Who's next in line? Planning a family business transition

Ann: Welcome to Building More Than Business. I'm Ann Lucchesi. I'm a Certified Financial Planner, a Certified Equity Professional and a Senior Director here at First Citizens Wealth.

Nerre: And I'm Nerre Shuriah, the National Director of Wealth Content and Knowledge. My background is as a tax attorney, and I also have certifications in business exit and mergers and acquisitions.

Ann: And today we're talking about family business transitions and why they're often more complex than they seem to be. But before we jump in, I want to know, are you a fan of Succession?

Nerre: Succession is a great show, and I'm a fan of anything that Matthew Macfadyen is in, but it's probably a little too dysfunctional for me, especially given the type of work that we're doing with clients.

Ann: Yeah, for certain. I don't think that it's exactly a playbook for people to use for family succession planning.

Nerre: We hope not.

Ann: But it does offer some things maybe not to do as well when you look at a show like that. Super complex issues, lots of family relationship dynamics, all the things that we're used to dealing with. You know, in our Beyond Wealth report, when we ask business owners about transitioning, about a third of them said that they expect to transition the business to the family, and at least half of those didn't have a formal plan in place, Nerre.

Nerre: That's true, and that's common. And maybe shows like Succession are good to raise the issue and bring it to the forefront in an entertaining way. And I think this is something where we've mentioned many times that business owners are just busy. They're busy with the day-to-day running, marketing, funding their business, and this seems like something that's far off, and so they kick the can down the road. It's also not an area where you have somebody constantly kind of talking in your ear and saying, get this done, get this done.

Owners don't necessarily have somebody saying, where's your exit plan? So it's easy to kick down the road, and it's hard to figure out who do I go to to get this done? What do I need to get done? And I'll tell you, it does involve quite an array of advisors. When we put a team together for a client, it's often different for every client, and it can involve a business consultant, a tax attorney, a business attorney, a CPA. It can involve a whole array of people with expertise in various areas—an ESOP specialist. So it varies, and I think it would be hard for an owner to figure that out on their own.

We also have the added layer of the emotional aspect of it. Thinking about leaving your business is not something that I think most business owners want to do, especially when they enjoy it.

Ann: Yeah, I often think if it was just purely structural and they could fill out a form and have it all done, they might be more apt to get there. But the reality is these family dynamics really create complexity, a lot of emotions involved, and I think it makes it challenging for owners to kind of get to that and want to move forward with it.

So maybe we start with a scenario that I know that you see often, which is something like this. You have an owner who's built a successful business, he has two children, one who's deeply involved in business, one who isn't. He wants to make sure that the business transitions, and in his mind fair and equal kind of come out the same. What kind of advice do you give someone like that?

Nerre: So in that situation, we're really going to be driven by a lot of qualitative factors, which is when does he want to transition? What does that look like for him? And do these children actually want to be a part of it?

So you mentioned that one adult child is active in the business. We need to have a separate meeting with that person, a safe space to find out what are your goals? I'd say we all have complex relationships with our parents, and sometimes we're doing things to please them and sometimes we're doing the exact opposite to go against them. But either way, they're driving the motivation, right? And so at times, we meet adult children involved in the business who are doing it out of a sense of duty. I love my dad. I don't want to disappoint him. He expects me to take this over, but it's actually not what I want to do with my life.

So sometimes we need to have that conversation to say, what do you really want? And it could be that we still can arrange for them to take over the business but build such a strong management structure that they're not really involved too much in anything day to day, but we need that information ahead of time.

Dealing with an active child and a passive child—as you mentioned—a lot of parents want to equalize, right? My estate's worth $10 million, I'm giving five here, five there. And that isn't necessarily fair. If the active child went and got an MBA and came back with extra knowledge and helped increase the marketing and revenue of that business, then it's not five-five anymore because that adult child added their input and their expertise to raise the value of the business. So we need to take that into account.

We also need to take into account—we don't necessarily want the passive child's finances resting on the business. So if I bought a big house and my ability to pay the mortgage is relying upon distributions coming from that company, I'm going to get upset if those distributions slow down, decrease, stop, and we don't necessarily need that adult child making business decisions based on the personal finances of their passive sibling.

Ann: Yeah, so it sounds to me like really it's about taking and separating this idea of equal and fair. They're really two different concepts and have to be approached differently. And then just how do you dig into all the family dynamics? This isn't just a sit down with the owner and have a conversation. It's a far more complex thing. At the end of the day, they're not just financial decisions, right? These are deeply ingrained emotional decisions, and they're going to have this lasting impact on the family. And I think that's sometimes what scares people from diving into it is because they don't want to make the wrong decisions. But certainly in my experience, and I think you'd feel this way, is what we've seen is wrong is not doing the planning at all. That definitely is the wrong thing.

So speaking of that, let's transition this idea of the never planning. It seems like so many owners, they're so busy. You and I see it all the time. They're growing the business, and they just don't do planning. But why is that? It seems so important when we're talking about it here.

Nerre: It's probably easier to kick the can down the road, they're busy with the day-to-day stuff. And honestly, having that discussion about when I die, what's going to happen, that's tough. That's tough for some people. I've had people who are superstitious and say, if I talk about it, it's making it happen, which, you know, I don't necessarily believe. I believe it's preparing for an inevitability, but it's hard to get people over not wanting to tackle something that seems too big and voluminous and emotional.

So we all know that money makes you emotional. Can you imagine now a business that's tied to your identity? You've spent all your time on it, and sometimes all your money because a lot of times when we look at the balance sheet for these business owners, that business is their main and sometimes only asset.

And so dividing that up or talking about when they're not there can be painful. There's been times where we've had an owner start to transition to an adult child, start to give up some control, and they say, the main feeling that I have now is feeling obsolete, feeling fired. My son now makes all the decisions, and I'm no longer important. That's difficult to deal with. So we really need to dig in and create not just a plan for what happens to the business post-transition, but what happens to the owner post-transition. What are they going to do to take up their time?

Ann: I think they oftentimes are thinking, oh, well, this is something I can get to, but you and I both know if you don't have a plan in place, it can be problematic. We had talked to Andi and Danielle of ExpressIt it previously, and of course their father had this business. I'm sure in his head he had some idea about transitioning and then unexpectedly got ill and passed away rather quickly, and they were thrust into having to take this over. And so it's really important that owners understand one way or the other, you're going to have a plan. It's either one that has been thought out and put down on paper and works, or as you often put it, they're going out horizontally. But it could also be things like disability. We've seen partners get disabled. I've seen people just hit the burnout level and want to exit, and that's just where they're at. So it's really important that they get there, and it's really important that they're thinking about the family, the employees, the customers like everybody in that plan.

Nerre: Ann, you're absolutely right. You mentioned Andi and Danielle. They did a great job of picking up where their dad left off, but they also gave up quite a bit to do it. I mean, one of them gave up her dream job, the other was a stay-at-home mom, so that left a lot less time for the kids—especially in the early years when they were trying to figure things out without a plan, without a vision to follow.

And we also see a lot of business owners, especially in the Baby Boomer generation right now, not understanding the value of their business. So they're willing to shut it down, sell everything in a fire sale and liquidate it without realizing there's somebody that could pay for this. They could continue this on, think a little bigger. There's some value that you can either pass on through proceeds to your heirs or a legacy that can continue. And too often, I see people willing to just let it liquidate and go to nothing rather than really exploring all the options for what could happen to that business.

Ann: Yeah, it seems to me like having the written plan might reduce some conflicts, but it also provides, if you've done it right, stability—stability for the employees, for the customers, et cetera, and really keeps that business going.

So when someone says to you, you know, I have this business, I want to transition it to my family, where do I start? Where do you direct them to go, and how do you direct them to do it?

Nerre: So the first step is to start with yourself. You've got to know, what is your personal vision and what do you need? We find a lot with business owners, they've mingled their personal finances with the business, so sometimes the business is paying for their car or their car insurance. At times we see businesses pay for airplanes and things like that, which is nice, but we need to pull that back out. So we need to see what's the amount you need from this business to continue living the way you want to live and supporting the people you support up until your life expectancy, which we always choose as a conservative number, so we're talking 90s or thereafter. If we can back into that number, then we know where to start, what that business is worth. If you need $20 million and the business is $15, then we've got to get back and start building that business, building the growth.

And if you have that number and the business can afford it, then we start talking about strategies of how to pull that out of the business whilst transferring it to the next generation because that's not necessarily a liquidity event, right? So after we get that retirement number, then we start looking at who are the transferees and having those family meeting-type discussions I mentioned earlier where we pull them aside and say, what do you want to happen? I mean the adult children. Is this something that you really envision for your future? And if we can arrange that, what does that look like? Are you heavily involved? Are you overseeing in sort of a board type of way? And arrange it based on the family dynamics.

Ann: Yeah, so much of it comes back to communication and planning. So even if the structure's in place, it sounds like it's equally if not more important to have the family on board and then properly communicate. And the communications—family level, employee level, partner level, any of those different levels that you have to think about—you have to bring them all on board, get everybody together. Everyone just sometimes thinks, well, if I get something structurally done, I'm done. To me, it sounds like that might be just the start of the whole evolution of it.

Nerre: I think that's what makes business advisory so fascinating. There's some aspects of planning that are purely quantitative. It's mostly a numbers-driven exercise. But with business advisory, there's a lot of qualitative issues—the readiness of the next generation. How do we get them ready? What is the culture or temperature of the rest of the employees? Will they stay through a transition? All those kinds of qualitative things are really where we spend quite a bit of energy to get the owner ready for their plan.

Ann: So I think, you know, at the end of the day, the takeaway is these aren't just financial decisions, which oftentimes I think owners think they are. They're really deeply personal with a lot of complexity around it, and they affect relationships long after the transition, and so it's really important to think through what it's going to do to your family.

Nerre: Absolutely.

Ann: Thanks for joining us for Building More Than Business. If you found this helpful, please follow us on Apple Podcasts, YouTube Music or Spotify, and please share it with someone you know who might enjoy it. We'll see you next time.

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