Wealth: The 7 deadly sins

By Beth Braverman

Avoid these mistakes

When it comes to running a family business over the long term, there are myriad ways that things can go wrong, such as product failures and external economic shocks. But often the reasons that a family succumbs to the “shirtsleeves to shirtsleeves” curse come down to basic financial mistakes.

Here’s a look at some of the more common money mistakes that family businesses make — and guidance on how to avoid them.

Mistake #1: Taking an ad hoc approach to dividend decisions.

Dividend payouts should reflect the performance of the business and its current and future need for cash, rather than the needs of family member or shareholders.

Protect your business: Having a predetermined policy around dividends can make it easier for both shareholders and the business to plan for the future.

“Over the long-term, you should be setting dividends based on how fast you expect to grow, and how your business is expected to perform, while keeping some kind of cushion in the business,” says Joseph Astrachan, founder and chair of family business consultancy Generation6. “Families often don’t do that, and they distribute dividends based on family needs.”


Mistake #2: Failing to prioritize estate and succession planning early.

For family businesses, estate and succession planning tend to intertwine, and they’re among the most important tools for ensuring that a business — and the wealth it generates — get passed on to the next generation as efficiently as possible. However, many business owners fail to recognize how long it takes to put a succession plan in place and get started on the process too late.

Protect your business: If you haven’t already begun working on your estate and succession plans, start now. Make sure to involve a tax professional to help navigate an increasingly complex and ever-changing tax landscape. Your team can help you determine the best structure for the transition, for both your business and your estate, whether that’s using a trust or transferring ownership to the next generation or to other employees.

“There’s no right or wrong answer, but you as the current owner need to make a decision about how you’re going to transfer ownership and then communicate that decision to the next generation, so they’re able to work with what they have,” says German Herrera, who works in Egon Zehnder’s family business practice.


Mistake #3: Not focusing on next-gen financial literacy.

Family members who will become the future shareholders (and potential employees) of a family business need education not only in the family business itself, but also on their responsibilities as heirs and shareholders

“They don’t need to be trained and expected to become employees, because that’s a choice, but they need to be trained and developed to be a family owner,” Herrera says.

Too often, family businesses expect younger generations to make smart decisions as they come into their wealth, but do not give them the tools to do so.

“They’re not going to be people who grow up and get a job with a W-2, so they need financial literacy skills,” Herrera says. “They’re going to inherit wealth, and perhaps an operating company or investment company, so they need to be able to make financial decisions. Everyone needs to have at least a minimum financial literacy to do that.”

Protect your business: Start teaching children the basics of financial literacy — including how it relates to their future involvement in the family business — as early as possible. Having financially fluent family members who are committed to the family business can help minimize the first three problems on this list, Astrachan says.

“When you have a really aligned family that’s committed to each other, they tend not to make big cash demands on the company, whether it’s through dividends or estate planning,” he explains.

As the children get older, start discussing business decisions with them, so they can understand how the family approaches such matters.

“They don’t have to be making the decisions,” says Mark Conrad, a partner with Compardo, Wienstroer, Conrad & Janes at Moneta, a registered investment adviser that works with family offices. “They have to be at the table understanding why decisions are made and developing relationships with outside advisers, having independent relationships with attorneys, accountants and financial advisers.”


Mistake #4: The loyalty effect.

When you’ve been working with the same vendor or selling to the same customer for multiple generations, it can be difficult to change the terms of your relationship or to cut them off entirely. Such loyalty, however, can have an impact on the business’s bottom line.

“Family businesses tend to be very good to their customers and supplies,” Astrachan says. “They tend to pay their suppliers super quick and give customers a lot of time. But that is cash that they might need to run and grow the business.”

Protect your business: In today’s environment, with supply chain shortages and other unusual economic challenges, long-term relationships do have value, but it’s still important to regularly look at whether your payment terms are in line with industry standards or whether making adjustments could benefit your cash cycle.


Mistake #5: Allowing family conflict to impact business decisions.

Particularly when family businesses make it to the second or third generation, the number of family members involved in a business can give rise to rivalries between siblings, cousins, spouses or other family members. That can create a danger to the company if such conflict spills over into the business, or if company leadership starts making decisions to placate other family members.

“Money will change family relationships if you allow it to,” Conrad says.

Protect your business: Consider putting an independent board in place. A board can offer third-party guidance on decisions and help business leaders look beyond family traditions to make decisions in the best interest of the family. Establish policies and codify them so that family members understand the process before it goes into action.

“Having the right policies and practices in place before you need them is the best practice,” Herrera says. “And it’s the only way to avoid or minimize family conflict and the consequences of family conflict.”


Mistake #6: Nepotism

Favoring family members in the workplace, either by promoting them more quickly or paying them more than their peers, is prevalent in family businesses. But nepotism can create resentment among non-family staff. Nepotism becomes particularly problematic when unqualified family members get promoted into leadership roles before more qualified coworkers.

Renee Fellman, an turnaround specialist who has been the interim CEO for 20 companies, shares the story of a grandfather who promised his granddaughter that she’d be CEO one day. Later, it became apparent she did not have the qualifications to take on the role.

“The expectations had been set years earlier, and ended up causing problems within the company, but also problems within the family,” she says.

Protect your business: Arne Boudewyn, head of family wealth and culture services for Wells Fargo Wealth & Investment Management, suggests having a formal employment policy in place, so that family members don’t believe they have a birthright to work at the company.

That policy might include qualifications such as getting an advanced degree or experience elsewhere before coming to work at the company.

Creating such a policy is a “very basic governance and communication opportunity,” he says.


Mistake #7: Not protecting business assets from divorce.

For couples for whom the family business is considered marital property, the consequences of a divorce can have a devastating impact on the business itself. Doug Baumoel, founding partner of Continuity LLC, considers the potential financial damage from divorce to be the biggest threat to family businesses.

“There’s often a lot of anger in divorce, and lots of desire for retribution and hurting the other person” Baumoel says. “In that kind of a divorce, they more they talk to their attorney and the more they fight, the more the attorneys get paid. So the incentives are aligned not for peace but for separation.”

Protect your business: Trusts can go a long way toward protecting a divorcing spouse from claiming rights to a business. Families might also require all family members with an ownership stake to get a prenup shielding their shares in the case of a divorce.

“You should have all the protections in place that you can,” Baumoel says. “They’re not a solution to anger or hatred. But when there’s clarity on who owns what, those mechanisms can protect the family business.”

Divorcing families might also bring in a consultant who specializes in such situations to help align the interests of all parties. A family Baumoel recently worked with were arguing over a buyout agreement. One side felt they were losing out on potential future growth. Baumoel helped the two sides reach an agreement that included a clawback provision in the case of a windfall.

“Introducing ideas like that can calm down the tension in the room and hopefully get them to be more rational and less emotional about the economic decisions that they’re making,” he explains.

Other Related Articles

  • Life After Exit: How to Prepare for Post-Transition Success

    After years of hard work and strategic planning, transitioning a business to a new owner – through sale or transfer to the next generation – marks a significant milestone.

    Once the process of transitioning the business is complete, the focus shifts to planning for what lies ahead, which can be a daunting endeavor. The following questions may arise:

    • How can I effectively minimize my tax liability throughout the transition?
    • What will my cash flow look like once I exit the business?
    • How can I ensure that I maintain my desired standard of living?
    • What is the optimal strategy to ensure my family achieves its financial goals, considering potential financial market fluctuations and volatility?
    • How can I structure my estate to effectively pass to subsequent generations?

    Similar to the preparations made for the business transition, planning for the next stage of life requires meticulous attention to detail and thoughtful strategies.

    Creating a Comprehensive Post-Transition Financial Plan

    Building a strong financial plan extends far beyond the assets acquired after exiting your business. It requires a holistic approach that encompasses your goals, values, lifestyle, and individual needs. By considering all of these factors together, rather than addressing them in isolation, you can develop a long-term strategy that increases the likelihood of achieving what truly matters to you.

    Your plan should include:

    • Lifelong Objectives: Identify your long-term goals, including retirement plans, philanthropic endeavors, and inheritance objectives.
    • Cash Flow and Liquidity: Ensure the availability of sufficient cash flows and liquidity to fund your objectives.
    • Risk-Adjusted Returns: Set appropriate expectations for investment returns while effectively minimizing risks.
    • Value-Based Investing: Align your investment decisions with your personal values.

    To develop this plan, close collaboration with trusted professionals is essential. Working closely with a CPA, financial advisor, and estate planning attorney ensures all aspects are well-coordinated and optimized for your unique needs.

    Planning for Retirement

    A critical component of your post-transition financial plan involves securing your financial well-being throughout your lifetime. While the specifics vary for each individual or couple based on their expected longevity, it is encouraged to design a strategy that can endure until age 95 or even 100, considering potential advancements in medical care.

    Personal visions for lifelong goals and expenses differ significantly, making it essential to collaborate with an advisor who can create a customized plan tailored to your desires. Establishing an advisor relationship early allows for a diversified investment strategy that aligns with your unique requirements for income generation and effective wealth growth while maintaining a level of risk that aligns with your family's comfort level.

    Estate Planning, Philanthropic Goals, & Intergenerational Wealth Transfer

    More than any other component, estate planning requires a collaborative effort between your estate planning attorney, accountant, and financial advisor. By involving each of these professionals, you can develop a thoughtful strategy that fulfills your philanthropic objectives, creates a lasting legacy for future generations, and considers the legal, tax, and financial implications.

    Key considerations may include:

    • Accurately estimating the value of your estate to inform the most effective and tax-efficient estate plan.
    • Preparing the necessary documentation for creating, funding, and maintaining legal entities and trusts.
    • Identifying a charitable strategy that is aligned with your values.
    • Optimizing tax benefits based on the estate plan and charitable strategy.
    • Filing accurate and timely filed tax returns with governmental entities consistent with your estate plan.
    • Planning for the payment of any transfer taxes (such as federal estate or gift taxes) or state level transfer taxes.
    • Determining the needs of loved ones.

    This phase of estate and financial planning is often emotionally charged, as it involves turning a lifetime of hard work into a sustainable positive impact for your family and community. By aligning your estate plan with your values and long-term goals, you can create a legacy that resonates with your aspirations and leaves a meaningful imprint on the people and causes you hold dear.

    Investment Management

    Investment strategies are often considered early on during a transition, but their real importance becomes apparent in your broader wealth management plan. Once you have worked with your financial advisor to fully understand your life goals, investment portfolios can be thoughtfully constructed.

    Remember, your financial success hinges on having a well-crafted investment strategy that adapts to changing circumstances and maintains focus on your long-term objectives. By working with professionals, you can navigate the complexities of investment management with confidence, ensuring that your financial resources are strategically deployed to secure a prosperous future for you and your family.

    Plan for Life’s Journey & Leave a Lasting Legacy

    A wealth plan is about more than just money. It’s the blueprint for how you will make some of the most significant choices in your life – from when to sell your business to how you want your assets to be maintained, passed down, and used to achieve your personal objectives.

    At Eide Bailly, we help you create a clear, concise plan so you can obtain your financial, personal, and charitable objectives. Our goal is simple: We want to help you achieve your dreams.

    Learn more about Eide Bailly’s transition planning services for family-owned businesses here.


    DISCLAIMER: Investment Advisory Services offered through Eide Bailly Advisors, LLC, a Registered Investment Advisor. Insurance products are offered or issued under Eide Bailly Agency, LLC. Eide Bailly Advisors, LLC employees may also be licensed as insurance agents/producers of Eide Bailly Agency, LLC. Eide Bailly Advisors, LLC. and Eide Bailly Agency, LLC, are wholly owned and operated under Eide Bailly LLP. Not all products and services are available in all states.


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