Best's Review


Family Planning

Family-owned businesses hold a gold mine of opportunities for financial advisers.
  • Sally Whitney
  • October 2005
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Family businesses should be of interest to today's financial adviser. An estimated 12 million Americans report that their principal occupation is owning or operating a small business. According to the Family Firm Institute, family firms comprise 80% to 90% of all North American businesses.

Successful family firms are driving the creation of wealth. The Phoenix Cos., along with Harris Interactive, recently completed its annual Phoenix Wealth Survey of high-net-worth individuals. Online interviews were conducted with 1,514 U.S. adults, aged 18 years and over, who are financial decision-makers for households with a net worth of $1 million or more, minus any debt and excluding primary residence. Responses affirmed that 30% of the affluent are business owners or partners in a business. Projected against estimates of the total number of high-net-worth households, that translates into a market of 2.5 million. And, of those business owners that responded to the survey, more than half—57%—reported they are involved in a family-owned business

Although this segment is growing, it's also evident that family businesses, even profitable ones, don't always succeed. A sobering statistic from the Family Firm Institute reports more than 70% of family-owned businesses don't survive to the next generation, due to lack of planning. Inadequate estate planning and failure to properly prepare and provide for the transition to the next generation, coupled with lack of funds to pay estate taxes, were among the leading causes of business failure. In nearly half the failed cases, the transition and the ultimate collapse of the firm were precipitated by the founder's death.

Much of that failure rate could possibly be attributed to the relationship, or lack thereof, between family business owners and their financial adviser. While they may be open to advice about financial planning, owners of a family business are so likely consumed by the workload of day-to-day operations that they haven't had time to carefully plan for the business after they no longer own it. Of the affluent family business owners who responded, the Phoenix survey reported:

-- 68% do not have a business succession plan;

-- 55% do not have a business transfer or continuation plan; and

-- 70% have never had their business professionally valued.

The fact that such a large number of affluent family business owners have never had their business professionally valued tells us they don't know how much they're worth, let alone how to pass the company on to their children or trusted business partners.

Closer Look

Finding successful family business owners can be a challenge—they often are an elusive group, and again, don't necessarily seek out financial advice. Looking at the typical multigenerational family business, it's possible the affluent founder isn't going to advertise his or her status. Realistically, contact with wealthy business owners is likely to come from referrals from their network of trusted advisers, including certified public accountants and attorneys.

Since successful family business owners may not advertise their needs for financial advice, it's a good idea for advisers to have a clear idea of who they are and how their businesses are structured.

Demographically, family businesses have distinct characteristics (see "Demographics").


Once contact has been made, it can be challenging to prompt affluent family business owners to address the universal truth: Sooner or later, even without an estate tax, someone else is going to own the business. For the most part, owners are so focused on day-to-day operations, they haven't determined how the business will run after they retire, become disabled or die.

Clearly, advisers first need to look for ways to shift the business owner's attention from the present to the future. To be successful, it's helpful at the onset for advisers to gain a better perspective of the business's financial outlook.

From a personal financial-planning point of view, family business owners are indistinguishable from other business owners in terms of their needs, concerns, attitudes, behaviors, products owned and future purchase intentions.

However, the Phoenix Survey reports family business owners are more likely than other business owners to say they don't invest the time they need in order to properly manage their finances—47% compared with 35%. While all businesses are time-deprived, this might be even more the case with family business owners.

The survey also discovered family business owners are less likely to express concerns about their retirement security (see "Retirement Security").

These results suggest that family business owners consider their business their primary source of retirement security.

Another place the survey found significant differences is in business planning. In general, the survey found family businesses have fewer plans in place, and therefore offer more opportunities for advisers (see "Advisers").

Business owners typically purchase individual life insurance to retain key employees and reimburse the company for the loss of an employee. Succession plans overwhelmingly involve family members, the survey reports, as 76% plan to have the business passed on to another family member, while only 21% expect it to be owned by a key employee. And only 8% of family business owners think their succession plan will entail liquidation of the business. Again—there's an expectation the business will continue, while somewhat paradoxically, that it will also offer the main source of retirement income for the owner.

Family business owners who have continuation plans are more likely to have them arranged through wills—37%, compared with 9% for nonfamily businesses—and trusts—24%, compared with 18%—as opposed to buy-sell agreements—18%, compared with 44%.

From these data, it's clear that family businesses are underserved when it comes to their various planning needs. The components of their plans, when put in place, will likely vary from those of nonfamily business owners, due to the unique characteristics of family businesses. However, perhaps this is an opportunity to design more traditional plans and apply them to the family business.

Protecting the Family

An intake analysis, or "discovery" process, should be an adviser's first step. Some of the questions to be asked include:

-- What motivated the owner to start or acquire the business?

-- What exactly does the business do?

-- Who are the customers? Competitors?

-- What are the primary concerns of the business?

-- What are the obstacles to greater success?

The adviser should explore decisions the family business owner wants to make in each crucial scenario of retirement, disability and death. Will he or she keep the business or sell it? Who are the logical people to take over? For many family business owners, the business represents a lifetime of hard work. Family and friends may be inextricably tied to the enterprise. Failing to plan ahead increases the risk of business failure, and backlash by cherished family members.

Once the intake and discovery are complete, it's time to move into planning mode. For every decision the family business owner makes, the adviser should craft a strategic plan to address a key priority. For example, if the business is to remain in the family, succession planning requires knowledge of key-person insurance, as well as irrevocable trusts and survivorship life insurance. If the family business is to be used solely for the owner's retirement, the owner will need to consider buy-sell agreements and permanent life insurance. If the business is to be transferred, business transfer strategies have additional tactics.

Each plan should then work to mitigate income and estate taxes, as well as create liquidity, if needed. It's often surprising to family business owners how much planning they need to undertake to create control and reduce risk for their businesses. For example, the Internal Revenue Service can become a devastating creditor at a very inopportune moment—when a business owner dies. It's also quite likely that the basics of wills and trusts will need to be covered, as well as the more sophisticated concepts of deferred compensation, key-person coverage and cross-purchase plans. Before implementing any plans, however, owners should consult their tax and legal advisers for information specific to their situation.

The wealthy family business owner market niche is growing and offers an opportunity to expand business. Having an understanding of what the niche requires, and the needs family owners bring to the table, can be a tremendous asset. For the owners, this may be the first time they have been offered the chance to think about the future of their business. For an adviser, this is a unique opportunity to offer strategies that ensure the owners' years of hard work pay off to the next generation and beyond.

(Contributor Walter Zultowski is senior vice president, Business and Market Development, for The Phoenix Cos.)

by Walter Zultowski

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