Interview with W. P. Richardson
AUTHOR: W. P. Richardson
IdeaTransfer interviews W. P. Richardson on family run businesses, generational conflict and the expectations of Texas Financial Partners.
Founder, Texas Financial Partners
Whitley Penn Financial Services
IT. Most of your clients are privately owned businesses. What led you to focus in that area?
WP. I came from a third generation family business. My grandfather started the company and eventually shared ownership with my mother and father. I assumed after graduating from TCU, I would take my place in the business. However, I quickly learned that problems come in two forms in a family business—business problems and family problems. We had both.
Our business problem was new competition with a better and well-capitalized model. But ahead of that were unsolvable family conflicts between G1 owning 51% and G2 at 49%. I opted out after one year for the life insurance industry, where I gained the planning knowledge and experience to actually solve these kinds of problems.
IT. Grim statistics of family business survival may be driven by external competition and internal conflicts, but is there more to plan for?
WP. Ironically, success creates its own set of problems. Many thriving businesses won’t have liquidity to survive the tax impact of ownership transfer. Lack of liquidity plagues Texas family businesses where wealth may be tied up in land, leaving the business as the only asset with a market for provide estate tax liquidity.
Even founders who sell outside the family seldom realize the financial and tax impact of the transaction. Owners have to plan well in advance for any transition, and heirs have to stay with the plan after they inherit to realize the full value. Unfortunately, founders get caught up working in the business and delay working on the business as a family asset.
An example of the power of working on the business came up recently when circumstances allowed the founder to take advantage of a lowered valuation on the company. Losing value my not be good news in a business. However, reduced stock value meant the owner could gift more stock to trusts established for the next generation. By removing these assets from the estate and purchasing life insurance to meet the tax liability, the business can be preserved and the full value pass to the next generations.
IT. Go back to generational conflict—how can G2 earn a voice in G1’s planning process?
WP. Parents like equality for their children. In mature family businesses the next generation is already settled in careers and lifestyles, and equality doesn’t apply. For example, children who are active in the business look forward to reinvesting profits for growth, while the inactive owners want to see some income from the asset. Sustaining family harmony across generations can be hard enough while parents are alive, so it’s discouraging to watch plans unravel after they are gone.
Strategies to equalize the value of inheritance without conflict are integral to the plan, so I favor family meetings during the planning process and continuing when assets pass across generations. The next generation may not know what the transfer of the business and family assets can mean to them, because wealthy parents often avoid financial disclosure for security and psychological reasons. But equally important, a multigenerational plan is effective only if the next generation adheres to it, and the meetings help align everyone’s intentions and expectations.
IT. Isn’t it Texas Financial Partners intention and expectation to assure that multigenerational harmony?
WP. Exactly, because the planning process and the financial strategies to fund tax liabilities and asset equalization create a long term commitment to provide clients advice and service. We refer to Texas Financial Partners as a client continuity merger dedicated to preserving the quality of that advice and service across generations.
IdeaTransfer is an independent firm with three decades of experience consulting with advisors, advisors groups, and financial institutions.
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