A dynasty of one's own: When family wealth comes from a family business, the planning can get personal.

From Sumner Redstone's media conglomerate to Edward Johnson's financial services empire, the succession battles of high-profile family businesses have hit the headlines in recent months. Yet even if you don't own a Viacom or a Fidelity, transferring a business from one generation to the next still poses serious challenges. In fact, about two-thirds of all family businesses fail to make it from the first generation to the second, according to family business consultants. As an advisor, you can try to improve the odds for a family business' survival. At the very least, you can help ensure that the family makes a deliberate decision about the business' future course, instead of having their hands forced by an unexpected death or other circumstance. Along the way, what you learn could help you transition your own business. -ST_TD- You probably already have entrepreneurs among your clients. If you don't, the opportunity to serve them is huge. Family-owned businesses, both publicly and privately held, account for about 85% of all U.S. businesses and generate approximately 64% of America's gross domestic product, according to a survey by Laird Norton Tyee, a Seattle-based wealth management firm. The 2007 Laird Norton Tyee Family Business Survey found that financial planners ranked third, behind accountants and lawyers, as the outside advisor a family business uses most frequently. Closely held family enterprises are vulnerable to greater stresses, both financial and psychological, than their public counterparts. "You run a business that's hard enough," says Barry Cain, a family businesses advisor at the CPA and consulting firm Blackman Kallick in Chicago, whose own family ran a steel business. "When you weigh family on top of that, that's even tougher." The good news is that advisors already have many of the skills needed to help family businesses. Devising any sort of plan will take many clients farther than they had gone on their own. Here are some pointers to emulate and some to avoid. A PSYCHOLOGICAL PROCESS Most family businesses don't address succession until they're forced to when, for example, an owner falls sick or they receive a third-party buyout offer. "Often, they'll come to us when a transition is right around the corner," says Tim Kochis, CEO of Kochis Fitz, an advisory firm in San Francisco. It's no surprise then that fewer than 30% of family businesses have put their succession plans in writing, according to Laird Norton Tyee. Business owners have trouble confronting succession for reasons that should be familiar to self-employed advisors. Many entrepreneurs' identities are so wrapped up in their company that they can't imagine the business continuing without them. Advisors can prepare them for the reality of change. Marty Carter, a licensed clinical social worker and business consultant to wealthy families, says she tells business owners, "We don't know what will happen when the next generation takes over. The only thing we know for sure is that it will be different." Entrepreneurs often can't imagine their life without the business they've poured so much energy into. Advisors can help them envision a second act. For people to retire successfully, they need to move on to something else, Cain says, such as a position on a board of directors or charity work. Rich Simmonds, managing principal of Laird Norton Tyee, says some of his clients regain the excitement they experienced building their businesses by judging business contests at local colleges. Succession planning also involves facing the possibility of mortality, which is hard for most people to do. Even so, Simmonds tackles the question early in his involvement with a new family business client. He asks the owner what would occur at his or her company if anything happened to him or her tomorrow. "In a lot of cases," he says, "you get a long pause and then an answer that comes a few months later." Failing to plan is a big mistake, family business experts say. It's also a big opportunity for financial advisors specializing in the long view. Planners should encourage their family business clients to think of succession planning as a process, not an event, says Cain. It's never too early to start, even if the second generation is still in school. In fact, it's best to begin before the next generation graduates from college, Simmonds says. When a business founder dies without a succession plan, his or her spouse or children often aren't equipped to carry on the day-to-day management of the company. They may have grown up around the business, but actually running it requires a different level of knowledge. In these cases, heirs are frequently forced to sell off the company, Simmonds says. If the children aren't old enough to take over in the event of the founder's death or retirement, and a spouse is unprepared, unwilling or unavailable, interim leaders can help bridge the gap if provisions are made for them in the plan. Cain counseled a family with a fourth-generation manufacturing business who employed an interim COO for the two sons to report to while their father was alive but not actively involved. The brothers eventually took the reins.Employee morale can also suffer when a business doesn't have a clear succession plan, with devastating consequences when the employees are related. Cain recalls one family he worked with where the father found it too hard to tell his son that he wasn't the best qualified to run their manufacturing firm. So the son expected he would succeed his father until the dad tapped his sister to take the company reins. The son left the business and cut off the father's access to his grandchildren. Father and son should have talked beforehand, Cain says. While the end result might not have changed that is, the son might still have left the business a discussion could have helped avoid the rude surprise the son received and perhaps prevent the resulting estrangement. EXERCISE PATIENCE So where should a planner begin with clients who haven't addressed succession yet? Start by asking them what they want and being prepared to listen. "One thing I think financial planners aren't accustomed to is waiting for people to talk," Carter says. It might take years for a family to finalize its succession plans, Carter cautions, but the conversation has to start somewhere. Planners risk getting consumed with the technical aspects of succession planning if they don't take time to listen to clients, Kochis warns. For example, they may try to "throw their whole toolbox" at a problem to demonstrate their prowess with the likes of sophisticated estate planning tools, such as intentionally defective grantor trusts. While these strategies may have a place in the overall plan, an advisor should take time to understand the situation before springing into action. Planners can also start by assessing the retirement income needs of the generation exiting the business. How much cash will that family member, or members, need to extract in order to live comfortably? The vast majority 93% of respondents to the Laird Norton Tyee survey had little or no income diversification. All their net worth is tied up in their businesses. This concentrated approach reflects the entrepreneurial personality, says Greg Rosica, a tax partner with Ernst & Young who works with high-net-worth families. Entrepreneurs are an optimistic and self-reliant bunch. "There's an inclination for them to reinvest in the business," Rosica says. This is as true for families who have a net worth of $10 million or more, including the business, as it is for mom-and-pop shop owners. This lack of liquid assets may also explain why family business owners are less likely to employ financial planners than, say, lawyers or accountants, Simmonds says. Planners with rigid account minimums may lose the opportunity to help these businesses protect their wealth. Indeed, business owners require extensive insurance coverage, including general liability, umbrella and workers' compensation on the business end and disability, property and casualty and long- term care on the personal end. TEAM PLAYERS Early in the succession process, Simmonds advises families to hold an "all- hands" meeting with all their outside consultants, from lawyers and accountants to planners. This helps define and assign responsibility for the various aspects of the succession plan. While clients are often reluctant to convene a meeting involving thousands of dollars worth of billable hours, he notes, they're the ones who benefit most from this coordinated approach. It helps to gather all professionals in one room, in part because they can limn a complete picture of the client's situation. Clients often don't know what they should tell their advisors about their business transactions, Simmonds says. For example, let's say a client sold some real estate. She told her CPA and lawyer about it, but she didn't think to mention it to her investment manager, even though the sale could potentially be used to balance out gains or losses in her investment portfolio. This group of professionals has its own dynamic, and it can become as thorny as that of their clients. Glenn Ayres, a consultant with the Glendale, Calif.-based Doud, Hausner & Associates, a family business consulting firm, recalls one case he worked on in which a financial planner clashed with the other team members. This planner was friendly with the client, who was the president of his own business. The client had several children and had avoided telling them his succession plans. Ayres advised him to make his preferences clear, while the planner told him that it was his business and he could do what he wanted. "It was a power struggle," Ayres says. Charlie Haines, a planner with an eponymous firm in Birmingham, Ala., forged a more collaborative spirit through study groups with local accountants, lawyers and psychologists who all work with family businesses. This builds trust, prevents turf battles and promotes referrals, he notes. One resource for those who would like to create this kind of a peer group is the Family Firm Institute, a Boston-based organization for professionals in different industries who serve family businesses. The institute has an online directory of its members at www.ffi.org. Haines was one of the first planners in the country to employ a staff therapist. Marty Carter worked at his firm for several years before establishing her own business. "I had the sense that we were only treating the symptoms," Haines says of his decision to hire Carter. She says conflicts about money are often rooted in something deeper. For example, Carter recalls a wife who overspent her husband's credit cards as retaliation for him not spending enough time with their son. A therapist can help get to the root of the conflict. Indeed, it's important for planners to realize when they risk getting in over their heads with family feuds. If a family has deep- seated angers or fears, and this emotional baggage prevents them from making progress on a succession plan, a referral to a mental health professional is often in order, Cain says. His clients occasionally take offense at this suggestion, but Cain doesn't mind. They weren't making progress anyway. OWNERSHIP VERSUS MANAGEMENT One way a planner can ease family tension is to help create separate governance structures for the family and the business. First- generation owners often focus on building the business to the exclusion of making formal policies and procedures to support it. (Does this sound familiar, advisors?) This system often breaks down if the business continues into the second generation.Families and businesses are based on opposing principles. While families embrace equality, affection and a tolerance of one another's foibles, businesses run on incentives, performance rewards and a Darwinian survival instinct, Kochis notes. In a lot of families, all members get equal benefit from the business, no matter how much (or little) they contribute. Part of separating family ownership from business management means compensating family members involved in the operations of the firm over and above what they might receive as a part owner. If the business hasn't established a formal compensation system and one brother buys a new Mercedes, the other siblings may resent it, Ayres says. The brother, on the other hand, might consider it a company car. A board of directors can help establish rules for the second generation entering the business. In three- quarters of family firms, a board of directors guides strategic decisions, according to the Laird Norton Tyee survey. Yet more than half of these boards are composed of family members only. Outsiders offer a welcome perspective, experts say. "Entitlement is a pretty big problem in family businesses," Carter says. The most successful transitions happen when children must work outside the business for several years before joining the company. One global family business Simmonds worked with requires the next generation to live abroad before they can work for the business. This firm is in the minority, though. In the Laird Norton Tyee study, 65% of respondents had no policy outlining qualifications for family members who work in the business. When members of the next generation do come on board, they need the space to establish their own credibility. Judith McGee, CEO of McGee Financial in Portland, Ore., encountered resistance from her employees when her daughter, Linette Dobbins, began taking leadership roles in the business. "I heard a lot of 'When you quit, I'll quit,'" McGee says. She dealt with these comments by demonstrating her confidence in her daughter, letting her lead without overriding her decisions. Family members often work much more effectively together when they have separate, clearly defined roles. This is the case with McGee and her daughter: For more than 10 years, McGee focused on client relationships and public relations while her daughter ran the office. This approach also works well for Joe Biondo Sr. and his son, Joseph Jr., who together run the Biondo Group, a money management firm in Milford, Pa. A typical entrepreneur, the elder Biondo tried to retire twice, unsuccessfully. "I'll die with my boots on," he says. But he's scaled back his responsibilities these days, while his son, a Wharton MBA, has the final say on company decisions. OTHER ALTERNATIVES As the statistics show, most family businesses don't make it to the second generation. But these ventures shouldn't automatically be viewed as failures, Kochis argues. "A lot of people approach those statistics with surprise and regret it's a safer point of view to say, 'Wouldn't it be surprising if many businesses did survive to the next generation?'" In other words, it's not all that common for the next generation to have the talent, training and temperament needed to take the reins, he notes. Some entrepreneurs don't want the business to stay in the family. Nearly 20% of respondents to the Laird Norton Tyee study count themselves in this group. This underscores the importance for planners to really listen to their clients and not assume that their goal is generational transfer. Warren Buffett is one fabulously successful business owner who has no plans to involve his children in his company, investment firm Berkshire Hathaway, after he departs. Instead, each of his three children runs a charitable foundation that receives support from their father. Establishing a foundation is a good way for a family to leave a legacy when their business falls into outside hands. So what happens to a business if it doesn't transfer to a family member? It can be sold to an employee, a third party, or, in the worst-case scenario, liquidated. In the first two cases, a planner can help clients value the business in preparation for the sale. (This is a must even if the business goes to the owner's children, since the amount is used to calculate gift tax.) In any planning scenario, the advisor must step back and let the client frame his or her own definition of success. This holds particularly true with entrepreneurs who are passionate about their businesses and who often measure success outside of monetary terms. Planners are starting to get the message, Carter says: "It's taken the financial world time to realize it's not just the money they need to talk to clients about." (c) 2007 Financial Planning and SourceMedia, Inc. 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