The deteriorating economy is causing headaches for H. Chandler Taylor and his wealthy clients. Some of the biggest headaches belong to family business owners, says Taylor, a principal at St. Louis-based Moneta Group. Many of these clients have the bulk of their wealth tied up in their businesses. "The more successful they are, the more they have to deal with the question of what will become of their business—will they sell it outright or pass it on?" Taylor says.

These days, that's a tough question to address. One of Taylor's clients, the owner of a specialty textile company, hoped to transfer ownership to his employees over time by structuring an employee share ownership plan (ESOP). But ESOPs require financing. "There isn't a bank out there willing to support this transaction at a price he felt was even close to reasonable," Taylor says. "He's ready to retire and transfer the day-to-day of the business to key employees; now he has to adjust to staying at the helm until lenders are less risk-averse."

For clients like Taylor's, who are owners of solid businesses they've run for decades, these are trying times. Even if the recession hasn't hurt them, lack of access to capital markets may. And since the bedrock of most financial planning practices is the family business owner or entrepreneur—an individual who has transformed a family-owned restaurant into a chain of cafés, for example—advisors must be prepared to grapple with the ramifications for clients' financial plans.

The Long-Term View

In some ways, family business owners are in a relatively strong position, according to a new report by the Economist Intelligence Unit on behalf of Barclays Wealth, a division of Barclays Capital. The report found that family business owners tend to take a longer-term perspective and are less likely to take outsize risks to boost short-term profitability. "These traits can lead to a conservative financial and business strategy which, while it's rarely favored during boom years, comes into its own when the market enters a downturn," the report concludes.

Steve Salley, Florida-based director of the family enterprise initiative at GenSpring Family Offices, agrees. After three decades working with family business owners, both as a lawyer and within a family office, he believes these companies have a degree of flexibility that others don't. "The family members tend to be more patient shareholders [of the company], and identify with the business more closely than a typical shareholder will," Salley says. "In tough times, there is an emotional link to the business that pulls family members together and helps them focus on what they need to do to get through the turmoil."

That doesn't mean planners working with these clients won't face a lot of problems as the recession drags on, however. Tough times magnify any existing strains between family members, whether they're involved in the business or not. A family member who forgoes a salary increase or bonus may find it hard to understand why some relatives complain that their dividends aren't growing as they once had. Second- or third-generation family members with differing visions for the company's future may end up in open conflict as the business tries to address long-term strategic issues.

Transition Problems

One of the biggest issues planners are likely to confront, as Moneta's Taylor has already discovered, is that the economic environment is likely to force family businesses to reconsider the nature and timing of their transition. Until recently, capital was so readily available and tax rates so low that for many business owners selling their business was the logical strategy, says Matt Brady, managing director of the wealth advisory group for Barclays Wealth.

"Now there's an incentive for the family business owner, the family and the advisor to discuss other options. The odds are current owners are going to be running the business for longer than they might have anticipated, so there need to be discussions about what it's going to take to make that work."

Conflict between family members over the direction of a family business, poor governance standards or reluctance to bring in professional managers can offset strengths that are otherwise associated with family businesses, the Barclays Report notes. And it may fall to the business owner's financial advisor to provide guidance and seek necessary experts to ensure that a short-term economic crisis doesn't damage the long-term outlook for the family and the business.