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Listen now! Five Mistakes Business Owners Commonly Make

In less than five minutes, learn the five major risks family-run businesses commonly overlook.

A man works with his son at their woodworking business.

Podcast Transcript

Host: Dave Specht, National Development Manager for Family Dynamics, Wells Fargo Private Bank

[Dave]:

Building and growing a business from scratch takes a unique set of talents and character traits. Perpetuating a business across generations takes a different set of skills altogether.

I’m Dave Specht, the Family Dynamics National Development Manager for Wells Fargo Private Bank, and I’m your host for “Your Financial Journey,” a podcast series that explores questions that families of wealth commonly face.

So why is it so difficult to pass a business from one generation to the next? In our view, there are five major risks that business owners commonly overlook.

  • 1. The lack of a formal contingency plan for the ownership and management transitions that are inevitable. Having a documented backup plan if leaders retire, leave the company, or pass away should be mandatory, but most companies don’t have formal contingency plans. Understanding how ownership will transfer as owners pass away is also key to the stability of the organization and to the well-being of the family unit.
  • 2. The absence of an entrance strategy for family members returning to the family business. Set expectations with family members and next-generation owners around their roles and responsibilities and what they will be accountable for. And just as important is creating governance policies that support and reinforce those expectations. Without this clarity, there may be trouble for the business and likely struggles in the family relationships.
  • 3. No clear strategy for communicating with nonoperating shareholders. Managing expectations and setting a pattern of communication with nonoperating shareholders is key to keeping them emotionally invested in the company. Whether that means sharing annual financial statements or just an update on the business performance and key opportunities and challenges in the future is helpful.
  • 4. The lack of a clear path to liquidity for shareholders. Privately held company stock doesn’t always have a ready market. Forward-thinking business owners will put strategies and structures in place to create a path to liquidity for shareholders. Without a clear path to liquidating shares, and regular valuations, shareholders may feel disloyal when they’d like to sell their shares. It also could represent a risk to the business if the business isn’t prepared from a financial perspective to provide for this liquidity event.
  • 5. No personal cash flow planning for the founding generation. While business owners may amass wealth in a company, many struggle to know how to create the same level of cash flow outside of their company. Others struggle to know what their lifestyle expenses are because many of those expenses were run through the business.

Consider investing time now to help minimize the business and relationship mistakes that business-owning families commonly make. To learn more, contact your financial professional at Wells Fargo Private Bank.

What can Wells Fargo do for you?

Creating a plan for every generation of your family can be a challenge. Schedule time with your team to get started.

Wells Fargo & Company and its affiliates do not provide legal advice. Wells Fargo Advisors is not a tax or legal advisor. Please consult your tax and legal advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your taxes are prepared.

Wells Fargo Bank, N.A. offers various advisory and fiduciary products and services including discretionary portfolio management. Wells Fargo affiliates, including Financial Advisors of Wells Fargo Advisors, a separate non-bank affiliate, may be paid an ongoing or one-time referral fee in relation to clients referred to the bank. The bank is responsible for the day-to-day management of the account and for providing investment advice, investment management services, and wealth management services to clients. The role of the Financial Advisor with respect to Bank products and services is limited to referral and relationship management services.

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