Succession planning specialists say that only about one out of three family businesses successfully transfer from the first generation to the second. Although family business transfers have not been commonplace among independent financial advisors, this appears to be shifting. Boomer advisors see their children as an appealing
alternative to grooming an unknown or selling to a consolidator. Even though financial advisors by nature are intuitive, generally good communicators, and have witnessed their own clients’ anguish over transitions, many suffer from the same affliction when it comes to their own plan: How to transfer the business without destroying the family?
Parents couch their concerns in terms of fairness, work ethic, the need for experience, and getting a fair price for the practice. Children cite issues of having the right business model, authority to make decisions, and affordability of the purchase. Very often, they are talking past each other.
I recently had a conversation with an advisor who joined his father’s practice several “bumpy” years ago. Initially, he described his concerns as a conflict with his dad about how to transform the practice to be more substantial and relevant to current circumstances. But the real issue was: “As the son, I am currently facing a crossroads of staying with the business or going on my own. If I stay, there are questions as to what I should be entitled to in terms of compensation, responsibility, and future ownership opportunities. If I stay with my dad,” he continued, “What should be my role? How should that be structured? What is fair compensation? What percentage of revenue should I be entitled to as a non-owner, non-profit-sharing employee? Should I be entitled to ownership? To whom do I report?” That last point seemed to give him the greatest heartburn since he obviously had been reporting to his dad his entire life.
He conceded that the option of leaving and starting his own RIA did not excite him. So the true crossroads wasn’t between staying with the business or making a go of it on his own. The real issue facing both his father and him was between continuing their patterns of dysfunction or learning a new way to resolve their differences. When pushed, it appeared that son and father were on different pages because they had no framework for discussing their differences and negotiating an agreement.
The key for them is to try to make decisions about the business–including compensation, ownership, and responsibilities– in a strategic context. What business are they in and why? Where do they want the business to be five years from now? What will they need to invest in as a business to fulfill that vision? If you have a clear goal for the enterprise and a plan to achieve it, then you can evaluate whether certain actions will move you closer to your vision or detract from it. This helps to neutralize issues related to ego, control, and money by putting issues into the context of what you are mutually trying to accomplish.
A good place to start resolving conflicts is to have each party define their own definition of success. They should consider personal fulfillment, business fulfillment, money, time, responsibility, the nature of the people they work with, family relationships, personal ambition, and career goals. Parent and offspring need to know their own answer and it’s equally important to convey that answer to each other.
When he was honest with himself on the answers, the son’s choice to remain in his father’s business or go out on his own became much clearer. Unfortunately, conflicts arise between many parents and children in business–and sometimes in their personal lives–because both are reluctant to convey what’s important to them.
If I were a young advisor, I’d want to have a frank discussion with my father over what I hope to accomplish in the business, what I’d want out of the business relationship, and how I expect to be recognized emotionally and financially. If I were the father, I’d approach the same issues from my perspective. I’d want to talk about how to structure the transfer of ownership, (e.g., gift, partial sale, discounted sale).