Developing a succession plan for a family business involves a unique set of challenges, and with a major generational wealth transfer looming, advisors could benefit from developing expertise in this area, experts said on Monday.

An estimated 70% to 90% of global gross domestic product is derived from family businesses, according to Allen Taylor, president-elect of the Canadian Association of Family Enterprise. As baby boomers prepare to retire, demand for succession-planning advice is set to soar.

“We know that there’s going to be a huge shift in the next 10 to 15 years of wealth and control of these businesses across the world,” said Taylor, who is also president and CEO of third-generation family-owned firm Taylor Associates.

Speaking at a Toronto CFA Society seminar on succession planning, he said it’s critical for families to engage in comprehensive preparations of the financial, legal and operational factors associated with transferring a family business from one generation to another.

Lawyer Sean Lawler, a partner with Shibley Righton LLP, agrees that thorough planning is crucial. Failing to have important discussions prior to a business-owner’s retirement can lead to family fallouts and major lawsuits, he warns.

“It’s important to advise clients to take the time to deal with the details of the transition early on, while everyone is still engaged in the business,” said Lawler.

Financial planners can play an important role in helping families develop a succession plan for their business, but they must take the time to learn about the considerations relevant to family business.

“The unique challenges and opportunities that are in a family enterprise need to be deeply understood,” said Taylor.

For instance, business owners risk passing the enterprise down to family member who is unenthusiastic, or unqualified to be taking over, which can lead to problems. Family conflicts also present a common threat to family businesses, so relationship dynamics must be considered. In addition, the establishment of effective governance mechanisms and appropriate checks and balances tend to be overlooked by family businesses, but are important to put in place, Taylor said.

One of the most common pitfalls for family enterprises is simply failing to have a discussion about the future of the business and assuming that a family member will take over, or postponing the succession planning discussion too long, the experts said.

An advisor can play a role by urging clients to address the succession issue earlier rather than later. A thorough succession plan involves a lot of time and consideration, and engaging in early dialogue helps families avoid a “crisis-driven” succession that is forced by unforeseen circumstances.

“The wrong choice is often made because the time doesn’t provide for consideration,” said Taylor.

Advisors can also help clients by reminding them to regularly review their succession plans. For instance, families that had been planning to sell their businesses in the near future could face new challenges finding buyers amid the recent recession and credit crisis. As a result, Taylor said advisors should help clients readjust their plans regularly.

“Make sure your expectations match the environment,” he said. “That happens by having regular discussions.”

Taylor warned that financial advisors looking to work with family businesses may face challenges. Many family businesses are inclined to keep their business within the family, and may not actively seek outside advice.

As a result, earning the trust of clients is one of the most important steps for financial planners to take in developing an advisory relationship, the experts said.

“The closer the advisor is to the family on a day-to-day basis, the more likely he or she is going to be involved in the succession planning,” said Lawler.

IE