Brown Harriman Brothers recently Survey of Private Business Owners it has created quite a stir in our circles. One statistic that stood out to me was that 91% of business owners want their companies to stay family-owned, but three in four (74%) admitted that the roles of the next generation are either “poorly defined” or “not have been fully communicated.” Survey respondents owned businesses worth at least $10 million, yet three in 10 (29%) said they were “struggling to choose a successor” and nearly half (45%) said the main reason they would not consider sell some or all of their business soon is that they “identify with their business” too much to give up.

Questions to consider

When I read it, I thought, “What are you waiting for, owners? Why haven't you started having those conversations with your kids?” I wish the authors of the survey would analyze this situation further. For example, how do owners plan to transition the business to NextGen if they have three or four children, but only one can run the business? How will they plan for uneven inheritance? Where does the liquidity in the estate come from to pay estate taxes? Hint: It won't happen by accident.

Also, if the owners want the business to stay in the family, where does the money come from to provide mom and dad (the founder) with a comfortable retirement? Do children want to stay in the business? Too often, founders assume they do and are in for a rude surprise when they hand over the reins. The stress and disruption of the succession plan could have been avoided by having those conversations well in advance.

We talk so much about businesses that have stayed in the family for generations. But we don't hear much about the actual mechanics of how business parents transfer or “sell” the business to NextGen. How tax efficient is the sale if the children don't have the money to “buy” the business from their parents? Suppose the owner dies with the business and leaves the shares to their children — but there is no liquidity in the estate. Where does the money come from to pay the tax if it is a taxable asset? And what about the only child who didn't want to go into business? These would have been good questions to ask your survey respondents – and for you to ask your business owner customers.

Or, what if none of the founder's children are interested (or capable) of running the businesses, but one of the children is married to a business-savvy spouse who is ready and willing to take over the reins ? How do you balance the family dynamic if the parents give the business to the smart son-in-law but leave the shares in the children's names? What is the real difference between ownership and control?

So what if your client has three children and wants to ensure that they each benefit from the business even though only one is responsible enough to handle the business and the wealth it generates? Therefore, the only responsible child will support her brother and sister who do not work? How much unhappiness will this cause in the family? How do you handle the all-too-frequent situations in which the non-working children want their dividends, but the responsible child still wants to grow the business? Where do you draw the line?

Or what about the opposite situation, in which the owner gives full control to the same child who is in the business and never pays the other children a dividend? Your client wanted each child to inherit equally from the estate, but they are now prevented shareholders. They have no rights. They don't get money. They own worthless shares. Or do you assume they own stocks but can't realize any value from them? These are scenarios our customers face all the time.

According to the survey, nearly half of family business owners (46%) were willing to give up control and partial or full ownership to maintain family dividend payments. Further, a third (35%) were willing to sacrifice growth. While the survey authors did not address this, I have found that it is often because owners need the income more than anything else. They are used to the business paying for their lifestyle and have no other resources.

These are the kinds of questions you and your client should think about before making the transition.

Difficult conversations

I know what you're thinking. Your client started a business from scratch and built it over 30 years. Now, it's worth $10 million, and they want to transfer ownership to their children. Shouldn't they keep some of the capital before passing it on to the children? It depends on how you and your client structure the transfer. You can give it as a gift. You can do it through a sale. There are charitable transactions you can do if the business is a C corporation. You can transfer half or three-quarters of the business while your client is still alive. They can sell it outright. They can finance it. But you need to start thinking about different scenarios and what's best for your client and their family before it's time to walk away. Yes, they can be difficult conversations.

The researchers also found that almost all owners surveyed were reluctant to communicate their plans to family members. The top two barriers were concerns about whether their plan was right (66%) and emotional discomfort with discussing wealth with family members (55%). It sounds reasonable, but how do owners expect to have a successful outcome if they aren't talking about anything meaningful with their children?

Fears about NextGen

Another important point raised by the authors of the survey was the fear of the owners that their grown children would be taken advantage of because of their wealth. According to the survey, I think the fear is shared by much more than 38% of owners. In my experience, it's just another way of saying that the owners don't trust their children to handle the responsibilities of a family business and the wealth that comes with it. However, in putting in place the right succession plan, those in charge will not benefit if they are experienced and think business. That said, I agree with the researchers that it can be helpful to communicate with NextGen and set boundaries for responding to requests from contacts or nonprofits for financial assistance.

Finally, the researchers found that a third (36%) of private business owners did not think that some children shared the same values ​​as the company's mission. The company's mission must be clearly communicated to the offspring, and yes, children often have different values ​​than their parents. The trick is to respect all the values ​​and find a way to successfully integrate them into the business.

Randy A. Fox, CFP, AEP  IS THE founder of Two Hawks Family Office Services. He is a wealth strategist, philanthropic estate planner, educator and nationally known speaker.