When it comes to retirement, clients who own family-run businesses may face a dilemma: Do they pass the business on to the next generation or sell it?

The choice is about finances, of course, but also identity, experts say. Whether it's the first or third generation running the show, a family-run enterprise is often a point of pride.

"The business is synonymous with their life's work; it defines them and has often been a large part of their families' life as well," notes Greg Onken, a San Francisco-based advisor with J.P. Morgan Securities.

Advisors have a unique opportunity to help clients in need of guidance and a sounding board – and now might be the moment for an advisors' timely overture.

Industry insiders say that clients who own private businesses are facing ever-more lucrative offers from private equity firms, increasing the pressure to sell and leaving some clients in need of guidance and support.

"The truth is that M&A activity is back to where it was pre-2007. Our clients are seeing astronomically high valuations. Sometimes it is too good an offer to pass up," says Arne Boudewyn, head of Family Dynamics and Education at Abbot Downing, Wells Fargo's elite boutique unit for ultrawealthy clients.

And the stakes are high, as a mistake in succession or exit planning can be costly for the client as well as his or her family.

"For business owners, succession planning and estate planning go hand(in-hand)," Adam Frank, head of Wealth Management at J.P. Morgan, says.

When it comes to business and family, here's what experts say advisors should know.


Boudewyn says advisors are increasingly expected to have some understanding of families, business and the strategic planning that goes into transitioning from one generation to the next

"They need to be able to give at least some soft advice," Boudewyn says.

The first obstacle in any transition is whether there are children or other heirs – adult ones – ready to inherit the family enterprise. Obviously, there can't be a succession if no one's around to be the next in line to assume the throne.

But having children to inherit isn't sufficient, experts say. The question is whether or not the heir is capable of running the business. And navigating these issues requires a strong grasp of family dynamics.

Frequently, children can treat the business as a proxy for how much their parents love them, making things quite complicated, Frank of J.P. Morgan says.

"There's a lot of emotion going on behind the scenes. Recognizing the potential for discord in the two roles, as a family member and a participant in the business, that's the most difficult one for families to get a hold on," Frank says. "Where I see success is where families communicate frequently, about the family and the business. But unfortunately that doesn't happen frequently."


Unfortunately, succession plans sometimes run off the rails because family members, or the businesses themselves, aren't prepared for it.

Governance is key, says Robert Seaberg, president of consulting firm Intersect Consulting and also a former Morgan Stanley managing director. There needs to be a rules-based decision making process and clear criteria for a successor in order to make that transition successful.

"The reason for doing that is because you avoid arbitrariness or the appearance of arbitrariness within the family," Seaberg says. "And from a business perspective, you are giving the impression to non-family employees that you have a culture in place that is based on fairness."

Too often, family businesses lack these kinds of policies and procedures, he says. The family as well as the business can unravel when fighting ensues over perceived slights and favoritism. Plus, the chances for conflict rise as the family grows larger, adding new children and grandchildren who have a stake in the enterprise.

"What happens is that the natural Malthusian progression – the number of people wanting value out of the business – is itself a real tension," Seaberg says. "Governance has to grow along with the generations. The simple structure you had in the beginning may need to change."

He says strains can also develop when family members not running the business will seek to benefit from dividends paid by the business, while the family member running operations, "will want to plow that dividend back into the business."

Workplace tensions can also arise.

"Sometimes family members say, 'I prefer you as my dad and not my boss,'" Boudewyn says.

Implementing clear rules helps ensure "that there is an honest separation between the family and the business," Seaberg says.

Of course, it's not the advisor's modus operandi to write those policies and procedures, Seaberg says. But they can prompt discussions, and in doing so get their clients thinking more expansively about the succession and the family.

"This is a great way to start the conversation, to look at the structures, if you have someone say, 'Oh my daughter is going to join my business.' You can respond, 'That's great, you must be so proud. Have you thought about all the policies and procedures you'll need in place?'

These things take time. They need to be nurtured. So the earlier you start, the better, and the client will feel extraordinarily well-served," Seaberg says.


With younger kids, there's an opportunity to build focal points of activity outside the business.

"We've had a lot of success in counseling business owners to get their kids involved in some kind of family activity. That's typically done with a charity or private foundation," Frank of J.P. Morgan says.

This approach can help kids understand their role as family members, he says It has the added benefit of getting kids, particularly those that will not be involved in the running of the business, involved in the family.

Plus, Frank says, "It is a great way to get the kids invested in the family's ethics.  It can eventually lead to discussions of the business. And it brings the kids along."

Searberg says that there's an added advantage for creating family activities outside the business for children who aren't destined to run the enterprise.

"They can say, 'Well I don't want to be involved in the business but I am glad that mom and dad are supporting me in this way,'" he says.


If a client does sell the family business, then the liquidity event will significantly alter financial and estate planning – and potentially family relationships too.

"Once you move into a liquidity scenario, those corporate governance structures aren't appropriate anymore," says Abbott Downing's Boudewyn. "So what is your governance structure going to look like?  Mom or dad may have been the head of the company, but are they still the head of the family?"

In a sense, the new family business will be managing their wealth, he adds.

Advisors report that clients appreciate getting help with these matters. Michael Marcovici, an advisor with Merrill Lynch's Private Banking & Investment Group, says he and his partner have been able to tap the expertise at other units of Bank of America to help clients thinking about selling the family business.

Marcovici and other advisors at firms with similar capability say that extra level of engagement goes a long way with clients.

"It's benefited our practice too, because we are benefiting our clients at every level," Marcovici says. "Through that process, we are spending a lot of time talking about estate planning which is integral in putting that sale together."

Both Marcovici and partner Patrick Baldwin say it's critical to be an active listener during each stage of the relationship with these types of clients and their families.

"I would open with candid questions about what they envision for their business, what appetite their children really have for following them in the business," Marcovici says.

Marcovici, Baldwin and others say what it almost always comes down to is the family's dynamics.

"These entrepreneurs, they are really good and passionate about their company, the industry they serve – and their family," Baldwin says. "That's why understanding the family is so important."

Read more:


Register or login for access to this item and much more

All On Wall Street content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access