Family business owners who are considering selling are often discouraged by the question, 'what will I do now?' according to Dr. Tom Deans, former business owner and author of Every Family's Business. In an interview, Deans said that owners' identities often get so wrapped up in the business that they find it difficult to imagine life after the company is sold.
To overcome this barrier, it's important to frame the question more personally. He recommends asking 'who will I be?' The answer can then form the vision for the family legacy and provide a critical piece of the puzzle. After all, to be profitable, he or she needs to define the vision for the family business.
When running a business, most founders and owners need to reinvest their money back into the business in order to have the cash flow to build client orders. Concentrating this money into the business finances the parts and the salaries required to get product out of the factory door and into the hands of the customer. This means that extra cash is absorbed, and for many years the family business does not spin off large salaries and a wealthy lifestyle.
During the sale of a business, owners often leave legacy issues on the back-burner. Due to the hectic pace of due diligence and negotiation before a sale, issues like governance and long-term goal setting are often neglected. Yet ironically these 'softer' issues are often the hardest to confront.
When a company is sold (known as a liquidity event), it can bring sudden wealth – even richness – which can and will affect individuals and their families who may be unprepared.
"Making money is very different from protecting wealth," said Deans. "Owners are good at solving problems and they can see transitioning as another problem to solve. Managing new wealth is about risk aversion and relinquishing control."
It's counterintuitive for owners who have success from taking risks and being in control. Within the family business, it will now be far more about being co-operation and preparing the heirs.
Choosing how to structure and manage the newly liquid assets can freeze up the owner and their family. Answering the following questions can help unfreeze the move from family business owner to family wealth manager:
What does the wealth mean for the family? Is it important to leave a family business legacy? Family business owners can create the legacy with their wealth, but Deans cautions against pigeonholing future generations.
"Many owners make the mistake of instilling pride in the family business; that life is about tradition and not about pursuing their own dreams – and definitely not about reaching their full potential. Imagine if Henry Ford had followed in his father's footsteps as a farmer, and Steve Jobs in his father's footsteps as a restaurateur?"
What's the risk level of each family member? Insufficient oversight of their business affairs and inadequate awareness of potential risks means families are more exposed than they realize. Each family member's level of risk tolerance is obvious when skiing or driving a car, but not when planning the family legacy.
What risks can the family agree to take together? Constructing a risk framework around each of the family members will give a common understanding of the family goals, reduce the stress and improve the mood at future family get-togethers.
What to do first? It's common to delay the decision making process because the first step is the most difficult. It's safer to maintain the status quo than to risk a family argument. Reading about other family business stories and distributing case studies of similar family business situations can begin the conversation. Organizing a meeting with other family business owners who sold and have been through the journey to wealth management will also help inspire action.
"There are financial advisors to assist business owners through this transition to wealth. Families are complex and emotional. Using financial experts is not a sign of weakness, but of strength and wisdom," said Deans.
The road from running a family business to managing the family wealth is well-trodden. It may seem an ideal situation to outsiders, but family businesses who have gone that route know the challenges. But one thing is for certain: those who make the conscious decision to build a family legacy and get the governance in place to manage their wealth will have a smoother journey ahead. "This is how new money becomes old money."
Jacoline Loewen is the director of business development of UBS Bank (Canada), named Best Private Bank Globally 2014. Ms. Loewen is also the author of Money Magnet: How to Attract Investors to Your Business. You can follow her on Twitter @jacolineloewen.