Are you or a family member a business owner? If so, think about the beginning. Perhaps these are recent memories? Or was your business started by a family member whose legacy you are carrying into the future? No matter when your business was born, it is often started because of someone’s great idea or passion. Owning a business can be exciting and exhausting all at the same time. As an owner your attention is often drawn in many directions. Sales, customer service, growth, employee matters, administration and competition are just some of the demands you face regularly. But how often do you stop to think about what happens after you no longer wish to be involved in the business? Who will take over? What happens if “something happens” to you? If you wish to place your business in the hands of the next generation, how will you extract the value you’ve created to fund your retirement or next venture?

Succession Planning can be complex and specialized to each individual situation. It involves areas of financial planning which include funding the transition and tax strategies, liquidity reinvestment plans, whether for retirement or funding another venture, and estate planning. Because the demands of running your business are constant and of course a high priority, succession and by extension, contingency planning often takes a back seat to more immediate concerns. At First Merchants Private Wealth Advisors, we can help ease the overwhelming feeling planning for your future can create. In this article you will read about what you can be doing now to prepare for the future and how our team can provide valuable experience- based guidance to help you avoid unintended consequences.

First, here are some statistics to stage the importance of succession planning. Did you know 90% of all US family businesses are run by family and many of these business owners want and often expect their children to take over the business? But only one third of these businesses survive until the second generation! Even fewer end up in the hands of the third generation, just 10-15%, and a mere 3% move to the fourth generation.

Why is this the case? What is causing this phenomenon? Some research points to a disconnect between the parents/owners of the family business and what their children envision. Each generation comes with their own set of values. It is important to understand where each is coming from and their priorities when crafting a succession plan. The demands of running a business may conflict with the next generation’s values, where as an example, work/life balance may be a higher priority. Understanding differences in generational values and priorities along with early and straightforward discussions go a long way to ensure disconnects are uncovered and addressed.

Another reason which often surfaces is that starting and building a business is the exciting part! As stated earlier, a new business is often borne from a great idea or a person’s passion. Once past the early stages, the next generation may not share the same level of enthusiasm. After all, starting and growing your own business is different than taking responsibility for one that is already in operation and started from someone else’s idea or passion. It’s not to say one phase is better than another but rather, needs and demands change as the business matures.

Sometimes differences can be surmountable, for example views on hiring or business investment. Others are crucially significant, such as a general lack of interest in taking on the business. In all cases, clear and direct communication is imperative. Each family member involved or expected to be involved should openly share their priorities and all should be clear on how it will impact the prosperity and continuity of the business. Equally important is sharing expectations and taking the time to formalize plans and agreements to avoid unintended consequences, particularly when the unexpected happens.

Over the years, our team at First Merchants Private Wealth Advisors has witnessed examples of how generational priorities combined with a lack of planning can adversely affect families and their businesses. Let’s examine one such example. There was a client whose family owned a rather large and successful business. The patriarch passed away suddenly and was survived by his two biological children who were in management positions within the business, along with his wife, the children’s stepmother. Over the years, the owner and family patriarch lent large sums of money to the business. These loans were never documented, just understood, or thought to be understood between the parties. After he passed away, the stepmother believed the loan payments were due and owed to her. The children disagreed. The relationship between the children and stepmother became strained and since the loan was never formalized, each believed their view to be correct. Without going into further detail, situations such as this one can fracture familial relationships and lead to legal battles, potentially causing harm to the business as well. A simple loan document, formalizing the arrangement could have easily solved their issues.

In another situation, a client who was part of a third-generation family business decided to retire and wished to redeem his shares in the business. While there was a succession plan in place, the lack of a formal valuation and liquidity plan created issues. Lack of liquidity can pose a threat to the execution of a succession plan. Understanding and preparing for how transitions take place are just as important.

Lastly as an owner, most of your financial resources are likely invested in a single asset – your business. As you transition, it is important that your succession plan consider tax implications to you and your business, your future income and liquidity needs along with estate planning. A successful succession plan prioritizes these areas along with the other aspects of your plan. In short, succession planning involves planning beyond the transfer of ownership. Income replacement, wealth preservation, wealth transfer and tax mitigation move to center stage following your transition.

When considering who to involve in building your succession plan, we urge you to surround yourself with a team of experts. Your team should work collaboratively and include your accountant, attorney, key employees, business valuation professionals and experts from our First Merchants Private Wealth Advisors team along with our team of First Merchants bankers. Each offers expertise in areas which relate but are not duplicated by the others, all of which are crucial to ensuring your succession plan produces the outcome you and your family desire!

Audrey Mistor & Anna Little

First Merchants Private Wealth Advisors products are not FDIC insured, are not deposits of First Merchants Bank, are not guaranteed by any federal government agency, and may lose value. Investments are not guaranteed by First Merchants Bank and are not insured by any government agency. This material has been prepared solely for informational purposes. First Merchants shall not be liable for any errors or delays in the data or information, or for any actions taken in reliance thereon. Any views or opinions in this message are solely those of the author and do not necessarily represent those of the organization.