Family businesses traditionally have difficulty in transitioning from generation to generation. Knowing when and how to transfer the business to the next generation is one of the problems that keeps business owners up at night--and many never get it right. In fact, two-thirds of family businesses fail to transition to the second generation, and only 10% make it to the third. A primary reason is the lack of an exit strategy that facilitates the financial independence of the older generation of owners without damaging the viability of the business. An effective succession plan strikes a balance between these two imperatives.

CBIA spoke recently with Peter Keller, head of private banking for First Niagara Private Client Services. We asked him how family business owners can ensure their own financial well-being without damaging the business as ownership transitions from one generation to the next.

CBIA: When is the right time to start thinking about management and ownership succession?

Peter Keller: We believe in starting the dialogue as soon as possible, and there are several topics that can get this important dialogue going. First, we help the family examine the business itself, as well as family history and dynamics, with an emphasis on including family members who are not actively involved in the business. Businesses will often have a natural successor already in place, yet this person may have not been officially designated as such. It is important to understand how the successor's management will interface with the existing owner. These kinds of conversations create the framework needed for the older generation to begin separating their personal financial needs from the needs of the business. With this framework as a basis, the exit strategy begins to crystallize.

CBIA: When you say the dialogue should start "as soon as possible," could you clarify?

Peter Keller: This tends to be a difficult conversation. It is often delayed indefinitely or does not start until there is a setback. Consequently, the conversation is forced on the individuals involved rather than being proactively planned. For instance, it may be initiated because of an illness or a valued family member leaving the business out of frustration with the generational transition. On other occasions, the owner is reluctant to take the necessary first steps because he or she is wary of the abilities of their potential successors. Sometimes the owners have been talking about designing a succession plan but waiting for the right time to actually act on the discussion. The key is to act now and start thinking about your personal needs, not just the business. Deciding on the financial resources you will need to maintain a comfortable retirement lifestyle should not be an afterthought. Many owners find that once they make their retirement needs a priority, it is often easier to make other decisions that will ultimately benefit the business and its heirs.

CBIA: How do you determine what financial resources are appropriate for your needs?

Peter Keller: The business owner needs to find neutral advisors who have family business expertise and with whom they can build a meaningful relationship. These advisors should collaborate and have regular access to each other as they coordinate the needs of the business with the needs of the family. Also, the business owner needs to be careful to pick the correct individuals for the family business situation. For example, in addition to your lawyer and accountant, a private banker should be a member of the team helping the business owner define his or her own personal financial goals independent of the business.

CBIA: What's the biggest advantage of having outside advisors?

Peter Keller: The transition of business management and business ownership is a balancing act. You need to weigh the needs of the business against the needs of the owner. What is needed is an impartial view that aggressively evaluates all alternatives. Business owners (particularly first generation business founders) see their business as an extension of themselves. It is difficult at best to step outside of the business for perspective without some help. They often see a personal exit plan as conflicting with the best interests of the business. Bringing in an experienced team of independent advisors allows the business owner to separate personal and business priorities and develop a plan that works for the best interests of both the business and the owner. This would leave more time for them to run the business--and sleep at night.

Peter Keller is the Head of Private Banking for First Niagara Private Client Services. His is responsible for credit and banking services for high net worth individuals, families, business owners, and nonprofits. As head of the team, Peter manages bankers in Connecticut, Massachusetts, Pennsylvania, and New York and has extensive experience in structuring credit facilities. Prior to joining First Niagara, Keller was Managing Director and New England Region Head of the Citibank Private Bank, and was a Senior Credit Officer.