Clearing a Path: The Critical Need for Clarity of Purpose in Succession Planning

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Stacie Jacobsen: [00:00:00] Welcome to The Pulse by Bernstein, where we bring you insights on all the complexities of wealth management. I'm your host, Stacie Jacobsen.

By now, most of us are likely familiar with the HBO show Succession. There's no question that a huge part of its appeal arose from the over-the-top dysfunction of the Roy family.

Viewers enjoyed the power struggles, the sibling rivalries, the chaos.

But what is it really like in the real world for a family planning a succession? When the sale of a business or a transfer of generational wealth is on the table, how can a family work together for everyone's benefit and preserve their legacy?

At Bernstein, we've seen over and over again that a lack of intention in planning and structuring a transaction can lead to unwanted consequences for even the most financially successful families.

The approach cannot be ad hoc. It's essential to have conversations that uncover common values and a shared mission.

And it's important to follow a carefully crafted process defined by clarity of vision. The further in advance you start that process, the greater the chance of success.

On today's episode, we'll hear from experts with real world insight into the challenges faced by entrepreneurs and families who are facing highly complex transitions.

I'm joined by my colleague Deacon Turner, Bernstein's National Senior Managing Director for Engagement and Growth Initiatives.

Deacon is one of our leading experts in pre and post transaction planning, with considerable experience in helping clients achieve generational success. Deacon, welcome to The Pulse.

Deacon Turner: Thank you, Stacie. Happy to be here.

Stacie Jacobsen: With Deacon and I today are two experts in succession planning, Ben Berger, tax partner with RSM and co leader of the Global Family Office Enterprise, and Champ Rawls, partner and succession advisor at The Rawls Group.

Thank you both for being with us. Thanks for having us.

Thank you. All right, Deacon, I'll start with you.

Both you and I have seen examples where families have been extremely successful in the transition of wealth, [00:02:00] but also, unfortunately, those families that have been unable to bind together as a cohesive family unit because of the wealth.

Can you speak to the risks of really not planning properly in advance of a transition?

What can go wrong?

Deacon Turner: Well, in the 25 years that I've been working in this space, I've unfortunately experienced some real catastrophes and one particularly haunts me.

Which was a very successful oil and gas family who in the transition from the founding generation was quite successful in building wealth, but ultimately, because they had not established good process for governance, because they had a number of elements of intra family dynamics that had never been worked out.

I unfortunately watched the family essentially consume itself in litigation over the course of nearly a decade, bankrupting a multi-hundred million dollar business in things that probably could have been taken care of very well, had the founding generation and then second generation been well-prepared to navigate conflict and challenges in a responsible and thoughtful way.

It was a real tragedy.

Stacie Jacobsen: You know, I'd like to bring Champ and Ben into the conversation now, too. Um, both of you have a vast experience in working with families in transition. Um, Ben, what is your experience?

Ben Berger: Not that different from Deacon. I would say communication is really critical.

You know, I work with a particular family that... This was really relevant that for many years, the senior generation really ran the family enterprise.

And then, you know, all of a sudden we turn around and the next generation are in their 40s, ready to step in, ready to be part of the family enterprise and that gap that had existed for so many years reared its ugly head.

And now we're left with the situation where senior generation is looking to transition out.

The next generation is really looking for a way to transition in. And because of years of neglect, that [00:04:00] really is not going very well.

The secret is really not that difficult. It starts with communication early and often between senior generation, younger generation, siblings.

That really optimizes the chances of success.

Champ Rawls: I would agree. I think that communication is key.

And I'd also say that building a generationally large business, it's not the same thing as being able to facilitate your own succession planning. It's very hard to the point that, Ben just made generally what we run into as well is the difference in work ethic, the difference in commitment to the business, how they want to run the business.

So you get a senior family member who's done it looking to transition and the kids have. No same characteristics of how they want to do it. So getting all of those people on the same page, I think, is really the groundwork of succession planning.

And I'd argue it's the intentionality behind that communication as well, right?

Stacie Jacobsen: So many families do [00:05:00] get together, they talk, but, you know, having that guiding light as to where they ultimately want to go is extremely helpful.

You know, Deacon, there's got to be a process in place, right? Can you walk us through what that process will be?

Deacon Turner: Well, I think that the process, you know, depends on the family situation, but I think the process begins with having some formal conversations that, frankly, to riff on what Champ outlined and what Ben said, really need to have kind of an external party or a third party intermediator, often to make them successful.

I think everyone can be familiar with the warm and fuzzy conversation about family goals and values, and then nothing happens. What you want to have is somebody who's going to hold everybody accountable.

Make sure all the voices are heard, and then may utilize exercises in varying forms, whether that's around clarity of values, clarity of areas of emphasis, finding what you want to de emphasize, and starting to build from that to map [00:06:00] out how the different generations or the different elements within a family can communicate with each other.

At Bernstein, we start with those kind of exercises in various forms.

And then that may lead to the development of a mission statement for the family, clearly delineated goals and objectives, sometimes something as complex as an actual formal constitution. And then it doesn't stop there.

One of the things that we regularly work with is to help families refresh the conversation, whether that's in regular family meetings.

And where they can also learn how to think about dispute resolution.

You know, I think John Davis is famous for talking about the fact that no disputes, no conflict within a family is often a bad sign because it means that the challenges are being submerged. They're not being aired.

And I'm sure that Champ and Ben, you guys both have clear experience with something where everybody think.

The elements are hunky dory, but in fact, once you get into a real conflict with no [00:07:00] process for dispute resolution, that's when the wheels start to fall off. We've had

Ben Berger: success working with families where the way that the next generation gets involved is by taking the lead and creating. Or enhancing the family mission statement, you know, where are we going as a family?

What are our goals and objectives? Because everybody has input on what that is, and it can evolve over time. That mission statement really drives the decision making of the family.

So whether it's to invest in a particular asset class, whether it's to, you know, philanthropic goals, whether it's to buy or sell a company, all of those decisions, you know, you look to the family mission statement, you look to say, okay, does this decision align with what we are supposed to be doing as a family.

The answer is yes. Great. If the answer is no, it's not.

But as you said as well, there are disputes that come up, um, certainly Champ, I'm sure you have stories of that.

Champ Rawls: You know, when we talk about mission statement, it gets in my mind, the thought process of sitting down with [00:08:00] these families and developing really, what is the strategic 3, 5, year plan?

It always changes, but I'm working with the family right now.

That's got a disconnect between the mom and dad and the kids because we haven't been able to get them together to go, this is what we're working for.

And so sitting down and having those strategic planning sessions with them. And it sounds so weird because you usually have strategic planning sessions at the corporate level, but we look at these big.

Multigenerational families as corporations at times, and you've got to treat it with the process, the procedure, the formalities of those, because in the absence of that, everybody has mismatched expectations.

You know, everybody looks at those famous names of families in the past and how they got that way.

Well, they had a goal. And they went for it.

And then you layer on top of it, the philanthropy, the community, all those things that make a difference, um, [00:09:00] beyond just the

Deacon Turner: money. And I'd like to add one more thing right there, Stacie, if I can jump in.

I think it's important too, because it's, it's easy to start focusing on how's the family going to invest, how are we going to keep growing wealth.

It's important to also define in that process how family members work within the family governance structure, how they come into it as spouses join the family, and then what responsibilities they have at different stages in their life of joining the family.

When those are left That's what starts to create confusion.

That's where, as Champ said, the expectations that are ill defined start to come to the fore and fester into problems.

Champ Rawls: I’ll just add there, too, real quick.

We break that down into family business compensation policies, family business benefit policies.

When you're talking multi generational second, third, fourth generation credit card policies, all of those, you know, who's getting a car, who's doing this kind of stuff and [00:10:00] really sit down and sign off on those things at a board level to go.

This is what everybody can expect from spouses, benefits, compensation.

Stacie Jacobsen: You know that the families that we're talking about now are already financially successful.

Once your core needs are really met, that definition of success. tends to really be unique to each family unit.

Deacon, can you share what some of the definitions are of success that you've come across and why it's so important that each family define their own?

Deacon Turner: Well, every family is unique, and I was actually meeting with a family just before we began recording this podcast who came away from one of our summits, talking about the fact that the most important thing they learned was that there is no one standard for how to run a family office, but there were a lot of great ideas that they needed to pull in and customize for themselves.

I think if you ground your family in what your goals and values are, you can then start to develop a governance approach that lets you define success in its own terms.

We see families [00:11:00] that are very focused philanthropically, and they define success in terms of how their impact is occurring and how their philanthropy is working.

We see other families who try to define family success as remaining a cohesive family.

You know, when you get into second, third, fourth generation, It can actually be quite challenging to reinforce common family mission and goals and identity. And the families we see in that space that are really focused on how you create common family culture and bind people together are the ones that remain successful.

And I'll put out one other really interesting element of success.

I've actually, and you and I have both done this, worked with families who defined that the best definition of success for them was to no longer remain in a family office together and to be able to amicably separate to go their own way.

Often in a situation where a family enterprise has been sold.

They have competing and differing goals for [00:12:00] themselves as individual nuclear families, and there's enough wealth that they can move apart.

And by doing so, they resolve the main conflict, which is that they didn't want to be in business together.

Ben Berger: To stay together, to your point, you know, there has to be this alignment of interest.

And if there's a misalignment, and they're, they force themselves to stay together, that's clearly not success, and we've all seen that as well.

But as advisors, we help families recognize... that they have competing interests, that they would be better served and likely more successful both financially as well as meeting their non-financial goals by splitting up.

And that's not a bad thing. It's just the way it is.

Champ Rawls: We like to say we don't like to create prisoners of partnerships.

And one of the big things I, I was just talking with an oil and gas family.

And I think this is like four generations ago, the patriarch put in his will bloodline business provisions.

It will stay in the family with you guys as partners [00:13:00] forever.

And I think that is a classic case of not having a holistic succession plan in place, because inevitably, you get to a third, fourth, fifth generation, not only do they not want to work with each other, oftentimes they don't like each other, so it becomes a terrible disaster of trying to step in and help a situation when you've got people who are just in constant conflict

Stacie Jacobsen: and to Ben's point earlier about preparing the next generation to receive wealth, you know, what is the process that each of you have in place in order to get that next generation really ready to be the steward of the family wealth?

Deacon Turner: I'll jump in here.

One of the things that Bernstein that we're very focused on is again, trying to be as intentional as possible around how wealth is modeled.

Beginning in early stages in the life of a kid, how their parents model and approach wealth in terms of how they spend, how they live a lifestyle starts to set the kids up for [00:14:00] success.

How do you value hard work? How do you value achievement? And those things that lay a groundwork for future stewardship are important early.

And then you can start to educate financial literacy, start taking it beyond just, you know, understanding, balancing a checkbook, but into understanding investing.

Starting to understand the elements of the family's tax and trust and estate structure, understand the family wealth, the family enterprise, and do that appropriately by stage.

If you leave it to happenstance, the odds are that the kids will not be ready.

Ben Berger: Yeah, Deacon, I agree with everything you said.

I think the other piece there that I found was an interesting idea that somebody taught me and we've implemented across many families is, you know, when a family member gets to a particular age, they're assigned a mentor.

And usually that mentor is outside of the family.

So it's not their dad or their mom or some relative. It's usually a professional advisor.

So it could be myself. It could be [00:15:00] somebody in the investment community.

It could be an attorney. It could be somebody who's a third party professional advisor of the family who is used as a sounding board.

They could meet once a month, once a quarter, and just talk about questions that are on the mind of this person. Teenager or somebody in their early twenties, you know, just to help them navigate the really complex world of wealth.

There are a lot of things to learn. And then the other piece is giving the next gen some level of responsibility inside the family.

It doesn't mean that they have to have a job. It could mean they, they lead a committee or they lead a particular project.

It could be a mission statement. It could be an analysis on their own of a particular investment that the family is contemplating.

Just giving them a sense of responsibility so that, again, they feel connected and part of, of the overall family enterprise.

Stacie Jacobsen: Yeah, we often find that using philanthropy as a tool to bring young children into that decision making process and responsibility is a really good way to get them started.

You know, Champ, I wanted to ask you [00:16:00] because for many of these families after focusing on a business for so many years, you develop an identity with that business.

And then once it's sold, sometimes former owners really struggle finding meaning.

So how do you help those that are stepping away from the business and going through a liquidity event? actually find meaning post transaction?

Champ Rawls: Not easy. A lot of talk, a lot of wine.

I think what we find is those first generational builders of businesses are so entrepreneurial that if they sell one, they're generally getting involved in something else.

So we really like to try and sit right beside them and offer that advice from the financial standpoint to the investment standpoint to overall, we really look at a state asset allocation and a state investment policy statements to go. Okay. Now, after you sold, you had something that fulfilled 90 percent of your life.

Where do we now, percentage wise, put different aspects of [00:17:00] your life into place?

Philanthropy, community, and really what we've seen a lot is our clients have sold their business, lived great for five, six, seven years, and called us back and said, Nope, I'm ready to do it again.

I want to buy in and we've sat down and developed a strategic plan and they often are, um, so much better in it the second time around because they have been there, done that, and already hit the

Deacon Turner: success button.

You know, one thing you're asking there, Stacie and Champ, you're speaking directly to the entrepreneurial generation.

What we see also is if there's a long standing family enterprise regularly, it's given the common definition and common meaning to the family.

And the existential crisis hits if that enterprise is sold, some families make the transition because they switched to philanthropy, but it can be a real challenge if it's no longer around a manufacturing firm or a oil and gas business or real estate, who are you?[00:18:00]

And it doesn't even have to be a large family enterprise.

You see it with entrepreneurs who are going through a really successful upswing in the growth of their business.

And what we all see regularly after that is they have no plan on what they're going to do post. And you see people start the founder.

We think it's really critical to get this out of just the family enterprise context and think about what is life like post transaction.

We're seeing more and more that families are looking for partial liquidation or partial transactions.

Whether that's the private equity or a strategic buyer, or it could be in the form of something like a partial ESOP, an Employee Stock Ownership Program, where they're taking liquidity off the table for the family, but they're using governance structures and the ownership of an enterprise to keep defining that common family mission.

Ben Berger: Yeah, the other trend, Deacon, that we often see is, you know, family has a liquidity event and the first thing that comes to mind is I have to create a family [00:19:00] office, right?

And it's, you know, sometimes a situation where there aren't enough dollars to create a true formal family office, but it's that patriarch hungry to continue to do something or to run an enterprise like they ran a business.

And so the pre transaction planning has to include it.

The post transaction planning, right? It really all goes together.

And so long before you even think about having a transaction, it's up to us as advisors to really sit down with the business owners and have that conversation around.

Okay, yes, there's financial goals, but we got to think about what's on the other side of things.

We're going to have a significant amount of wealth.

We all know, too, that most business owners, after they have a liquidity event, generally are hungry to start another business, because that's all they've ever done.

It doesn't have to be an active business. It can certainly be passive. It can certainly be a whole series of different investments or different things that they're involved with that they never had a chance.

Their opportunity, but the key is putting an organizational structure in [00:20:00] place post liquidity so that the patriarch or the family themselves really feel like they're part of an enterprise.

Stacie Jacobsen: For our listeners that they're recognizing that they need to take that first action step. I'll throw it out to the three of you.

How does somebody actually get started knowing that they're about to come into or in a couple of years from now have a significant wealth transition?

Champ Rawls: I can start. I think it is understanding the time, what your building of the business looks like, the situation. We really haven't spoken about successor ID and prep.

Do we have successors who can step in and run a business successfully?

Do we have leadership that can do that? And really, the third one is score. If the decision is sell, what's the value? And I think in all of those situations.

One needs to be asking themselves, looking in the mirror and saying, I know how to successfully build something.

I don't know how to do my own succession planning.

And I think that's the point where you [00:21:00] look for a professional to come in and look in all aspects of your family, your business, your estate, your planning to go, this will work, this won't work.

Ben Berger: But it does go back to the family's overall goals and objectives, right?

Because that's really what's driving the sale. Or at least it should be. Right.

And if you start talking to the individual who runs the family business. And you ask, you know, him or her, do you, you know, why are you selling or why are you thinking about selling? And there are a lot of different responses.

It could be that the value of the, of the business has been maximized and now is a good time. Um, it could be that the family has very different goals now than they did when the business was started.

You also have to look at the other stakeholders of, of the business, right? There, there could be dozens of.

Family members who are shareholders or partners in the business and take what they're thinking into consideration as well.

You start with thinking about why are we selling, and then those goals will drive what happens next.

What kinds of things does the family really want to embark on? I [00:22:00] had a family go through a liquidity event, you know, fairly recently.

They are in the process of restructuring their organizational chart to create somewhat of a family office with a governance structure that makes sense for their particular family.

But early on in the conversation, the CEO of the business You know, I, I said, okay, so now we're going to convert from being an operating business to being a family office.

And he corrected me and he said, no, we're, we're still the same family.

We still have the same objectives. This operating business that we had was one in a series of many investments that we as a family are going to continue to make together. And so that was really insightful for me. In understanding how a family thinks about their enterprise versus a third party advisor.

Deacon Turner: I think we've all been fortunate to see families who have made that transition from a core enterprise component of family business to successful operating investment companies.

I would put one other thing on the table too. I think there's something of a unique component that comes in for the first generational, maybe entrepreneurial [00:23:00] founders.

All too often we see That they've been so head down in building their business, their tax and trust in a state approach to a transaction is lacking.

They don't have clarity around all the elements in the code and all the various structures they could use to, to help manage their tax bill in a transaction, to think through clearly how they're going to give money to subsequent generations, how they're going to set aside wealth or philanthropy.

People actually need to pay attention to the really basic component of tax and trust in a state approach. I would just encourage everyone listening to think through that.

And I think it's all too easy for very busy entrepreneurs to say, well, take care of it after the transaction. They spent all this time building wealth in their company.

And then what do you see happen? They give an inordinate amount of money to the federal

Stacie Jacobsen: government. Thanks to the three of you for being here today.

We certainly did cover a lot [00:24:00] of content. So before we go, Deacon, I'd like to ask you to wrap it up for us. Can you give us some of your key takeaways?

Deacon Turner: Sharon, I want to say thank you again to Champ and for Ben, uh, joining us because your insights were really valuable.

I think if, if I were going to summarize things, I, I would reduce it to three key points.

So number one, you have to start defining your goals and it has to be a process to do that. That probably means you need a third party external to the family to help you.

Second of all, you have to realize that that process doesn't happen in just a short period of time.

Tied to a transaction or the transition between one generation and the next.

It is ongoing and it has to constantly be refreshed. Just like the family identity and the family culture has to be. So you should not look at this as some kind of transactional component. Oh, I've done my trust and estate plan and everything is okay.

This kind of work around successful, uh, transitions [00:25:00] within families, whether that's sale of a business or across generations.

Has to be ongoing and you have to give a great deal of attention to it. And then the final point I would make, and this will echo something that Champ said earlier, is trying to be too iron bound and to rule from the grave in a plan actually creates more problems than benefits.

The best thing that we see families do is create an element of flexibility in their goals and objectives that allows the family to evolve through time and change as conditions change. All

Stacie Jacobsen: right. Well, thank you for that Deacon. Thanks, champ. And thanks, Ben, for being with us today.

Ben Berger: Great. Thanks for having me.

Thank

Stacie Jacobsen: you. Thanks to everyone for giving us a listen.

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