Thursday, March 24, 2011
Wealth managers with clients who are business owners may need to prepare for some rough transitions. Approximately 27% of family-owned businesses around the world expect to change hands within five years, but 47% have no succession plans in place. People don’t like dealing with their mortality, so the lack of succession planning isn’t all that surprising.
Wealth managers need to remind their business-owning clients to divorce their emotions from their logic when it comes to succession planning. Many entrepreneurs leave their business to their children regardless of what’s actually best for the company, the owner, and the children. They don’t even think to explore their options.
Another dangerous area in succession planning arises when some children are involved in the business while others aren’t. The parent wants to treat children equally, but giving ownership stakes to all children regardless of involvement is a recipe for disaster. Owners in this situation should develop wealth outside of the company or purchase life insurance policies for the benefit of non-involved children.
Another succession problem arises due to the recession. Many owners who planned to turn their business over to their children cannot afford to do so. Owners who plowed their wealth back into the business rather than paying themselves may not have enough saved for retirement. Further, owners may not even be able to pull out wealth from the company if it is now cash-starved. These owners have to stay on the payroll, which may damage the next generation’s opportunities.
When an economy is struggling, the tension level in family businesses is “exponentially” higher than in other companies whose ownership is more emotionally removed from the enterprise, says Paul Karofsky, owner of Transition Consulting Group in Framingham, Mass. “In families, it’s about unconditional love, it’s about equality, it’s about everyone taking care of everyone else. In business, it’s about performance, it’s about how well we do,” Karofsky says. “When you take those two different value systems and put them together, you have fodder for instant conflict. Now add a struggling economy, and you’re really putting a lot of pepper into the mix.”
Jerry Gleeson, Succession Not Succeeding for Family Business, Registered Rep, Mar. 22, 2011.
Special thanks to Jim Hillhouse (WealthCounsel) for bringing this to my attention.