Small businesses present good opportunities for advisors

It's evident that small business plays a major role in the U.S. economy.

In fact, the small-business share of the country's gross domestic product is 50 percent. Additionally, small businesses create about 60 percent of the jobs in this country.

As such, these enterprises are a significant source of wealth generation for the families that own and operate them.

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For many people, owning their own business is the American Dream come true. However, managing that business takes a great deal of hard work, and it also requires a financial game plan.

On the flip side, financial advisors often see the small-business owner demographic as a desirable place to position themselves, yet many are unprepared for the various challenges and issues that present themselves when working with families who own successful businesses.

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To be sure, family business enterprises present unique challenges to financial advisors.

For most financial advisors, the mainstay topics of retirement and portfolio management are often met with blank stares by the key players in a family business. In some cases, the notion of retirement is a totally foreign concept to a business owner who does not see himself pulling back and living the life of Riley.

Others believe, and rightfully so, that if they were to sell the business and/or successfully transition it to the next generation, there will be plenty of money to meet their retirement needs.

Bigger and more pressing issues for family business enterprise include topics such as succession planning, family governance and wealth-transfer strategies that will minimize the impact of estate and inheritance taxes.

The complexity of the family business enterprise is magnified because of the various constituencies who need to be considered. With non-family business-planning clients, the focus is on the needs of the individual or couple.

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In the family business, there are many other stakeholders to be considered. For example, there are the family members who own shares in the business, family members who own shares and work in the business and are likely key executives for the enterprise, and potentially non-owner manager/executives who may own some equity and yet other permutations.

Only about half of family-owned businesses make it to the second generation and even fewer to the third generation. Advisors who work within the family business arena often refer to the saying, "Shirtsleeves to shirtsleeves in three generations." This is a proverb whereby the first generation builds wealth, the second generation expands the wealth, and the third generation spends the wealth and has to start over again.

Multigeneration family enterprises have several important and distinct challenges to overcome to avoid the three-generation trap:

1. Family governance. Family squabbles are often the fodder for "soap operas" and for good reason. They happen, believe me. The challenges are even more accentuated in a family business, where family members work together every day and then spend the holidays and special events together as well. There are also family members who may be on the outside of the business and possibly feel left out because they may not have the "inside scoop" on what is going on in the business or among their relatives working there.

While families without a business are interesting case studies, a family business is even more fun. Navigating the boundaries between ure generations.

Tools such as family mission statements, capturing family history, family constitutions and working with those skilled in fbusiness and the family is a critical element to provide a path for success for futamily dynamics can shine a bright light on the reasons for the family to exist and strategies on how future generations can thrive.

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2. Wealth transfer. Most financial advisors have some experience in regard to estate planning that will be helpful. It is important to recognize that due to the aforementioned family dynamics issues, the straightforward wills-and-trusts discussion may fall on deaf ears.

Key contacts in the legal and accounting profession who specialize in family businesses will be vital and their input on techniques and strategies that can assist the transfer of wealth to the ensuing generations will likely take many forms that differ from a traditional estate plan or buy-sell agreement.

3. Business consultants. Other key team members will include business consultants who can assist with identifying key strengths and weaknesses within a family business. They'll address questions such as:

  • Who is the best person to be the key executive of the business?
  • Is it a family member? If so, then which one?
  • If not a family member, then what role will the family members play?
  • Is the company strategically positioned to survive and thrive for future generations? If not, then what strategies should be employed to maximize the value for the family?
"Financial advisors with the proper temperament and skills to put together a team of professionals can uniquely position themselves as a key resource to handle a family business."

Working with family businesses offers challenging and specialized work for financial advisors. To work successfully, a team of contacts who are trained and experienced in family dynamics and how they impact family businesses are vital.

Consultants who can work through any family and business issues and work together as a team to assist the family to thrive are a critical element.

No one person or firm can actually have all the answers. Therefore, financial advisors who possess the proper temperament and skills to put together a team of professionals can uniquely position themselves as a key resource to handle a family business.

—By Robert Klosterman, special to CNBC.com. Klosterman, a certified financial planner, is CEO and chief investment officer of White Oaks Wealth Advisors, ranked by CNBC as a top-rated fee-only financial advisory firm.