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Advisors help small-biz owners keep it in the family

The statistics on the unhappy fates of family businesses are well known in the wealth-management world.

Only 30 percent of family businesses make a successful transition from the founders to the second generation, 13 percent make it to the third generation, and just 3 percent make it to the fourth.


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Those statistics don't reflect the fact that many families choose to sell their businesses and/or successfully enter new businesses and new markets, but they do highlight the very difficult path that families have in maintaining ownership of a business.

"Family businesses account for a big percentage of [gross domestic product], but they are inherently fragile and subject to fragmentation," said Douglas Box, founder of Box Family Advisors. "That's borne out by the data on the lack of successful successions. Even those lucky enough to make a transition will still have major challenges," he added.

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The thousands of family businesses run by baby boomers approaching retirement age have some big decisions to make. And with thin and increasingly volatile markets this summer suggesting that the time to sell is running out, those decisions are all the more crucial to a family's well-being.

"A lot of people regret not selling [their businesses] before the great recession of 2008," said certified financial planner Bob Klosterman, founder of White Oaks Wealth Advisors.

All families are unique, with their own dynamics and dysfunctions, and there is no ideal fix to optimize the management of a family business and protect the family's wealth. Business owners typically need the full array of professional services, from lawyers and certified public accountants to financial advisors, estate planners and family psychologists.

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However, it's not the tax strategies or the trust vehicles, the investment programs or the estate-planning tricks that matter most for owners and members of a family business; rather, it's the "soft" stuff, like communication, emotional honesty and a willingness to consider the perspectives of all family members.

"There can be multiple good choices for families owning businesses," said Judy Green, president of the Family Firm Institute, which conducts education for owners of family businesses. "It's about how families will agree to come to decisions. It's a process, and being willing to engage in the process is the biggest thing," she explained.

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While wealthy families aren't likely to get a lot of sympathy for their troubles, the truth is, businesses can often become a major source of conflict, uncertainty and general fear and loathing among family members. Rivalries and resentments, and unresolved issues between parents, children and siblings can and do destroy wealthy families.

The key to avoiding that, say advisors, is to give a full airing of the family's dirty laundry and to consider basic questions about the importance of the business to family members.

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"The odds are against high-net-worth business owners from the get-go," said Jim Brennan, a senior family wealth advisor for GenSpring Family Offices. "Families often address complex planning issues first instead of determining the wishes of the second and third generations. They need to do the family stuff first."

Here are three basic questions family business owners need to address before getting into details about how best to manage a transition in the business and preserve their wealth.

1. What's the purpose of the business?

It may be self-evident that a family business is intended to support and sustain its family members, but business owners need to address the basic issue of what the business means to the family.

"One of the biggest questions owners need to answer is why … they [are] in business," said Joan Ridley, a certified financial planner and president of Business Wealth Solutions. "Is the purpose of the business to keep family members employed, or is to grow family wealth?"

The answer to that question can and likely will differ depending on which family members are asked. It's crucial that the desires and expectations of all members of the family are understood, and in most cases it will require the help of an outside counselor or psychologist to get there.

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"It can get ugly," said certified financial planner Grant Rawdin, founder and CEO of Wescott Financial Advisory Group, which has an organizational psychologist on staff. "There can be a lot of hard feelings, and it's important for them to come out," he explained, adding, "Sometimes they can be petty grievances or childhood issues, and sometimes they can be smart and important to the business."

2. Do you have a ‘family constitution’?

Once a full airing of family issues is undertaken, the next step is to draft a "family constitution," or mission statement, that can serve as a blueprint for making important decisions.

"Everyone has opinions about how things should work," said Klosterman of White Oaks Wealth Advisors. "With a lot of people involved, it's very difficult without a process. It's crucial that families develop a unifying message about running the business and about their interaction with their community and each other," he added.

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GenSpring's Brennan starts the process with anonymous surveys of all family members to determine the values that are important to each of them. From there, he looks to build a structure for a business plan to fit those family values. "We try to make a compilation of shared family values and not focus on disparate values of family members," he said. "Consensus is the goal."

3. Succession or sale?

Once the answers to the first two questions are determined, business owners will be in a much better position to decide whether a business should remain in the family or be sold to outsiders.

Business founders may want their children to succeed them, but their children may not have the qualifications or desire to take over the business. In some cases, family conflicts may be so bitter that an internal transition may be impossible.

Box at Box Family Advisors suggests families go slow and make sure they consult all members about their views of the business and their aspirations. "The worst decisions are usually made when Dad and a lawyer cook something up without consulting anyone else," he said. "This is where families blow up."

"Families often don't realize they're held together by a business, and when they sell it, they fall apart." -Douglas Box, founder of Box Family Advisors

Box also said that selling a business is usually his last suggestion to clients. "Families often don't realize they're held together by a business, and when they sell it, they fall apart."

When Box's father, former professional football player Cloyce Box, died, he and his three brothers went through a bitter conflict that ended up in a forced sale of the oil business their father founded.

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"The family enterprise had kept us together; now we don't have as much to talk about," he said. "There's a bond that will never be there again because of what we went through."

—By Andrew Osterland, special to CNBC.com

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