Because I am a certified financial planner, most people do not think of me as someone who worries deeply about family business succession issues.
Yes, I’m the guy who geeks out on statistical analyses of publicly traded companies. And sure, I do spend a fair amount of my time helping to build 401(k) plans and I work with business owners to ensure that their employees are properly served by those plans. And, of course, I work with families to help them understand how retirement savings and planning can serve them in later years. But family business succession planning? Really?
Let’s forget for a minute that I am a third-generation business owner, and let’s even overlook my credentials as a certified exit planning adviser, eschewing these points for a clear-eyed view of the hard cold facts facing family businesses in need of transition. You may then be able to understand why all business owners (of family businesses or otherwise) should be engaged in the conversation about succession planning.
Against the odds
The consensus among family business owners, according to The Family Business Institute, is that their businesses will continue to be owned by the same family or families at least five years from now. However, many of the 88 percent of owners who believe this will be fighting the odds given that only 30 percent of family businesses survive into the second generation, 12 percent survive into the third generation, and a mere 3 percent survive into the fourth generation and beyond.
But why should this batch of seemingly niche statistics matter to all business owners?
About 90 percent of businesses in America are family owned or controlled, according to the U.S. Census Bureau. And, according to a study by Kennesaw State University’s Cox Family Enterprise Center, family businesses account for 78 percent of all new job creation, generate 62 percent of the country’s employment, and account for 64 percent of the U.S. gross domestic product.
The truth is that the majority of American businesses are family businesses, and the extensive role that they play in the broader business community makes them indispensable, given their impact on and interconnectedness with all American businesses.
It may be worth pointing out that we aren’t just talking about the micro business on Main Street selling antiques to locals or the hardware store owned for generations a just a few blocks away attempting to compete with the likes of Walmart. Remember, a majority share of Walmart’s stock is still owned by the heirs of Sam Walton through the Walton Family Enterprises holding company, thus making Walmart a family business.
But what matters most?
Most of the family businesses with whom I have worked over the years intend to pass their businesses on to future generations, most often to their children or grandchildren, but sometimes to cousins, in-laws or others in the extended family tree.
Those business owners who have not engaged in a relationship with a proactive team of advisers or a qualified CEPA (certified exit planning adviser) oftentimes do not formally plan for their intentions to become a reality with a modicum of efficiency and a dearth of unnecessary headaches.
Almost all business owners who are serious about an eventual transition of control of the family business to the next generation look beyond the numbers and the financial statements; they look beyond the payout to boost their retirement years. And almost all of them express to me their gravest concern: how to instill in the future generation of business owners their generational ideals and values.
According to a study by Deutsche Bank, what is most important to family business owners goes beyond the transition of financial wealth and extends to the transfer of primary values to the next generation. These include encouraging children to earn their own money, charitable giving, philanthropy and volunteerism.
The impending crisis
The 2016 Family Business Survey conducted by accounting and consulting firm PwC highlights the impending family business crisis when it notes that as many as 43 percent of family business owners currently have no succession plan in place.
The absence of a business succession plan can lead to incredible and often avoidable tax consequence, significant detriments to profitability and productivity, and worst of all, possible loss of family-ownership in the business.
The right professionals
With such a complex array of issues facing family business owners, it is no surprise then that a cadre of professionals is necessary to support those businesses in their planning for transition and in the process of transition itself.
The professionals I find most helpful in a smooth transition include a business law attorney, a CPA with business valuation credentials, a team of financial planners and wealth managers, and an exit-planning and family-values consultancy team. In the absence of one of these professionals, the transitioning business owner can expect a similar hole in his or her final transition.
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