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CIBC’s Commercial Banking podcast series, Conversations in Commercial Banking, understands that your business is a living, breathing entity in need of nurturing to continue to grow. Whether you’re looking to navigate a tough economy, tap into current industry trends or identify key tools to take you to the next level, our team of experts are here to equip you with the information you need to make your vision a reality.
Announcer:
Welcome to Conversations in Commercial Banking, a podcast series dedicated to the pressing financial topics facing middle market business leaders. Today we bring in experts from all facets of our North American institution to provide actionable insights that help you navigate today's environment. Our discussions include industry trends, strategies to identify and manage risk and unlocking opportunities for growth, all with the purpose of helping you realize your ambitions. And now for this week's episode.
Brian Greenblatt:
Hello and welcome to Conversations in Commercial Banking. My name is Brian Greenblatt and I lead commercial middle market banking in Illinois for CIBC US. I'm pleased to be your host today.
For the second episode in our privately held series, we discuss the emotions and hard decisions at play between relatives when looking towards the next step for a family business. Do you automatically transfer the business to the next generation, or you look to outside third parties to be buying your business? Joining me today to discuss this further is Halsey Schreier, Managing Director and Senior Wealth Strategist here at CIBC.
Halsey, hey, welcome and thank you for joining us today.
Halsey Schreier:
Happy to.
Brian Greenblatt:
I think we're going to dig deep here today. The first thing I want to ask you is, when you're thinking about the transition to the next generation, you're thinking about something that's approaching, it's near term for you, how soon does a family want to start thinking about that?
Halsey Schreier:
As early as they can, in all honesty. This is perhaps the hardest transition for a business is to keep it within the family and move it successfully to the next generation of business owners. It's much easier to sell to a third party because you're getting out of it, you're creating this fungible good, this liquid net worth that can be spread among the different family members. But when you keep it in the family, things are much more complicated, because you have to have individuals that are involved and those that aren't. So the earlier you can start this process and at least the considerations that go into it, the better for the family in general.
Brian Greenblatt:
And I think that makes it a ton of sense. If you think about families as they're thinking about it, what are the first things, if you're starting early, maybe right after birth, tell us what the first things families should start to consider as they begin talking about it as a family unit?
Halsey Schreier:
Well, when they sort of sit down... You got to look at a number of things. I think one thing that's always good to understand is, well, what do we have here? What's the value? What's the value of this ongoing concern and what do we need to do that's considered fair and equitable treatment among the family? And it's also then thinking about, all right, so who's involved with the business? Who do we want to be involved? Do we want all individuals to be owners? Do we want to take care of people who aren't involved in the business in another way?
The fundamental thing is really... At first I think you start off with the financial pieces because those are the easiest, because financial and numbers are easy to define. You want to make sure that if you are going to step away from the business, that you know have assets for retirement, and that you can take care of yourself and your spouse and make sure that your lifestyle needs may be met, that you know sort of take care of all these little things.
And then once you get the financial side, then it becomes a bit more complicated. Because then it's sort of the warm and fuzzy family issues of we've got individuals that may be involved with the company, some that you want to be involved, others that have no business being there, but you want to make sure everyone's treated somewhat fairly from an estate planning point of view.
So there's a lot that goes into the conversations, but I think the starting point is really understanding what you have and then sort of thinking about where you want to go and making sure that you, as the first generation let's say, can be taken care of in retirement.
Brian Greenblatt:
So you made an interesting point there about family members involved versus uninvolved. What have you seen work as families begin to talk about that? Because there seems to always be this conflict between family members who are engaged and those who are less engaged in it other than maybe at a board level. What have you seen families that have been successful do to make sure that that works?
Halsey Schreier:
I think the key to most of the successful transitions is open communication. And I think we see this not only in the family business setting, but in just multi-generational estate planning in general. The more open the lines of communication while generation one is still around, the deeper the conversations, the better understanding that everyone can achieve at the table, because they can ask questions as to why these decisions are being made. The hardest decisions to understand are those you are never fully explained.
So the families that have open lines of communication, have family meetings, come together and discuss long-term ideas of what their goals are for the family and their wealth, and in this case their family business, are the most successful. Because even those that are outside of the company then understand that, oh, everyone's thinking about this as a global family unit. Even though we're not a part of this ongoing entity, they know that they're a part of the overall plan and they understand the logic and reasoning behind the decisions made by generation one that's in control. Because it's a very touchy subject because generally not everyone's going to be involved with the business. There may be some children that have a better skillset and more apt to the business and others who just don't care.
But at the end of the day that family business is really generally the nest egg for the family and really the major generator of wealth. So whether it be eventually a sale to a third party or just the cashflow the business turns off, you want to make sure that there's an explanation as to why these decisions are being made, why this plan is being undertaken, and the more open the lines of communication, the more successful we found our families to be.
Brian Greenblatt:
I mean when you talk about communication, because I mentioned board, board members, both family on the board or external board members, is there some version of communication that seems to work better than others to make sure that they're talking? It's the family meeting, it's some version of that that you've seen work well to make sure... Because I do agree with you, communication is pretty important.
Halsey Schreier:
Yeah. I mean, the classic family meeting I think has been the most successful because everyone's in the room and everyone has a chance to see body language and just... Because obviously so much of communication, even though we're on a podcast, is nonverbal. And having that understanding the warmth of the room and being able to see when you make a statement, if something really impacts someone else in a negative way, without them saying a thing.
So having that classic family meeting, and obviously some of those got postponed for the past few years with all the Covid nonsense and everything else, but really getting everyone in the room and having an open way of discussion, that's what we've seen the most successful for our families be. Because it really allows everyone to contribute. And even if someone's not comfortable speaking in front of the group, you can tell. And then their needs can be discussed in private on the side and really help bring together all the different groups, because obviously all families have so many dynamics at play.
Brian Greenblatt:
So just so we don't leave this hanging here, and let's talk about your skillset a second. When you start thinking about tax and the implications of tax, are there key strategies to start early to start thinking about that from a tax perspective?
Halsey Schreier:
Yeah, so I mean, the transitioning of business within family combines a lot of different aspects of the tax world. You've got the income tax, because you want to make sure that if you're going to transition that business and you want to have a cash flow going forward, that it's structured in a proper manner. So a lot of times in this world we'll see some sort of combination between a gift to the next generation and a sale, to make sure that the generation one is taken care of in retirement. Because as I said earlier, that financial consideration, when you step away from the business, you need to make sure that you can live. So having that some sort of cashflow or some sort of tax efficient structure put in place, whether it be an installment sale or something like that, is always a nice thing.
But then you have obviously the overlay of a estate and gift taxes. And right now our estate and gift tax exemptions are at an all time high at the federal level. It's approximately $12 million in 2022, it's going up to about 13 next year. So that's a lot of value a family can pass on to the next generation without paying estate or gift tax.
So that kind of planning and utilizing those exemptions today or at your death and establishing trust to capture those exemptions and the value of the company, is very, very important. So a lot of times in this family world, we'll see this two-pronged approach where there may be some gifting done of the business entity and other assets to maybe those children outside of the business entity, but also some sale or some sort of structured sale from one generation to the other so that there's value given to that first generation so that they can retire comfortably and live the lifestyle they want to live.
Brian Greenblatt:
Since we're on this mixture of estate tax, family harmony, kind of all blended together, what do you see when you think about the primary business owner and their ability to let go? And how does that affect some of the decisions when you start talking about it early and the emotional aspects of that? Because it's a hard thing for someone to do, and I'm just curious what experience you've had, but also how you have seen people deal with it well?
Halsey Schreier:
That is one of the toughest things, because really the family business is almost like another child. And for that first generation who's created this business and built this business, that letting go is very, very difficult. And it takes a lot of thought and some people hang around a little too long. But it's really, it's having those discussions early and sort of putting a plan in place to transition the leadership and control to another individual.
So for the most part we'll see either, that next generation's either going to be one or a couple of children, and they become the leadership. And it's not something that happens overnight. It's usually a slow drip over time where generation one starts to give away a little bit of control at a time sort of as a test, and just to make sure that their instincts are correct and that generation two is ready. So if you have a business where you have a couple of divisions, maybe one takes over one and another child takes over the other, but you just sort of let them build their leadership from within. And as generation one becomes more comfortable, then more responsibility can be given.
So I mean, that allows sort of more of a natural transition to leadership, because the ones that aren't as successful are sort of the cold stop and then start up with someone else who hasn't maybe had the experience necessary to take on that leadership.
So that control aspect... I mean, that is the hardest question, other than balancing between the family members inside and outside the company, that idea of giving up control is definitely the most difficult thing to do. Because for the most part, generation one who has built the business. I mean, the business is almost like their alter ego. And so walking away from that is almost like walking away from part of themselves.
So from our successful stories, start smaller and give responsibility over time so that it's more of a thoughtful transition as opposed to cold stop and start over again with someone else.
Brian Greenblatt:
No, I think that that is so very true across the board. And I think the very first thing you said today was early, right? The earlier you do something, the more powerful it's going to be.
Halsey Schreier:
Correct. And unfortunately, this question gets kicked down the road so many times. But our most successful families are those that engage in this process almost constantly, where they're always looking ahead, they have a much more strategic view of their business, and they're not just thinking about this quarter or this year, but really where we are in five, 10 years, as our family expands, how we are going to incorporate individuals. It's really taking that long-term view.
And that's important, especially if your goal is to keep the family business within the family. You have to take an extremely long-term view because so many family businesses don't make it. They don't have luck on their side and they don't go through the process because there's always, "Oh, we can wait till next year." Well, that's not always true, and it's not the best practice. I mean, the earlier you can have these discussions and the more thoughtful you can be, the better it is for everyone involved.
Brian Greenblatt:
Well, it's interesting, you bring up another point, which is, today versus 40 years ago, there are many other opportunities for family-owned businesses to look for a transition. You have private equity, you have strategic, you have the family, you have management.
And when you think about the family unit today, is there a general mindset that people have going into it, again starting early, that... Are you feeling that the families today want to keep it in the family versus looking for other perhaps market driven ownership strategies?
Halsey Schreier:
I feel like so many family businesses start off thinking, I really want to keep this in the family. This is my legacy and this is something that I want to see grow. But, and I mean we've seen this a few times, it's where you start down that path and you realize how difficult some of these decisions are. And sort of creating that plan estate plan that really balances out between the involved family members and the ones outside the company, it's very, very difficult to achieve.
So I mean, even though the goal may be to keep it within family at the start, I think we both know that the simplest solution is to sell to a third party, and especially in today's world where there are so many different options available, it isn't just a competitor coming in or somebody else. There are so many different routes you can take.
So I think many families start off thinking, let's keep it within the family. But it takes a special family that is really, not to repeat myself too much, but open to those lines of communication and willing to put the time and effort in to transition to the next generation that actually can achieve the goal. Because this is the hardest business transition is to keep it in the family. It's a lot easier to sell to private equity or a third party and you just take the cash-out now.
So I think many families start off thinking, let's do this. And then as time goes on and generation two and generation three even are introduced, it gets more complicated and then it just becomes, well, maybe now's the time to move on and just create our legacy in a different fashion.
Brian Greenblatt:
Anecdotally, I get the most pleasure out of watching it move from generation to generation, especially when it's highly successful. And again, go back to the early comment and the ones that started early and have a thoughtful plan, have outside folks take a look at it and sort of vet it over a long period of time, have worked out relatively well. But it is from my perspective, most satisfying.
Halsey Schreier:
Definitely.
Brian Greenblatt:
And when you look at all the things we talked about today, and I think we've hit on it, but if you could pick one thing that's the pitfall, where do things fall short? What do you think that is?
Halsey Schreier:
I think when you're looking at this family business dynamic, where families really struggle and the most issues arise, is that the feeling of the fairness or equality for the generation taking on the business. And usually it's in the realm of we have a child or two or three involved with the business and other children outside, and there are hurt feelings, generally because of a lack of communication as to why these plans were made. Because that lack of communication, maybe because of a rushed planning process or just something happened in the family which caused a shorter window to allow for planning and the window closed too soon on communication, that's where we see the issues arise and that imbalance of perceived equity and fairness is not there.
And it's hard because you never want to talk about the end at the beginning, but I think that's something that... I mean, I've always thought about in my previous career as a tax attorney, and now it's, we always got to think about the end because we're going to get there eventually. So the earlier you can get to that discussion point, the better.
But it's that perceived imbalance between those individuals within the business and those outside that causes the most issues. And generally it's caused by lack of communication in the planning process and then an unexpected turn.
So I mean, we try to counsel our clients to avoid that and get the right team of advisors around them so they can get all the pieces in place, but it doesn't always work out in a rose garden. So it does happen, but we try to get the team of advisors in place early so that we can avoid that.
Brian Greenblatt:
Well, Halsey, I really want to thank you for your time and very enlightening to hear about your perspective on this. And I think if I had one theme of the day today, think early, think often, plan ahead. I think it goes without saying. But I really want to thank everyone for joining us on our podcast with a focus on the family dynamics that come into play when selling your privately held business.
If you have any additional questions, please feel free to reach out to me or your relationship manager at CIBC to assist. A well-executed transition is made possible through collaboration with your banker and other business advisors by communicating early on and asking questions, and sharing your ambitions for the future.
In our next episode, we'll talk about how to preserve family harmony when approaching potentially polarizing business decisions. In the meantime, check us out at us.cibc.com, or across several social media platforms by search @CIBC_us. Thanks for listening and we look forward to catching up with you soon.
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