Planning For The Next Generation Of A Family Business
Broker World Magazine

By Karl Bareither, CLU

It is a sad fact that most family owned businesses usually do not remain in the family - in spite of the wishes of the founder.

According to one study, only 30 percent of businesses make it to the second generation of family ownership. Fewer still make it beyond that. This in spite of the fact that most entrepreneurs say they hope the business remains in the family. Why the disconnect?

Brokers currently working in the estate planning and business succession planning market know that there is clearly no shortage of competent attorneys, accountants and other business advisors. Effective solutions, like buy-sell agreements, trusts, insurance funding, etc., have long been well understood by family business advisors. No, the problem is not lack of technical expertise or a shortage of advisors; it is something else - the human factor. Most business continuation plans fail because the plan is not fully supported by all the members of the succeeding generation. A technically well-designed plan that is ignored, or even sabotaged, by a disgruntled family member is doomed.

Let us consider a hypothetical example. Bill, a successful entrepreneur decides it is time to plan for the future of his family business. He calls in the usual cast of characters, his attorney, accountant, insurance agent and any other trusted advisor he feels should be involved. The "team" develops a foolproof plan for the next generation of leadership to ensure the business will continue after Bill dies or retires. Having a plan in place may give Bill a sense of security, but he has made a common planning mistake. Like many entrepreneurs, Bill has developed a plan that is essentially a secret as far as the rest of the family is concerned. In fact, many family members will first learn the details of the succession plan at the reading of the will!

A far better approach is to plan for the next generation of business leadership openly, involving all family members in a process that encourages open honest communication. Such a process is illustrated in the graphic on page XX. It is called family and business renewal - FBR for short. Here is how it works.

First, all family members are interviewed at the beginning of the planning so the specialist facilitating the process can understand each family member's feelings about the business and his or her view of its future. For example, some family members might envision an active role for themselves in the family business while others would rather inherit non-business assets. By interviewing everyone, the specialist also comes to understand other family dynamics that could potentially affect the plan. On the other hand, if the plan is developed without input from the parties involved, jealousies, sibling rivalries or other conflicts of interest could result in one or more family members resisting the implementation of the plan - perhaps even in court! Surely, this is an outcome the entrepreneur hoped to avoid.

So, in phase one in the FBR process, the specialist interviews everyone in the family, including spouses and in-laws, to determine the goals and dreams of all the family members. Ultimately, the new plan will provide for the transfer of all the family's wealth in a fair and equitable manner that preserves the business and meets most of the expressed needs of the family. Such a plan will be much more likely to enjoy the support of the entire family when the time comes for it to become effective.

The second feature of the FBR process that separates it from the typical approach to wealth transfer planning is the presentation of the new plan in phase three. Here again, the entire family is involved.

The new plan is revealed in a retreat setting. The family retreat is facilitated by the specialist and conducted in a neutral setting, away from the pressures and distractions of the business. A resort or hotel setting is ideal. Every family member who took part in the initial interviewing process is invited to attend the retreat. The stated purpose of the retreat is to review and discuss the proposed new wealth transfer plan.

After introductions and initial ice breaking, each family member is asked to respond to three questions:

"What are your expectations of this retreat?"

What do you admire most about your family and the family business?"

"What changes would you like to see?"

The first question is non-threatening and designed to get each individual comfortable talking in front of the group. The specialist records each individual's responses on a flipchart and posts them on the walls of the meeting room for all to see. One of the facilitator's goals will be to make certain that, at the end of the retreat, everyone will leave with the feeling his or her expectations have been met.

The second question is designed to solicit positive responses. Often, entrepreneurial families never really take time out to reflect on the many benefits of owning a business. In response to this question, as children and grandchildren express their positive feelings about the sacrifices of the founding generation, entrepreneurs often find themselves overwhelmed with emotion. All the sacrifices and hard work invested in nurturing the family business suddenly seems to be worthwhile. Again, the specialist posts all responses.

The third question gets to the heart of the matter. In essence, the responses to this question reveal the individual family members' opinions about the past and current business and family matters. Of course, if the specialist did a good job of interviewing family members, there will be no surprises here. Nevertheless, this step is important because it will be the first opportunity many family members have ever had to learn about others' view of the future of the business and their role in it.

At the conclusion of the three-question process, the specialist reveals the details of the new wealth transfer plan. Using the information gathered in the interviewing process, the specialist will have designed a plan that addresses most, if not all, of the concerns of each family member. As a result, the new plan will generally be well received and supported by everyone in the family. Not surprisingly, the new plan may be considerably different from the plan the entrepreneur would have developed without the input of the rest of the family.

One of the challenges for the broker wishing to use the FBR process in wealth transfer planning is to educate the entrepreneur about the value of using an open approach. The skills and abilities that go into creating a new business are often not those necessary for effective planning for the eventual change of leadership. However, reflecting on the dismal record of successful wealth transfer planning should serve as an incentive.

The good news for brokers is that the extra effort expended in using the family and business renewal process justifies charging a substantial fee. Planning fees can result in a substantial increase in revenue for the broker over and above commissions from additional product sales.

Brokers should also consider using the process for their own succession planning. Think of the FBR process as an opportunity to resolve your own planning challenges while positioning yourself to expand your business revenue in the process.

Click Here to Read More Articles