A thorny issue: personal financial security

Nation's Business, Feb, 1994 by John L. Ward, Craig E. Aronoff

The most common complaint we hear from next-generation family leaders whose parents retain managerial control of the family business is: "The boss won't listen to me, won't let me implement my ideas, and won't invest in the things we need to be successful in the future."

These heirs apparent often perceive their parents' behavior very personally, often seeing it as a lack of respect, confidence, trust, or even love.

We got a clue to what was really going on under the surface when we saw a father and son arguing about an investment advocated by the son and resisted by the father.

"Dad, you understood risk when you were my age," said the son. 'Wou made this kind of investment!"

"Right!" his father responded. "I took risks when I was your age. But I did it with my money. And now you want to do it with my money!"

Generational progress can be stopped in its tracks by issues related to personal financial freedom and security.

Moreover, lack of personal financial freedom often leads to personal decisions that compromise the business and the family--like a founder's refusal to transfer managerial control or stock ownership to the next generation even when it clearly would be a good idea to do so.

We hear a similar message stated in other ways in family businesses. "Don't you dare risk my inheritance," says an outside family stockholder to his cousin, a third-generation chief executive. Another successor puzzles, "If I felt more financially secure, I wouldn't worry about whether or not I'm selling my soul."

All these expressions make the same point: If key owners don't feel they have personal financial freedom, family friction and business compromise are inevitable. The first time financial freedom becomes a priority for a family business is when the rounding generation approaches retirement age. It's hard enough for founders to let go of the business they birthed, but it's even harder if they feel their exit makes them dependent on their kids for their security and their standard of living. Parents rarely turn over full control of the business to successors without feeling personally financially secure.

Thus, a key step in succession planning is to fund the parents' financial security. There are several possible approaches:

* The company can fund an annuity over a long period of time.

* The children can actually purchase some of the parents' stock, even if the parents are willing to leave it in their wills.

* The company can aggressively provide bonuses to the parents until their "nest egg" is financed.

In each case, it's essential for the parents to specify the level of liquid assets and income that would let them comfortably and willingly leave the business.

Just as it is unhealthy for the senior generation to live off the business, successors who could not leave the business without destroying their lifestyles also create an unhealthy situation. Successors in this situation often feel they are compromised and have little dignity. On the other hand, we find that if successors have some personal financial independence, they are more forceful and effective leaders of the business.

Young successors have typically not yet accumulated assets sufficient to give them a sense of financial independence. Young people's greatest asset is their knowledge and ability, so they should seek independence by achieving the highest possible degree of personal competence.

At least one-fourth of all family businesses reach the stage when many family members own stock even though they don't work for the company itself. Nothing is more embarrassing and disruptive to a family business than family members who feel no power in day-to-day business operations and who feel stuck in their stock-ownership position. Before this situation develops, we urge family businesses to develop a plan and a formula for stock redemption.