#Family Business Advisor, #2008 Archived
For many, the transfer of a Family Business can paralyze the Advisor as well as the Owners. There are so many decisions, and so many choices. What should be tackled first? There is, in fact, a logical sequence that can be followed flawlessly.
Before we jump in, start asking questions, and forming strategies, we need to understand the subconscious
forces at work in the minds of our clients as well as team members. The field of Behavioral
Economics studies human behavior in order to anticipate common impulses that do not promote rational
This article will discuss four of these common impulses. Next month, we will review another four
impulses that can lead us to the wrong conclusions.
In transferring or selling a business, these subconscious impulses can often lead the client or Advisor
off-track or down blind alleys. In addition, we have provided below some of the common ways to
counteract these impulses.
- Overconfidence. Our brain can be overconfident in its abilities especially in making accurate
estimates. These characteristics can have perilous consequences when it comes to
developing long term strategies, based on our client's estimates of what may happen.
Often I have seen client's projections and estimates of uncertainties to be unrealistic or
overly optimistic . To counter this tendency: Purposely scale down projections by 25% to
allow for unexpected issues.
Mental accounting is defined as "the inclination to categorize and treat money differently
depending on where it comes from, where it is kept, and how it is spent." Many
business owners spend impulsively as long as it is "deductible." To counter this tendency:
Judge all investments on a consistent criteria. Be wary of spending which has
been re-classified to make it acceptable.
The "Status Quo" Bias gives people a strong desire to hang on to what they
own. Owning something makes it more valuable to the owner, and this makes Owners
reluctant to sell businesses. Many business owners fail to invest outside of their business.
When it is time to transfer or sell the business, Owners must obtain the highest conceivable
price to maintain their standard of living. To counter this tendency: Remember that
the failure to sell now may result in a lesser sale price later when health issues, death or
business losses deteriorate the value of the business. Many Owners change their business
investment strategies in manner and scope as they approach retirement.
Anchoring. Present the brain with a number. Then ask it to make an estimate of something
completely unrelated, and it will anchor its estimate on that first number. Anchoring
can be a powerful tool in negotiations. Unscrupulous negotiators will name a high sale
price initially for a business to get the attention of the owner. Later, the Buyer chisels
away at the sale price until it is unrecognizable. To counter this tendency: Consult with
an objective firm to more accurately value your business.
Steve Robison has assisted Advisors and Family Businesses successfully navigate the sale or transfer of their Family Business with the lowest possible tax impact and the greatest value for the parties involved!