The sale of a family business is supposed to be the culmination of years of hard work and innovation writes Alanson B Houghton.
Bitter as parting may be, the reward is sweet. But mixed emotions aside, disaster may be lurking unless families and their advisors have thought through and carefully planned the transition process.
Faced with a large amount of liquidity for the first time, family advisors without investment expertise can freeze while facing important decisions, such as asset allocation and diversification. Trusted advisors need to recognise that the sale of a business will likely bring added layers of complexity to the family finances.
Assuming that the investment process is something advisors can handle themselves opens the family up to huge risk factors and serious implications for future generations. Wisely managing or overseeing the proceeds of a sale requires the help of a professional or group of professionals. Family advisors are key in overseeing the transition, they just need to know when and where to start.
Managing the liquidity transition process should begin long before a transaction takes place, at about the same time as the family decides to consider a sale. At that time, advisors should meet with family members and begin discussing what the post-business family with liquid assets will look like and what role a current or newly created family office may play.
Families shouldn't lose sight of the values that drove the family business in the first place and apply them to the next phase of their collective financial future. The goal, whether it's to make a philanthropic mark, secure assets for future generations, invest in family education, continue their leadership role within the community, or accomplish some or all of those things, will require significant short- and long-term planning.
Families need to plan at least 10 years into the future and continually re-evaluate those plans to determine where they want to be and what they want to be doing then and beyond.
A crucial first step is defining who has responsibility versus who has authority between the family and its office. Clearly define the role of the owners as directors with the staff executing policy. Family members will need to take on various responsibilities – serious conversations need to be held to determine roles and responsibilities in addition to what compensation, if any, family members should receive. Who's best qualified within the family and externally to articulate the family philosophy, values and objectives?
The family business had infrastructure, employees and reporting lines. Too often families don't realise that managing an investment process requires a different but equally important system of decision-making, reporting, strategic planning and governance. It's the role of the advisor to recognise that the skills and talents that got the family to this point will always be useful, and to help channel and nurture those talents.
Choosing outside personnel to execute the process is critical – they should be selected as carefully as any executive the family business was hiring would have been. It's okay to retain a loyal employee, but families need to recognise that after a sale of their business, the trusted family employee should play one role within a cast of many. Just the act of selecting and working with the right executive search firm, one that really knows where to find the right family office talent, can be tricky and can take considerable time and effort to be done property.
Possibly the most critical topic to address is governance and oversight. Families need to create a framework for decision-making and monitoring or make changes to an existing system to reflect their new situation post-sale. A regular venue for open and honest discussions should be established and facilitators should be brought in, if necessary, to help guide this important process.
The transition can be stressful, but working with families to plan a collective future can be enriching and fun. Help keep appropriate boundaries between family and business and remember the various hats – beneficiary, trustee, director, manager, sibling/parent/cousin – family members may wear when everyone sits down together.
Undertake the process deliberately and realistically and recognise that it will be challenging. But anyone who's been able to navigate the operation and sale of a family business should be able to manage the journey to liquidity in a harmonious and prosperous way.