FA-IQ reached out to advisors to ask: Should client family businesses stay in the family? How can advisors guide those conversations?

Ahmie Baum is the chief executive officer of Interchange Capital Partners. Baum, based in Pittsburgh, has been in the financial services industry more than 40 years, and his firm manages about $335 million in client assets.

Baum suggested five checkpoints to review when guiding a family’s decisions about its business’ legacy.

‘The Next Generation Is Highly Motivated to Carry the Torch’

“One of the best reasons to keep the business in the family is if the company is doing well and the next generation is highly motivated to take over. Maybe you have a son or daughter who has grown up in the company, is well-liked, and knows how to handle the day-to-day operations. Perhaps they have outside business experience that makes them a qualified leader as well,” he said.

Ahmie Baum

“This is the best-case scenario, especially when combined with a business that has steady growth and strong financials. These characteristics can be a great sign that your business would thrive if it was kept in the family,” he added.

‘Non-Family Employees & Shareholders Feel Equally Valued’

“This indicates that your retirement would not be detrimental to the overall operation of the business because you have built a cohesive culture that is based on more than one individual’s talents, skills, or personality traits. If this is the case for your company, chances are that non-family employees and shareholders will still feel motivated to work toward the success of the company even if you are no longer the one in charge,” Baum said.

‘The Business Has a Performance-Driven Culture’

“If your business has a performance-driven culture that focuses on tangible results as opposed to family relationships, then it’s a good candidate for being kept in the family. This is because businesses with performance-driven cultures are much less likely to fall victim to the nepotism trap,” Baum says.

“Family members who work for the company are held to the same standards as other employees, meaning they are only promoted to management if they are truly qualified based on their past performance and skill sets,” he added.

‘The Sale Price Would Be Inadequate at This Time’

“It’s not uncommon to have a successful business with a lackluster sale price. It may not fully reflect the true value of the company, or its value may not be large enough to finance other goals like retirement. In this case, it would make more sense to keep the business in the family until its sale price matches the underlying value,” Baum said.

‘Current Liquidity Is Adequate’

“If your family’s liquidity needs are adequately met with your current business setup, then keeping the business in the family is probably a good option. In some cases, significant amounts of an owner’s personal wealth might be tied up in the business, making it next to impossible to successfully retire without selling assets of the business or the entire business itself,” Baum said.

“If this is not the case for you, then you will have more options when it comes to how to structure your exit plan. You won’t be forced to sell to meet liquidity needs, but you also don’t have to keep the business if you would rather take the payout,” he added.

Jerry Davidse is chief executive officer of Presilium Private Wealth, based in Radnor, Pennsylvania. Davidse has been in the industry 21 years, and he manages $300 million in client assets.

Jerry Davidse

“Family businesses should not always stay within the family. Each generation is going to have different talents and interests. They may or may not be ideal for the current state of a family business. It is so important to have regular family meetings where this is discussed and planned for over time,” Davidse said.

“At Presilium, we have seen businesses successfully pass from generation to generation and others where it made sense to sell to an outside partner so the family could pursue a different passion. As their trusted advisor, we are able to facilitate these conversations and help them to make the right decision,” he added.