By Andy Douglas | managing director, private client advisor at U.S. Trust, Bank of America Private Wealth Management
The Greenville area includes some of the nation’s success stories. While household growth over the next five years is expected to be 5 percent, the number of millionaire households here is projected to increase at nearly five times that rate, 24 percent. However, a new U.S. Trust survey of wealthy Americans finds that poor planning – or even a lack of planning – by many of these affluent families is putting their wealth and income at risk.
One stereotype of wealth is that it’s inherited, but the opposite is usually true. Many of those who participated in the 2014 Insights on Wealth and Worth study are self-made business owners or senior corporate executives, including those with an entrepreneurial bent who are building the new companies seen in Greenville. They are deeply committed to their families, to their employees and to their communities.
While they sacrifice for their families and their communities, business owners often end up compromising in other areas. Many are not adequately planning for their own future or that of their business.
Business succession is a major challenge for the owners of many companies. More than three-quarters of those surveyed are the first generation to own their business, and two-thirds of them actually founded their companies. Most lack experience with transitioning a business from one generation to the next.
When it’s time to transition the business, it’s often not as simple as handing over the reins, because only about one in 10 owners expect their children or heirs to run the business.
However, if the children aren’t going to take over the business, then what? Selling the business or hiring professional managers to run it while the family maintains ownership requires a great deal of advance preparation.
Managing family wealth requires many of the same skills as running a business, yet one-quarter of business owners said they are better at managing effective communication and risk at work than in their personal lives.
The impact of this on planning can be seen in the fact that of those business owners who said they have a comprehensive estate plan in place, six in 10 named a family member as executor of their estate; only eight percent have named an attorney and only two percent have named a financial advisor.
It’s understandable that owners want people they trust on the basis of family ties to handle these matters. But the reality is that transitioning or selling a business requires skills and expertise that many people lack. Entrusting family members with responsibilities they may not be up to handling may be more of a burden than a blessing.
Here are five things business owners should consider to help ensure their heirs benefit from the businesses they have built:
Be realistic
Some business owners, hard-eyed realists in other ways, remain doggedly optimistic about the value of their businesses or the likelihood of their children taking over. Denial, as they say, isn’t just a river in Egypt.
Set clear goals
Ambiguity about an owner’s intentions isn’t just bad for family relations – it’s bad for business, too. Customers, suppliers and other stakeholders want certainty about a company’s long-term prospects, especially as the owner grows older.
Adopt and implement a business succession plan
A plan that reflects the owner’s business goals and personal objectives will help to ensure a smooth transition that maximizes the value heirs will receive.
Consult with family members and trusted advisors
Business owners need to take the time to discuss their intentions with their families and with those they trust outside the families, such as key employees, their attorney or their accountant, to ensure that both business succession and life planning are addressed.
Have the basics of estate planning in place
A will, comprehensive estate plan, durable financial power of attorney and other tools of estate planning should be in place before they’re needed.
Succession and estate planning for business owners is an important aspect not only of personal financial planning but of business planning as well, positioning a company for long-term success that will continue after the owner leaves active management. Implemented properly, it allows the owner’s heirs to realize the fruits of their family’s hard work while avoiding disputes or failing to realize the full value of the business. If you’re a business owner, it’s never too early to start this planning.
