“End Game” Training for You and Your Heirs

Most of us do not have up-to-date estate plans on how we want our heirs and/or charities to act. First, we have to decide whether or not we envision our current operating activities surviving us. Second, we need to contemplate a rapacious US Internal Revenue Service putting a high price on our business assets. Having been consulted by these people, I know one of the standards in placing a valuation on financial services companies is to determine what a third party would pay for the assets. There is a huge gap between the value that a competitor might pay for a sound operating business and what would be paid by an absentee owner of the free cash flow that a company can throw off. Taxes will have to be paid before an owner’s heirs get their money unless an installment payment is negotiated. These considerations lead to the need for training.

Replacement Training

The reason most people become entrepreneurs is that they do not fit comfortably within others’ organizations. As my good wife Ruth reminds me, like many entrepreneurs, I do not deal well with chaos that I do not create. Rarely do entrepreneurial people enter most industries with the object of managing people. They want to manage money, ideas or a few key relationships. While there are numerous trainees in our business community, they are being trained as functionaries to complete various, at times, important tasks. Rarely is time devoted to the training required to make big, as well as everyday, decisions. Talented entrepreneurs are extremely well-disciplined internally and require the exacting work of subordinates. However, it is natural for these Type “A” personalities to immediately make important decisions themselves, perhaps consulting perceived experts. Rarely to they go to key subordinates and ask them how they would make key decisions. Even rarer do they ask how the decision of the subordinate would be different than that of the owner. (Unless this is done, the feedback is “copy-cat,” and may not be representative of what the subordinate/leader-to-be will do.) One of the most difficult tasks of a leader with a potential leader is to let the manager in training make mistakes. All mistakes should be learning experiences for both the teacher and the pupil, but there is a limit as to the price the firm can pay for this kind of learning experience. Some portion of each day, week and month will need to be devoted to this crucial training,

If you can not locate acceptable entrepreneurs-in-training, then your business heirs need to have a well-developed plan to sell the assets that recognize the diminished value of the company without your presence. Hopefully, the IRS will accept the immediate sales price as the valuation for estate tax purposes.

Heirs Training

The various administrative details of settling an estate can be handled by lawyers, accountants, executors and trustees. All they are dealing with is the numbers that you have left behind. For many of us, our concern is for the lives of those that we have left. If we want them to conduct themselves in a particular fashion, we must train them to do so. One should not rely on the training your heirs got growing up. They are different now and most importantly, their financial lives as well as their emotional lives are different. Just as one needs to find the time to train someone to succeed the entrepreneur in business, one should commit to training your spousal partner at home, children, grandchildren, nieces and nephews. All can learn that the ultimate destruction of wealth comes much more from excessive spending than from investment mistakes. I have seen too many instances where money has been spent on the pleasures of the moment, acquisitions of assets that have done little to improve people’s lives now and more importantly in the future.

Some of the heirs need to become aware of various investment considerations, this may be particularly important in the succeeding generations. The financial aptitude of the heirs, including favored charities, has a lot to do with the proper construction of the investment plan that underlies the estate. A few heirs can be given some well-earned discretion, others not. Life-long spending patterns are an important input into these plans. One should examine the practices of favored charities in order to develop an appropriate giving plan. Some wonderful and very worthwhile groups lack some financial discipline or expertise and should be supported with those limitations in mind.

External Help is Available

Some people of wealth will want to develop their own plans and training arrangements. However, there are external sources that are available that can provide both educational and investment expertise to the extent desired.

I would be happy to discuss this off-line with anyone in this situation.

A Post-Script

“Whether you are doing it or not, it is happening.” This belief in succession training for business owners was the essential message I gave recently to an audience of financial services entrepreneurs who live or work near Summit, NJ. My talk was before a the second meeting of a group called The Summit Roundtable (TSR), which was modeled loosely on the Greenwich Roundtable. The group needed a speaker that would attract members of the widely defined financial services industry before the group started to attract potential clients for hedge and private equity funds.

The Inevitable End Game

The key from my point of view is that the termination of one’s control of operating and financial assets is inevitable, but the date is uncertain. To have a reasonable chance to accomplish to what we want of our lives, we should plan and probably increase our training efforts.
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