It's not news that mixing family and business can be messy, but advisors might be surprised to know the extent to which family-owned businesses need their services.
According to Boston-based Family Firm Institute, a nonprofit trade group for family businesses, 90 percent of U.S. businesses are family controlled. However, a surprisingly low number — only 30 percent — of these survive generational transition.
A majority of handoff failures are caused by internal family conflicts or by inadequate financial preparation — two things that a financial advisor can help clients avoid. Many business owners seem to expect smooth succession, even without establishing succession plans and without plotting a strategic direction for the business that extends past their own retirement.
MassMutual Financial Group found in its American Family Business Survey that nine of 10 owners surveyed expected their businesses to stay in the family, and that 40 percent planned to retire within five years, but half of those had not tapped a successor yet. Those numbers spell opportunity for advisors well-versed in business succession.
“There is definitely a tendency for business owners to avoid doing planning early on, and as a result, family conflicts creep up as the time for transfer approaches,” says Mike Stern, an independent business psychologist in Brookfield, Conn., who works with CEOs, management teams and family groups regarding business succession. A succession plan may take five years to construct, says Stern. At its most basic, it should define the mechanics (roles of children, others), the business strategy and future objectives of the business.
“Setting and justifying compensation levels and defining different jobs — to avoid turf battles — as well as writing down the business' goals and strategy,” is crucial to preventing family infighting and the implosion of the operation, says John Reddish, of Advent Management International in Chadds Ford, Pa.
“Just addressing a business owner's long-term issues results in discussions of retirement planning, his or her insurance needs, as well as education planning for children and grandchildren,” Stern says.
The rewards could be huge. According to the Family Firm Institute, by 2005 virtually all closely held and family-owned businesses will lose their primary owner to death or retirement. And by 2040, $10.4 trillion of net worth will have been transferred from one generation to the next.