June 20, 2024

When working toward a liquidity event, it’s important to manage expectations in the next generation, says CM Wealth Advisors CEO and Managing Member Douglas McCreery. That means succession of the management of the business as well as the management of the wealth that is flowing from a business sale. There’s no one right answer, but it’s a long-term project.
“One of the things that we see that is sometimes difficult for people to come to understand is that the DNA in being an entrepreneur, or being a money manager, does not necessarily transmitted to the next generation,” McCreery says. “It is not automatic. And you have to let that next generation find their own passion and not try to force one on them. And in doing that, you have to recognize what level of independent advice, independent management, be it, not even control, but at least a good framework of helpers that can stand in your shoes if something awful happens but will provide continuity in any event down the line. It’s a very long-term project and people tend to think of it as being something that, when my kid is 22 I’ll sit down with them and a year later everything will be fine. It starts when they’re 12.”
Helping to do that is outside input at the board of directors level, but also at the personal level.
“Life events like death, serious injury, normally don’t coincide with the right time to sell a business,” he says. “They often coincide at the worst time to sell a business. So, you need to have that structure in place to provide proactive, solid business management. If it’s a period of time where the next generation needs more time to mature but they’re going to be able to take the reins, that’s one thing. It may be a case of slowly transitioning to completely outside management. But the entrepreneur, early on, has to start thinking about those issues and act on them rather than just saying, OK, this will work itself out.”
Speaking at the Cleveland Smart Business Dealmakers Conference at the preparing for the rest of your life panel, moderated by CM Wealth Advisors Sr. Director of Investments and Private Capital Paul Bodnar, TalentLaunch President and CEO Aaron Grossman says he’s had to learn about such things through other people helping him understand what options exist for him and his business.
“I always thought when you start a business, either your kids can take over, you can sell it to a strategic, you can sell it to private equity and I never thought about this fourth one, no one ever taught me that,” Grossman says. “The chairman of our board had mentioned this to me about this idea of a legacy business, and thinking about it in that light.”
That, Grossman says, was an “ah-ha” moment for him, being in Cleveland and looking to avoid outside capital and keep the business headquartered in the city while also getting it to a meaningful size that allows it to contribute to the community is part of the goal. He says he wants to figure out how to create that in part by getting outside management but keeping the control in the way they have, that’s what he says he’s trying to accomplish.
Ultimately, it’s important for a business owner to think about that strategically versus waiting until a bad circumstance and then suddenly trying to figure out what to do.
On the succession side, McCreery says there are issues to consider around equality and fairness within wealth transmission to the next generation that can be very challenging, particularly if you have multiple siblings. One child could be blossoming into a terrific business manager and therefore has earned the right to run the business. But it’s still important to think through how that person is going to relate to their siblings, other branches of the family, and provide some mechanisms so that they may not get the same financial rewards, but their interests are protected.
“There’s no cookbook here where you turn to page 26 and the answers are a third of the way down the page,” McCreery says. “It’s another area that requires a terrific amount of focus and energy over time to make sure that you are not setting in place dynamite that’s going to blow up the family down the road.”
He says helping to avoid this requires transmission of information and managing expectations. Planning is a process that happens over time, whether through an informal advisory board or a set of trustees that have discretionary ability to distribute capital as appropriate, or a family trust company with an independent investment board and an independent distribution board that is set up for each branch. Whatever form it takes, it’s important to plan early because doing so can set up a roadmap for success.
Leiden Cabinet Company Former President and Owner Tom Leiden compares it to a situation in which a company hires a sibling because he needed a job versus establishing a plan. The former starts things going in the wrong direction because there are expectations that are not going to be met at either end, he says. And as the company gets larger an multiple family members are shareholders, it becomes difficult.
“That’s why we finally decided to buy them out so I could run them because the first generation wanted to use it as a cash cow, the non-working members just wanted money and so the few that were actually working at the time, we wanted to grow and do things but you’re hampered by everybody else,” Leiden says. “So, (while) I’m a strong believer in family organizations just limit who you bring in.”
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