Financial advisors should be aware of the socioemotional wealth (SEW) concept. The SEW concept proposes that for a family business there are things they value more than money. What a difference than with a non-family firm! They take great pride in providing employment, they value their social standing in the community, and often donate to local philanthropic organizations. Family members feel a sense of loyalty to the local community that helped build their wealth. They believe they have a responsibility as a steward of the business.
For example, it would not be surprising for a family to immediately turn down an overly generous buyout offer, especially if the business would be folded into the acquirer. This would flunk the legacy, mission and values test that is a priority to the family members.
What Family Businesses Need From Financial Advisors
• Over 90% of a family’s wealth is tied up in the business. They need diversification. If the owner needs income from the business in order to retire, this places a large financial burden on the successive generation. The financial advisor can help diversify and build wealth away from the business thus helping the business increase its chances for a successful intergenerational succession and business survival.
• Family business owners do not like thinking of retirement or “being put out to pasture.” The business is their baby. Their spouses often refer to it as the “other woman.” Understand the emotional weight this carries. They need succession and estate planning. They need buy-sell agreements using life insurance to protect key individuals.
• In the first generation, as many as 85% of financial decisions are made by a single powerful decision maker. This can make the business unprepared in the face of an illness or tragedy. They need a succession plan. More family businesses will fail upon the sudden illness or death of the leader, than due to market conditions or competition.
• They need professional advice. Understand their concerns. Discuss more than money. Help them follow their mission and values. They face a shortage of professional and unbiased advice.
• Presently, the most trusted advisors are the company CPA and their own spouse. It is changing, but in the past most CPA’s did not sell financial products and services. They provided unbiased advice and thus earned a high amount of trust. Be aware you may need to gain the trust of the CPA as well. CPA’s are a huge source of referrals to family business owners.
What Financial Advisors Need To Do When Calling On A Family Business Owner
• The advisor should first conduct an organizational history to obtain the age of the business, the number of family members and their roles, and identify the generation of family leadership. The mission statement should be discussed. Governance mechanisms should be uncovered, for example, is there a family council that makes decisions? Is there a board? Is there a formal process for making decisions?