The impact of the aging baby-boomer generation on American companies isn’t just about the retirements of longtime employees with crucial institutional knowledge.

Kevin Harris

Kevin Harris

Also to be considered is that there’s about $16 trillion worth of corporate assets that may change hands over the next 25 or so years, according to Northern Trust, as the aging owners of privately held businesses opt to sell or liquidate them — or, in the case of family-owned businesses, transfer oversight of the business to a next-generation family member.

As to family businesses, the owners are sometimes unwilling or unable to make sound decisions about what to do with them, says Kevin Harris, managing director of the Family Business Services group at Northern Trust, which manages, advises, and values some 1,150 closely held companies.

“A frequent situation is where the current owner’s identity is so intertwined with that of the business that [he or she is] just not able to cede control,” Harris says. “Another situation we see many times is where some family members are involved in the business and others aren’t. Who is going to be the next-generation leader? It’s a very difficult decision, and the owner may be unwilling to make it.”

CFOs at such companies can play some important roles, Harris notes. They’re wired to highly value planning processes and to regard them as an ongoing need, “which is what’s required, because succession planning is not a once-and-done type of exercise. It takes time.”

While the owner may simply not know where to begin, the CFO can help out on two fronts. One is formulating a strategic plan for the business, taking into account its capital needs, potential expansions or acquisitions to remain competitive in the marketplace, product enhancements, technology upgrades, and whether to fund such initiatives with equity or debt.

A solid strategic plan can inform the owner’s decision about what to do with the business.

But at a family-owned business, there is another set of things to consider. What are the financial needs of the owning family? What resources do they have outside the business? What dividends are appropriate? There are both short-term and long-term implications to those questions, says Harris: “Do they have sufficient assets and cash flows to meet their long-term objectives and accomplish their lifetime goals?”

And decisions about both what to do with the business and how to fund the owning family’s needs must take into account the family’s risk tolerance. “If there needs to be significant investment in the business to keep it competitive, the family might look at that and decide that it doesn’t meet their risk profile and that they’d be better off selling the business,” says Harris.

At the least, the CFO can play a role in educating and advising the owner on the need for planning, especially to prepare for unexpected events. Harris told of one recent example where the owner of a professional services organization, “the type of entity that has the person’s name on the front door,” suddenly passed away. “There had been little if any planning with regard to management succession or change-in-control provisions, and it quickly went from a thriving business to one with a very limited market and very little future.”

At another company that was controlled by a group of siblings, one of them passed away with limited financial resources outside of the business. Ultimately, the estate’s shares in the business will have to be returned to the company in order to provide for estate taxes and the needs of the surviving spouse.

The root of the problem was a lack of planning for the siblings’ personal financial needs. “Alternatives could have been put  in place years prior,” says Harris. For example, perhaps the company could have recapitalized its balance sheet by taking on debt and making  a distribution to the shareholders to provide them with some individual liquidity (although the tax impact of such strategy would have to be analyzed).

Alternatively (or in addition), the now-deceased shareholder could have purchased life insurance on himself to provide liquidity for his surviving spouse and purchased a second-to-die policy on the couple to cover future estate taxes.  The insurance coverages could have been purchased through an irrevocable life insurance trust, keeping the life insurance proceeds outside of the decedent’s estate.

The CFO being a driver of succession planning is not only important for the business, but for the finance chief personally, he adds. “Frankly, it is somewhat of a self-serving interest on the part of the CFO, because when the business is being sold or transitioned to the next generation of family ownership, there is a high level of need to retain that individual for consistency of knowledge and transfer of expertise.”

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