plan.
For the plan to be successful, each member of the family must understand and accept it. The best approach is to gather the entire family in a neutral setting, away from the business, where they can relax and enjoy themselves as they ponder the proposed new plan together. A resort setting is ideal. Properly structured, the family retreat is an ideal opportunity for the whole family to share concerns, hopes, dreams, and fears about the future.
At the end of the presentation, every family member must be convinced that the proposed new plan represents the best hope for his or her own future as well as the future of the family and business. Again, excluding any family member from this phase of the process endangers the entire plan.
Any extra time and effort you invest in developing the plan can be compensated for by charging a planning fee. This fee can be proportional to the complexity of the case, the market value of family assets, and the number of family members to be interviewed. Depending on the facts of the case, fees typically can range from $6,000 to $40,000. Because liquidity is often a primary need in planning for wealth transfer, sales of life insurance and other financial products and services are common. Keep in mind, however, that your services as a transfer specialist, and the substantial time commitment these cases require, can easily justify your charging the fee even if you receive commissions on product sales.
An additional benefit of treating the entire family as the client is the ability to expand the client relationship to other family members. Positioning the family as the client means that each family member sees you as a principal resource for family business matters. When the entrepreneur/owner dies, becomes disabled, or retires, you can be well positioned to guide the transfer. Without that connection to the surviving family members, forged during the planning process, the death of the entrepreneur/owner could mean the end of your working relationship with the business. It's well worth the effort to cement a good relationship early on, so that the next generation of owners feels no need to establish relationships with other advisers who offer the same services that you do.
Helping family-owned businesses plan effective transitions of ownership requires knowledge, patience, and well-honed people skills. Not every adviser is equipped to work in this specialized area. But professionals who seek out these opportunities and prepare thoroughly for them are among the most successful financial professionals in the industry ... and the opportunities promise to get bigger in the coming years as the boomer wave rolls on.
Karl Bareither, CLU, is founder and president of FBR System, Inc., a fee-based family business planning firm that uses a holistic approach to planning called the Family Business Renewal (FBR) process. He has written a book, Becoming a Wealth Transfer Specialist, that describes the process in detail. Mr. Bareither is a qualifying and life member of the Million Dollar Round Table and has previously qualified for the Top of the Table.
