Small, family-owned businesses are the engine of growth and job creation in this country. Therefore, it’s in everyone’s best interest to see them thrive.

Unfortunately, about 70% not only don’t thrive—they don’t survive past the first generation! Fully 95% fail to make it beyond the second generation.

This failure of family-owned businesses to succeed beyond the first generation is often a money thing. It involves a shortage of dollars.

Consultant Russ Allen Prince conducted a study of 749 heirs of failed family businesses. He found that family business failure is more often associated with inadequate estate planning than poor succession planning.

In other words, he argues that it’s often more of a money problem than a management issue.

He’s got a point. Every savvy business person knows that a thriving business can go under when there’s a lack of cash. In the same way that if you cut off the oxygen flow of a healthy person, you suddenly have a dead person…if you cut off the cash flow of a vibrant family-owned business, you’ll soon have a family business failure.

The usual tools to overcome the dollar crunch that occurs at succession time are:

• Properly drafted legal documents
• Trusts 
• Life insurance (Since death usually comes at the most inconvenient time, life insurance is often key to making small business transitions secure.)

But even when the “dollar” hurdle is successfully crossed, there’s often a second problem—direction. 

Linda Davis Taylor, an advisor to family businesses, makes this point by asking this question, “On a voyage over turbulent waters, should you build a better boat or train a better captain?”

Davis encourages family business owners to see their wealth in four different forms: human capital, intellectual capital, social capital, and financial capital. 

If you’re serious about seeing your family business prosper under the leadership of the next generation, you’ve got to focus on the human capital.

Ask yourself one question: If I devoted the same amount of time, energy and attention to my business operations as I’m spending in developing the next owner(s) of my business (i.e., your children or heirs), how successful would my business be?

Yes, yes, I know that being a business owner requires you to wear a number of hats. You have a lot of demands on your energy and attention—and not a lot of time. 

But can you imagine having a machine that’s central to your business’s success, and totally ignoring the maintenance of that machine? 

Don’t ignore the development and training of the next generation of your business’s owners. When you fail to plan, you plan for failure.

Speaking of planning, I bet you’ve got a retirement portfolio. What’s your plan for turning those “nest egg” assets into monthly living expenses once you stop drawing a paycheck? Do you have one?

If you do, does that plan really align with your “financial personality”? If not, I’ve got a free gift for you. Email me at bmoore@argentadvisors.com and I’ll send you a link to take the RISA® (Retirement Income Style Awareness®) Profile. There’s no charge. It only takes a few minutes, and it can save you LOTS of worry. 

Argent Advisors, Inc. is an SEC-registered investment adviser. A copy of our current written disclosure statement discussing our advisory services and fees is available upon request. Please See Important Disclosure Information here.

I’m retired and widowed. My two adult sons still depend on me to pay some of their bills—even though one of them has a job. (The other can’t seem to keep steady work.) I’m worried that when I’m gone, they are going to fight over my money, even though I don’t have much. Should I consider a trust?

Sadly, I see this problem more often than I’d like. It’s never pretty, and it rarely ends happily. It typically starts when parents confuse leniency for love. 

Children can always sense when a parent is afflicted with “leniency-love confusion.” And they will manipulate the heck out of those that do.

“Johnny, go finish your homework.”

“But I wanna watch TV!”

“Now, Johnny, you know the rules…”

“You don’t LOVE me!” 

(Nothing eats at an insecure parent like that statement.)

“Okay, you can watch. But just this once.”

Ugh. This dynamic is bad for kids, it invites trouble for parents, and it’s cringeworthy for onlookers.

I love those rare occasions when a parent quietly flashes “the look.” You know, the stern glare that says, “You just messed with the wrong Marine!” 

Instantly, the offending child shrinks and slinks away, knowing he/she is in serious trouble, with a capital “T.”

May I state the obvious? If nothing is done to squelch this kind of behavior early, the manipulative seven-year-old will grow up to be a manipulative 17-year-old…and a manipulative 27-year-old and… The longer you wait, the more complicated the cure becomes—if it can ever be cured.

We often think of parenting as “raising kids.” A better goal is raising responsible adults, who can stand on their own two feet financially (and in other ways). 

So, let me say this as clearly as I can:

It’s not healthy for a healthy adult child to be dependent on regular infusions of “rescue cash” from mom or dad. 

My greatest concern for my questioner is that this unhealthy pattern is draining her assets at a time in life when she can least afford it. Here’s what I advise:

• Tell your sons that the gravy train just ended. If they can’t manage to pay their own bills, you can’t count on them to take care of you when your money runs out. 

• Create a trust in your will. If you don’t have a will, have one drafted by a competent attorney. The will should stipulate that the assets of your estate be placed in trust, to pay an income for life to each of your sons, equally (if that is your wish). 

This way, there is nothing to fight over, and they can’t get their inheritance right away and spend it all. (And, yes, they would.)

• Get a professional trustee to carry out the specifications of your estate plans. Your trust document contains your estate plan. Your trustee is the one who must carry it out. 

Parents who financially support their able-bodied adult children obviously do that out of love. But I encourage you to start loving them with “tough love.”

It will be best for them…and best for you.

To help you think through such issues in greater detail, I’ve created a thorough checklist of financial questions for people who are 60-something. It’s free if you’d like a copy. Email me at bmoore@argentadvisors.com, and I’ll send it to you right away.

Argent Advisors, Inc. is an SEC-registered investment adviser. A copy of our current written disclosure statement discussing our advisory services and fees is available upon request. Please See Important Disclosure Information here.