3. Is the heir well-suited for the job? Above all, a parent must ask whether the child has both the passion and the aptitude for running and building the business. Is the child taking over merely out of a sense of obligation? Or is the business going to an individual truly well equipped for the profession and excited about their career? If not, it may be in everyone’s best interests—as hard as it may be to admit—to sell the business to an outsider and enable the heirs to inherit its monetary value instead. Building and running a business while also serving as a financial advisor is a difficult job that takes unique talents. Finding someone who can do both is a herculean task. Be open and honest with yourself in the assessment of your heirs and their strengths; maybe they are better served as a lead advisor with an ownership stake in the business, but not leading the organization; maybe they are better served as the owner (visionary/rainmaker) and not the advisor. This analysis and honest reflection should occur before any plan of transition is developed.
Often, it is wise for a prospective heir to spend several years outside the firm, preferably elsewhere in the financial services industry, before coming to work at the family business. This will enable them to test their skills and bring new and alternative ideas into the firm.
Indeed, founding advisors should not be afraid to enlist their existing clients’ help as a type of “review board” for their prospective successors. No matter how confident a parent may be in his or her child’s business acumen and skill as an advisor, if the practice’s existing clients see shortcomings in the successor’s abilities or approach, this may constitute a serious red flag that should not be ignored.
4. Is the transaction properly structured? Importantly, the transfer of control should be viewed as a transaction, not as an inheritance or a gift. As such, it should be structured with an objective valuation and at arm’s-length remove. Once that is established, however, there are many creative ways the transfer can be structured. Rarely are family-owned businesses bought out at once, but rather are structured over time. This allows the parent to continue working and gradually decrease his hourly commitment while steadily monetizing the value of his interest to fund his retirement, without placing too great a financial burden on the successor. Enlisting the input of your broker-dealer or an expert in advisor succession planning is invaluable.
5. What about the siblings? Finally, the interests of those family members who are not taking over the business must also be considered. In general, not all children will choose to enter the family firm, but they all have a stake. Moreover, a ceding advisor should bear in mind the dangers inherent in transferring the business to the child who is simply most in need of a job, rather than to the child who may have a successful career elsewhere and is therefore not interested in taking over.
This again argues for the value of an objective, arm’s-length transaction, in which monetary value can be fairly apportioned among family and heirs according to agreed-upon criteria. The last thing parents want is to create a situation that will sow dissension among their children after they are gone.
In today’s economy, where competitive, rewarding jobs can be hard to come by, a healthy family-owned business, which can offer not only sustenance for the current generation but potentially for additional generations to come, is a highly desirable possession.
There is a lot to consider to make an intergenerational transfer work well. But when done right, there is much to be gained.
Jeffrey Rosenthal is president and CEO of Triad Advisors, the hybrid advisor-focused independent broker-dealer.