The recent Brown Brothers Harriman Private Business Owners Survey has generated lots of buzz in our circles. One statistic that stood out to me was that 91% of business owners want their companies to stay in the family, but three out of four (74%) admitted that the roles of the next generation are either “poorly defined” or “have not been fully communicated.” Survey respondents owned businesses worth at least $10 million, yet three in 10 (29%) said they were “struggling to pick a successor,” and nearly half (45%) said the top reason they wouldn’t consider selling some or all of their business soon is that they “identify with their business” too much to give it up.
Questions to Consider
When I read that, I thought, “What are you waiting for, owners? Why haven’t you started having those conversations with your kids?” I wish the survey authors drilled down further on this situation. For instance, how do owners plan to transfer the business to NextGen if they have three or four kids, but only one can run the business? How will they plan for the unequal inheritance? Where’s the liquidity coming from in the estate to pay the estate taxes? Hint: It isn’t going to happen by accident.
Also, if owners want the business to stay in the family, where’s the money coming from to provide mom and dad (the founders) with a comfortable retirement? Do the kids want to stay in the business? Too often, founders assume they do and are in for a rude surprise when handing over the reins. The stress and disruption to the succession plan could have been avoided by having those conversations well in advance.
We talk so much about businesses that have remained in the family for generations. But we don’t hear much about the actual mechanics of how business parents transfer or “sell” the business to NextGen. How tax efficient is the sale if the kids don’t have the money to “buy” the business from their parents? Suppose the owner dies with the business and leaves the stock to their kids -- but there’s no liquidity in the estate. Where does the money come from to pay the tax if it's a taxable estate? And what happens to the one child who didn’t want to go into business? These would have been good questions to ask survey respondents – and for you to ask your business owner clients.
Or, what happens if none of the founder’s kids are interested in (or capable of) running the businesses, but one of the kids is married to a business-savvy spouse who’s ready and willing to take over the reins? How do you balance family dynamics if the parents give the business to the savvy son-in-law but leave the stock in the kids’ name? What’s the real difference between ownership and control?
Then what happens if your client has three kids and wants to ensure each one benefits from the business even though only one is responsible enough to handle the business and the wealth it generates? Therefore, is the one responsible child going to support her non-working brother and sister? How much resentment will that cause in the family? How do you handle the all too frequent situations in which the non-working children want their dividends, but the responsible child still wants to grow the business? Where do you draw the line?
Or what about the opposite situation in which the owner gives total control to the one child who’s in the business and never pays the other kids a dividend? Your client wanted each kid to inherit equally from the estate, but they’re now hamstrung shareholders. They have no rights. They get no money. They own worthless stock. Or suppose they own stock but can’t realize any value from it? These are scenarios our clients face all the time.
According to the survey, nearly half of family business owners (46%) were willing to give up partial or full control and ownership to maintain family dividend payments. Further, one-third (35%) were willing to sacrifice growth. While the survey authors didn’t address this, I’ve found it’s often because owners need the income more than anything else. They’re used to having the business pay for their lifestyle and have no other resources.
These are the kinds of questions that you and your client must think about before you make the transition.
Tough Conversations
I know what you’re thinking. Your client founded a business from scratch and built it up for 30 years. Now, it’s worth north of $10 million, and they want to transfer ownership to the kids. Shouldn’t they get to keep some of the equity before transferring it to the kids? It depends on how you and your client structure the transfer. You can do it as a gift. You can do it via a sale. There are charitable transactions you can do if the business is a C corporation. You can transfer half or three-quarters of the business while your client is still alive. They can sell it outright. They can finance it. But you must start thinking about the different scenarios and what’s best for your client and their family before it comes time to exit. Yes, those can be tough conversations.
Researchers also found that nearly all surveyed owners were reluctant to communicate their plans to family members. The top two roadblocks were concerns about whether their plan was the right one (66%) and emotional discomfort with discussing wealth with family members (55%). Sounds reasonable, but how do owners expect to have a successful outcome if they aren’t having conversations about anything meaningful with their children?
Fears About NextGen
Another important point raised by the survey authors was owners’ fear that their adult kids would be taken advantage of due to their wealth. As per the survey, I think that fear is shared by far more than 38% of owners. In my experience, it’s just another way of saying owners don’t trust their kids to handle the responsibilities of a family business and the wealth that comes with it. By putting the right succession plan in place, however, those at the helm won’t be taken advantage of if they’re experienced and business savvy. That said, I agree with researchers that it can be helpful to communicate with the NextGen and establish boundaries for responding to requests from contacts or nonprofits for financial assistance.
Finally, researchers found that one-third (36%) of private business owners didn’t think some children had the same values as the company’s mission. The company’s mission should be communicated clearly to the successors, and yes, children often have values different from those of their parents. The trick is to honor all the values and find a way to integrate them into the business successfully.
Randy A. Fox, CFP, AEP is the founder of Two Hawks Family Office Services. He is a nationally known wealth strategist, philanthropic estate planner, educator and speaker.
