When is the Right Time to Discuss Transition? ASAP
Interview with Peter Keller, Senior Vice President and head of Private Banking, First Niagara Bank
Family businesses traditionally have difficulty in transition from generation to generation. Two-thirds of family businesses fail to transition to the second generation and only 10% make it to the third. A primary reason for the failure of this transition is the inability of the ‘older’ generation of owners to have an ‘exit strategy’ that facilitates their financial independence without damaging the viability of the business. An effective succession plan finds a way to balance these two often conflicting forces. Trying to understand when and how to transfer the business is one of the problems that keeps business owners up at night.
We spoke recently with Peter Keller, Senior Vice President and Head of Private Banking for First Niagara Private Client Services. We asked him how family business owners can ensure their own financial well-being without damaging the business as ownership transitions from one generation to the next.
UMASSFBC: When is the right time to start thinking about management and ownership succession?
Peter Keller: We believe in starting the dialogue as soon as possible. We help the family examine the business itself, as well as the family history and family dynamics. We must be careful not to forget those family members not actively involved in the business. Additionally, the business will often have a natural successor in place, yet this person may have not been officially designated as such. It is important to understand how the successor management will interface with the existing owner and the potential successor owner. These are just some of the factors in getting this crucial dialogue started. This conversation creates the framework that allows the older generation to begin to separate their personal financial needs from the needs of the business. With this framework as a basis, the exit strategy begins to crystallize.
UMASSFBC: When you say “as soon as possible” could you clarify?
Peter Keller: Because this tends to be a difficult conversation to have, it is often delayed indefinitely or does not start until there is a setback. Consequently, the conversation is forced on the individuals involved rather than being proactively planned. For instance, it may be initiated because of illness or a valued family member leaves the business out of frustration at the pace of the generational transition. On other occasions, the owner is reluctant to take the necessary first steps because they are wary of the abilities of their potential successors. Or, sometimes the owners have been talking about designing a succession plan, but waiting for the right time to actually act on the discussion. The key is to act now and start thinking about your personal needs not just the business. Deciding on the financial resources you will need to maintain a comfortable retirement lifestyle should not be an afterthought. Ironically, in making this decision, it now becomes easier to make other decisions that can be of benefit to the business and the heirs.
UMASSFBC: How do you determine what financial resources are appropriate for your needs?
Peter Keller: The business owner needs to find the right, preferably outside, neutral advisors who have family business expertise and with whom her or she can build a meaningful relationship. These advisors should not be working in silos; they need to have access to each other as they coordinate the needs of the business with the needs of the family. Also, the business owner needs to be careful to pick individuals right for your family business situation. For example, in addition to your lawyer and accountant, a private banker should be a member of the team helping the business owner define his own personal financial goals independent of the business.
What do you see as the biggest asset in having these outside advisors?
As I mentioned earlier, the transition of business management and business ownership is a balancing act. You need to weigh the needs of the business against the needs of the owner. What is needed is an impartial view that aggressively evaluates all alternatives. Business owners (particularly first generation business founders) see the business as an extension of themselves. It is difficult at best to step outside of the business for perspective without some help. They often see a personal “exit plan” as being in conflict with the best interests of the business. Bringing in an experienced team of independent advisors allows the business owner to separate personal and business priorities and develop a plan that works for the best interests of the business, and for the best interests of the business owner.
This would leave more time for them to run the business and sleep at night.
Peter Keller is Senior Vice President andPrivate Banking Head at First Niagara Private Client Services. He can be reached at (203) 631-1703 and firstname.lastname@example.org