From the August 2012 issue of Investment Advisor • Subscribe!

July 24, 2012

Transitioning the Family Business for Retirement

Because these transitions are complex, involving many different experts, financial planners need to know when to take the lead

Illustration by Ellen Weinstein Illustration by Ellen Weinstein

One of the most important roles for any financial planner is helping clients meet their individual goals. In most cases, this includes sustaining their lifestyle once they cease working. Though retirement is an evolving concept, most look forward to a time when they no longer have to work, and the very essence of financial planning is preparing for that day. Though financial planning includes investments, taxes, estate planning, insurance and philanthropy, it often boils down to how to build and protect assets so clients and their heirs can enjoy the fruits of a lifetime’s work.

For financial planners who work with family business owners, all of these issues are present. However, they are often more challenging to address because the client’s personal financial issues are intertwined with running the business. Because family business transitions are complex, involving many different experts (lawyers, accountants and M&A specialists, to name a few), financial planners need to know when to take the lead.

The key is understanding the unique nature of family business transition planning. Succession planning itself includes several different elements, including setting goals for the transition process; creating a plan; determining whether the business will be passed to the next generation or sold outside the family; establishing a plan for life after the transition; and creating lifestyle balance for the retired owner. Financial planners play an important role in most of these elements.

During the goal-setting stage, much of the focus is on asset preservation, taking care of the extended family, and creating financial independence for the owner. The process doesn’t revolve solely around the owner, though—the family is just as important. What are the owners’ core values and goals, and how can they be prioritized? When the family’s values differ from the owner’s, how can they be reconciled? Establishing core values and goals is the essential first step to creating a financial plan. The answers to these questions will inform the rest of the process, and it’s important that the family be part of this discussion.

Next comes planning for the transition. Much of this revolves around business versus personal issues, such as determining the strengths and weaknesses of the company, future management, and employee and vendor relations. However, there is one key element of the planning stage that falls into the realm of financial planning: creating a personal financial plan for the departing owner that addresses how his or her goals will be met.

A personal financial plan is the owner’s strategic retirement plan. Every plan should identify and prioritize personal goals, appraise the owner’s definition and tolerance for risk, offer an appropriate investment strategy, and prepare the owner for retiring into a balanced and productive lifestyle. This is an area in which financial planners must take the lead.

Intergenerational estate planning is part of the process, particularly when there is more wealth than the owner will need. Most estate planning occasioned by a business transition revolves around tax minimization and transfer options. Where significant wealth is present, planning should be multi-generational and consider the estate tax, asset protection and gifting requirements of future generations as well. Specific strategies are determined by the family’s goals, demographics, existing tax law, timing of the transition and how early in the process planning has started.

Finally, where charitable intent is present, charitable planning prior to the transition can often achieve important tax benefits, in addition to furthering the family’s philanthropic goals.

The final two stages of transition planning are related: planning for life after transition and achieving lifestyle balance. Few advisors wish to tread here, leaving an opportunity for financial planners to help.

After the transition, the focus will switch from creating wealth to protecting it. Financial planners identify the owner’s tolerance for risk and create a plan for preserving the wealth the owner has created. This includes minimizing the amount of wealth lost to taxes. Finally, financial planners help create a wealth transfer plan to meet the owner’s goals for his heirs.

Ultimately, the financial planner’s skills help create a plan that addresses the owner’s financial security and the needs of future generations. In a complex situation in which a variety of professionals with different areas of expertise must work together, it’s important for financial planners to understand where they can provide the most value and be willing to exert their influence when necessary to promote the interests of the transitioning business owner.

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