MARK RIEPE: I'm Mark Riepe. I head up the Schwab Center for Financial Research, and this is Financial Decoder, an original podcast from Charles Schwab. It's a show about financial decision-making and the cognitive and emotional biases that can cloud our judgment.
At the end of May 2023, a hit HBO show aired its series finale after four drama-filled seasons. I'm talking about Succession, which was nominated for 75 Emmys and won 19[1] and certainly featured a lot of psychology and hilariously inventive insults, which is our stock-in-trade here at Financial Decoder. By stock-in-trade, I mean the psychology part, not the insults. I mention the show because succession is the topic for today's episode.
I'm not talking about a fictional dysfunctional family's power struggle for control of their multi-billion-dollar enterprise, but a discussion of how to plan to keep a business going after the founder or owner is no longer at the helm. If you own a business that you plan on passing to one of your offspring, here's hoping your family is more well-adjusted than the greedy and backstabbing Roy family of the TV show. To help us better understand succession planning and what options are out there, Austin Jarvis is joining us.
Austin is a director here at the Schwab Center for Financial Research. He specializes in business succession, and he also analyzes and provides insights on estate planning and taxes, complex gift and trust planning, advanced charitable strategies, and executive compensation.
Austin Jarvis, welcome back to the podcast.
AUSTIN JARVIS: My pleasure, Mark. Thanks for having me back.
MARK: So clearly this episode is directed at business owners who need or should be thinking about succession planning. Tell me a little bit about who is that? Who are we talking about? Or maybe more precisely, what types of businesses are we talking about?
AUSTIN: So in my view, succession planning applies to any business where there's more than one owner or where the owner's planning on utilizing the value of their business to either fund their retirement or pass that business down as a part of their legacy-planning goals. So I think you'll be really hard pressed to find a business that exists today where one of those situations does not apply.
MARK: Yeah, I think that's probably right. And this maybe seems like kind of an obvious question, but do you get the sense that business owners understand the importance, and are they starting to take actions to really make sure that they're prepared?
AUSTIN: Well, again, as I said before, I think succession planning applies to all businesses, but let's take a step back and look at some cold, hard numbers. When surveyed, 90% of business owners said that having a succession plan was important. But of those same business owners, 79% did not have a written transition plan in place.
So that's pretty rough to hear when you know that over the next decade, roughly $10 trillion worth of business value will transition either to a third party or to the next generation. And not to add salt to the wound of any business owner who's listening right now, but there are two other statistics that they should know.
First, for family-owned businesses, only 40% of them survive to the next generation. And it doesn't get any better for the third generation. It's even worse at 13%. And for those businesses that are put on the market to sell to a third party, 70% of them never do. Now, I don't want to be an alarmist about these statistics, but it does highlight why succession planning is important and why you should start early.
MARK: Yeah, I think those statistics are great, and this certainly wouldn't be the first decision which people understand at an intuitive level if it's important, but they have a hard time kind of getting going and getting started on trying to make the decisions they need to make.
And I think one of the things I like about your reports that you do for Schwab is that you really do a nice job of explaining in plain English what some of the key issues, the key decisions, are that really involve any kind of wealth management problem. So for succession planning, give me a sense of that. What aspects of the succession planning, what are those key decisions that need to be made?
AUSTIN: One of the first things we must consider when planning for a potential sale are the financial consequences for the owner. First question, when does the owner want to retire? Does the owner want to have a hard retirement date where they never have to deal with the business again? Or do they want to slowly transition out of the business?
Other things to consider are the income tax consequences of a potential sale, because if you don't plan for them, you could end up paying wildly more in income taxes than you would otherwise do if you had planned early. Other things to consider are the estate tax concerns. And finally, how to use the proceeds from that sale in order to fund either your retirement, charitable, or legacy-planning goals.
MARK: My guess is that that list grows a bit when we start thinking about businesses with multiple owners. Is that right, and what are some of those complications?
AUSTIN: Yeah, absolutely. For the businesses with multiple owners, there's a multitude of additional considerations, particularly in planning for the unexpected. 50% of small businesses transition due to the five Ds, which are death, disability, divorce, disagreement between the owners, and distress. And when I say distress, that could be the distress of the individual business owners or financial stress of the business itself.
One of the most eye-opening conversations I have with owners concerns death. I typically will say to them, without a written succession plan, do you realize that you may be in business with your business partner's spouse if that partner dies? These conversations quickly turn into whether their surviving spouse will give up their own career or whether they have the skills and experience to step into the business on day one.
Most of the time, the surviving owner would simply like to buy out the deceased owner's interest in the business. But if that is the actual goal, you must have a plan in place to ensure that that's what happens. Because without a plan, you have to negotiate with whoever is the new owner once that business passes through the estate. And they might not want to sell if they can just simply sit back and still get their share of the profits without having to do any of the work.
MARK: Yeah, those are great points. This is purely anecdotal, but as I think about some of the business owners I know, most of them are actually in family businesses. So what are the unique variables or situations that come up with a business that's family owned and really wants to keep that ownership down the line within the family?
AUSTIN: So family-owned businesses have unique challenges to plan for. First and foremost among them is identifying a successor to ensure the continuity of the business.
Is that family member going to own and operate? Or do you have a key employee who might have to run the day-to-day while the family member simply maintains ownership and kind of oversees what that key employee is doing?
So there are two common issues we encounter. The first is simple, transitioning to the next generation. But even that can come with issues. Does the person you want to succeed you have all the skills necessary to step into your shoes on day one, or do they need months or perhaps years of training?
What if there's more than one person you want to leave the business to? How do you structure the leadership of the business so that you can avoid future conflict? Do you want to have to step in and mediate conflict after you're out of the business because the people that are in charge of the business are your children or perhaps a combination of children, grandchildren, or other family members?
Beyond that, many owners must also consider how the transition affects their estate plan. Are you going to sell the business to a member of your family? Are you going to gift it? Are you going to do a combination of them? If you're going to gift it, how much of your lifetime gift and estate tax exemption does that utilize? Because that could mean more of your personal estate will be subject to estate taxes in the future.
Another consideration in this area is how to allocate your estate at death. If you transition the business to one of your children, how do you account for that at your death? Do you give the other children an amount that's equal to the value of the business?
Or do you give less, given that the child who's going to get the business must put in sweat equity, their time and effort, into a venture that has overall inherent risk? Whereas if you're giving cash to the other children, there's really no risk for cash.
So simply put, I often tell my business owners when they're trying to equalize their inheritance is considering a business transfer versus, you know, stock or cash that what's fair is not always equal. And what's equal is not always fair.
MARK: And I've got to believe that at some point, Austin, in these conversations, somebody is going to undoubtedly bring up, hey, maybe we need some new blood, some new money, and selling it to a third party. What are some of the advantages and disadvantages of that approach?
AUSTIN: So one of the biggest advantages of selling to a third party is the near immediate liquidity it gives to the owner to plan for their own retirement, charitable, and estate-planning needs. Whether you receive an immediate upfront lump sum payment or receive fixed payments over time, you can have a greater sense of certainty about your future.
So as I mentioned before, many business owners, their business represents the largest asset they own. From a financial-planning angle, though, this represents a large concentration of their wealth that is subject to all the risks inherent in owning a business. Is that business recession proof? Is it cyclical?
That can cause big problems when you're trying to transition, because if you're transitioning during a recession, your business might be worth drastically less than if you're in a booming economy. So selling the business to a third party allows you to diversify your overall portfolio to better spread out your financial risk.
But that sounds rosy. That's an immediate advantage, basically getting the value of your business in either a lump sum or payments over time. But there are some disadvantages to selling to a third party you should be aware of.
The first thing that you should know is that you are no longer the person calling the shots and setting the direction of this business. Some owners may not care once they're paid, but many owners have an emotional tie to their business, so seeing it move in a new direction could be distressing to them. Add to that the possibility that the business you poured your life into could end up failing because of someone else's decisions.
That can be pretty hard to process for a lot of business owners out there that have poured their life and soul into this business, sold it to a third party only to see it fail within a year or two. And once that sign comes down, that's an emotional hit that many business owners really aren't prepared for.
I also warn against the exact opposite. What if the business succeeds beyond the old owner's wildest expectations? Those new profits belong to the new owners, not to the old owners. And it's sometimes very hard for an old owner to accept the success of the new owner because they feel like their equity is what drove that new success.
MARK: Those are great points, Austin. We know listeners love examples. So do you have specific examples that you can share where some of this stuff has played out in real life?
AUSTIN: Sure, so I remember one client, after years having sold the business, being upset that he sold his business to a venture capital firm that ended up succeeding in ways he never thought possible.
And why did that venture capital firm succeed buying that business? Because they had access to capital that the old owner didn't. They invested in new technologies, they brought down costs, they hired more experienced professionals than the family members who were previously running the business, and they hired an experienced marketing team to drive sales that eventually led them to expand well outside their home market. That old owner lamented that the name of his business was now all over the airwaves, yet he didn't get anything beyond the contract price.
Now on the flip side of that, we had one family business here in the mountains of Colorado that had been operating for generations but could no longer compete with their corporate rivals nearby. They eventually sold with the hopes that the new owners would use their well-respected family name and keep the business going indefinitely.
Instead, the new owners quickly sold off the assets of the business and shuttered operations. Why? Because the new owners figured they could make a quick profit by selling off all the underlying assets. The buildings, the equipment, the land, all of it sold separately without caring for the employees that were employed by that family business or the family name in that community. And those old owners were in shock.
But nowhere in the contract did it say that that business had to continue operating and that the family name had to be protected. The new owners saw an ability to make a quick profit, and they took it. And the old owners were not prepared for that.
MARK: Yeah, I think sometimes maybe people have the impression that, hey, we can just sell to a third party. And walking away, it sounds pretty clean and simple, but life usually isn't that clean or simple. So what are some maybe some other examples of some of the practical difficulties that get in the way, particularly with a family sale?
AUSTIN: This is one of the areas where I caution business owners. So many family businesses employ family members, and those family members rely on the business for their livelihoods. So if you sell to a third party, you need to do one of two things. You either need to have provisions in the sale contract that protects your family members' jobs.
Or you need to make sure that those family members are completely aware of the risks and understand that their jobs and livelihoods are now subject to the new owner's plans and whims.
MARK: Yeah, I think families are complicated. I suspect we all know that. You've got a family. I've got a family. We all sort of get that. And I'm wondering what are some other dynamics that pop up solely because of families involved that probably wouldn't if you had a bunch of non-related people running a business?
AUSTIN: So I want to broach this topic with some sensitivity. There are often issues with family dynamics that must be managed. You'd be surprised how often siblings are given ownership of the family business only to have old sibling rivalries rear their ugly head in the future.
Who's going to be the mediator when that occurs? Do you as the business owner, who's basically out of the business now, 'cause you've made that transition, do you want to come back to settle squabbles during your retirement? I know that I wouldn't, but there are times when those old teenage rivalries rear their head again.
Another common issue happens when the old owner simply refuses to back away from the business. They have technically given up their ownership and control yet are somehow always involved in future business decisions because they are the matriarch or patriarch of the family. The new owners of the business, whether that's children, grandchildren, whoever it might be, might find the inability of the old owner to step away as intrusive, which can cause family discord.
So in short, unless all the family members are on the same page as to how things are going to run going forward, there is a possibility of really good intentions erupting into family acrimony.
MARK: So at this point, we've identified a lot of these pieces of the puzzle that need to be dealt with. So what does the process actually look like? How do people get started? What are the first steps involved for people that want to move forward and start thinking proactively about transitioning to a new owner?
AUSTIN: So this is going to get technical, I guess, on the more mathematical side of things. So just upfront warning. The absolute first thing that you should do is make sure your bookkeeping is in order. You'd be surprised how many times that we've talked with business owners, and they say that they've got an idea of what their business is worth, so on and so forth.
Well, let's see your books. Let's see your financial statements. Let's see, you know, how much income you're bringing in every year, and they simply don't have good records for us to be even start working on. So we have to engage an accounting firm.
So this means that you need to have your business financial statements audited to make sure they're in good order. So why would this be the first step? Because it will matter to both a third-party buyer and to the valuation expert when they start looking at what your business is worth. And most importantly, for the business owner, it matters to you.
How do you even begin to start to plan for a sale or a gift of your business without knowing the value of what you're planning for? So from there, you should look to lock down key employees that are essential to the success of your business and perhaps lock in long-term contracts or leases that are also essential. This makes your business way more attractive to third-party buyers who know that they won't face personnel or logistical issues immediately after their purchase.
But on a more practical level, you may want to investigate the experience and future plans of the new owner of the business if you can and are allowed. Are they someone you are comfortable selling the business to? Just because they offer you the right amount of money for your business doesn't mean you have to accept it if those emotional ties to your business basically say, "I don't want to sell, even for that amount of money, because I don't agree with the direction that you're going to take my business."
MARK: Yeah, it sounds like, obviously, you know, keeping good business and financial records, that makes a lot of sense. On the people side, what are steps that they can be doing right now to get ready?
AUSTIN: First things first, we've identified keeping good business and financial records is essential. But as early as possible, start identifying someone to either purchase your business or someone that can succeed you as early as possible. You can lock down these contracts for a third party years into the future if you'd like.
For your successor, if you're passing it down to a family member, make sure that you train them, that they are going to be known to all the people. If you're the rainmaker of the business, make sure that you're bringing them into the meetings with you so that they can start meeting the people that they need to know. This process can take months, it can take years, but if you're basically the rainmaker, make sure that the successor's with you so that the transition is easier.
MARK: We'll get back to Austin in a few moments, but I wanted to jump in here because I'm not sure that people who aren't small-business owners realize how difficult it is to create and maintain a small business.
According to the U.S. Bureau of Labor Statistics, of all the private-sector businesses born in March 2013, only 35% of them were still around 10 years later.[2] Overall, the survival rate for the businesses surveyed dropped most in the first year.
If the business made it past the first year, the survival rate kept going down, but it declined less rapidly with each passing year. If you're the owner of one of those businesses that continues to hold its own, well done. You've accomplished quite a feat. Running a small business is difficult. A lot of hard work and long hours, missed vacations, countless sacrifices.
If it succeeds, you can take the credit, but if it fails, it's all on you. It's an understatement to say that you have a lot of skin in the game. Because of this, there's a lot of emotion that can get in the way of rational decision-making. And entrusting a business you built from the ground up to the next generation is especially charged.
In the next part of my interview with Austin, I mention three biases, and I wanted to give you some more background on them. One is called the IKEA effect. This is when we value something more if we create it ourselves. The IKEA effect was coined by three researchers in a 2012 paper "The IKEA Effect: When Labor Leads to Love."[3]
You can see how the IKEA effect could cause someone to believe that the business they founded and dedicated themselves to for many years is worth more than its competitors. You can also see how this overestimation could be a hurdle if the owner wants to sell because they might hold out for a higher offer, which they feel is fair, that may never come.
Related to the IKEA effect is the endowment effect.[4] That's the cognitive bias where we value an item more if it belongs to us. In the original study[5] researchers Daniel Kahneman, Jack Netsch, and Richard Thaler divided a bunch of college students into two groups, buyers and sellers.
They gave the sellers mugs with a university logo on them. The sellers could either keep or sell their mug. The students in the buyer group were instructed to try to buy the mugs. The researchers asked the sellers what price they thought the mugs were worth, and they asked the buyers what they'd be willing to pay for those same mugs. The seller said the mugs were worth double what the buyer said. The students only had these mugs for a short time, and yet they grew surprisingly attached to them.
Imagine how strong the endowment effect would be for a small business you've owned for decades. If you'd like to hear more about the endowment effect, one of our sister podcasts, Choiceology, did a fascinating episode on it called "Love the Mug You're With."[6] Richard Thaler is one of the guests, and we'll include a link in the show notes.
Finally, we're also going to talk about the optimism bias.[7] This is when we believe we're much more likely to have something good happen to us and, conversely, we believe it's much less likely that something bad will happen.
This is probably why some entrepreneurs start a business in the first place. They believe they'll succeed despite statistics like the ones I quoted a few minutes ago citing how two-thirds of small businesses fail within 10 years.
Regarding succession, the optimism bias may cause some small-business owners to believe that they'll never have to give up their business, so they don't bother putting together a succession plan. Nothing bad will happen. They won't get ill or old or be forced to consider finding a successor, so they don't do it.
OK, enough with academia. Let's get back to my conversation with Austin Jarvis.
So Austin, we've talked a little bit about some of the decisions that need to be made, and now I want to kind of go on a different path and talk about some of the cognitive and emotional biases that get in the way of people making the decisions that they need to make.
And so when I think about these business owners, if you're, let's face it, if you're going to be an entrepreneur, you have to have a fair amount of optimism. And so from your experience, does that get in the way of making good succession plans for the future?
AUSTIN: Absolutely. So, one of the most common misconceptions business owners have, especially in the early stages, is that they are invincible. That they will be the exception and never face one of the issues that tests a business's continuity plan.
Every day, somewhere in America, some business owner will wake up and have an issue that could potentially devastate their business that could have been planned for. Examples: What happens to the business if your business partner gets a divorce? What happens to your family and your business if you get into a fatal car wreck on the way to the office?
All of these what-ifs are the things proper business and estate planning can address. My goal has always been, when working with clients, is to make it easier for them to put their head on their pillow each night, knowing that if the unexpected happens, that they have a plan to deal with it.
MARK: Austin, there are a couple things in the academic literature. One's called the IKEA effect. One's called the endowment effect. And basically, both of these are the sorts of things that cause people to overvalue things that either they own or they've built themselves.
And so we haven't talked at all about valuation—or in this case maybe overvaluation. So how often does that come up and become kind of a stumbling block to getting the process moving forward?
AUSTIN: It comes up way more often than anybody would really think. So the second-most frustrating misconception in business planning is dealing with the value of the business.
Very rarely do we have conversations with an owner where the value inside the business owner's head matches the eventual appraised value. You can imagine some owners who think their business is worth drastically more than the actual value, but when that valuation comes back, seeing that lower number can be deflating to the owner's ego, but also put a strain on the owner's future plans because now they have less value to work with.
Now, I will say at the other end of the spectrum, you have owners that believe their business is worth much less than it actually is. Now, these are much less common, but they do happen in practice. And when it happens, you must guide the owner on all the planning considerations that come with having a business with a value that's higher than what was expected. Here you need to talk about how to protect that value during the owner's life, and then how to transition that value into either their retirement or estate-planning needs.
MARK: Austin, earlier you mentioned that, I think the number was 90% of business owners recognize that succession planning is important, but 79% or something like that do not in fact have a written succession plan. So to me, that sounds a lot like just good old-fashioned procrastination. What do you think?
AUSTIN: Absolutely. In fact, a lot of the initial conversations we have with business owners occur when someone close to them passes away or they see another business fail because of lack of planning.
These are basically the same types of calls we get for estate planning, when someone close to you dies, and you realize you don't have a will or a trust or any of the other estate-planning documents. So for many of these business owners, they're juggling so many things all at once—making payroll, completing inventory, making regulatory filing deadlines, paying taxes, coaching their kid's baseball team, and making time for their marriage. I could go on and on and on.
But planning for years or even decades down the road for something that may or may not happen often takes a back seat to the immediate needs in front of them. But it's when they see the consequences of the failure to plan that suddenly that amorphous long-term planning issue becomes an immediate need and they take action.
MARK: Well, the good news, though, is that there is professional help available. Business owners don't have to go it alone on this sort of thing because a lot of these are technical details.
So maybe if you could spell out a little bit what kind of help, what kind of specialist, should a business owner be looking for to help make sense of all this?
AUSTIN: Sure. So the amount of specialists needed to sell a business can seem overwhelming, but each of them brings a certain expertise that is highly needed. From an onset perspective, I would say that the business owner looking to sell needs at least a CPA or accountant; an attorney; a business broker, so just like you'd sell your house, you need someone marketing your business; and a business valuation expert.
That last one, that business valuation expert, is crucial because most of the issues that the IRS might have with the sale or gift of a business will have to do with the value of the business. So when you're looking at a business valuation expert, make sure you hire one that has a history of having their valuations withstand IRS scrutiny.
And if you're planning on using the proceeds of the sale to either fund your retirement or being used for estate planning, make sure you bring in financial professionals who can guide you on how to properly deploy those proceeds for whatever goal you may have.
MARK: So Austin, that's a pretty good list. I wonder if those needs, do they differ if it's a transaction involving one generation to the next versus selling to a third party?
AUSTIN: Valuation experts are needed in both scenarios. For third-party sales, you, as the seller, will likely have a valuation you're bringing in to start negotiations, just as the buyer will likely have one as well.
For estate planning, a valuation is critical for being able to substantiate the value reported on a gift or estate tax return. Now, for passing to the next generation, estate-planning attorneys are more often involved, just because there's more options available.
If the business is going to be sold to the next generation, that's a consideration. Is it going to be gifted outright or a combination thereof? Or is the business going to be put into a trust, which is also an option?
So the estate planning that can be accomplished during a business transition period, whether sold or gifted or a combination, can really set up a family for long-term success.
MARK: Austin, what about the size of the deal? Does that influence the complexity of what we're talking about here in the extent to get all these other parties involved. I'm guessing a million-dollar transaction is very different than a hundred million.
AUSTIN: Absolutely. So the size of your team is going to depend on the size of your business just because there's a lot more I's to dot and T's to cross. So from a third-party selling standpoint, if you've got a million-dollar business, you might just need a CPA, an attorney, and a valuation expert. You may need a business broker. For a hundred million dollars, you might need a wide-ranging team that includes everything that we've talked about.
But for estate-planning purposes, you need to look at the value of your business combined with your personal assets. If that starts to get close to either your state or federal estate tax exemption limits, you're going to need to have an entirely different team.
You're going to have estate-planning professionals and business valuation experts that are competent in the estate-planning world to be able to help you because you need to have that guidance from an attorney to say, hey, here's how this sale or this gift is going to affect your future plans. Because if you do gift your business, you're going to lower that estate tax exemption amount, and more of your personal assets might be subject to estate taxes in the future.
And I'd be remiss right now, just knowing we're going into 2025, unless things change, the amount of lifetime exemption is about to fall by about half. So currently you've got close to $14 million if you're an individual to be able to give. That's going to be basically indexed for inflation. We're looking at probably 7.22 million in 2026. So about half of what you can currently give.
So that's another reason right now, if you're listening during that period, that this conversation is important for business transitions during this period where the estate tax exemption is relatively high and could potentially fall.
MARK: That's right. So always pay attention to Mike Townsend's WashingtonWise podcast for discussion of some of those tax bill changes that could be coming up during 2025.
Austin, I wanted to go take a step back in that interaction between the business owner and kind of the specialty advice teams. That interests me. So how might some of the emotional biases that we've been talking about, how might that affect the dealings between those two parties?
AUSTIN: I really think an example here would best illustrate how these emotional biases can affect how business owners interact with their advisors. So I remember once where I walked into a conference room flanked by a large team because this was a large sale. We had everything we needed to help this owner sell his business and ride off into the sunset.
We had three different valuations. We had the income tax ramifications on all different sale possibilities, how the proceeds were going to be invested, what we'd need to do to update his estate-planning documents. Frankly, we were ready to shine.
So I passed out binders to everyone sitting there. It all had the information. I opened my binder and began the presentation. And I remember after a few minutes, the business owner closed his binder and sat back in his chair with his arms folded. I was a little nervous. I stopped at the presentation and said, "Is there something wrong?" His response to that has stuck with me ever since.
He basically said, "We've had multiple meetings. You have the smarts that I don't on this, and I trust you to do the right thing for me and my family. I don't need to see and hear how the sausage is made. I just need you to tell me what I need to do and where I need to sign so we can get on with it."
He wanted that 30,000-foot explanation of the plan and nothing more so that he could get back to running his business. So to any new advisors who are listening out there, don't show off to your clients unless you know that's what they want from you.
MARK: Given that particular example, do you have a checklist that people should kind of keep in mind and keep referring to before they get into these conversations?
AUSTIN: Absolutely. So the first thing is know where the business owner is coming from, what's important to them, and what expertise do they have. Does the business have a sentimental value to the owner?
If so, they may value the business much higher than what it could be expected to sell for. And guess what? That's OK. Some owners may make the decision that if they can't get what they want for the business, they'll just keep it and pass it down. That's a completely valid thought to have.
But as an advisor, if you know that the business is the primary means to fund this owner's retirement, you may have to have a more difficult conversation about how to keep the business going when and if the owner can no longer do so and run the day to day. Can they train someone to take over for them so that at least they can still draw on the profits when they can no longer work?
In short, meet the owners where they are. Oftentimes there is some wiggle room to work with, but you never want to push an owner into a plan just because the numbers work best. You want to make a plan that the owner feels good about even years after the sale.
And I will tell you the number of owners that lamented that they sold their business is actually quite high. And I think just because the numbers look the best, sometimes we forget about the emotional aspect, that they would rather have waited, or they could have trained, that there was another option available. But they were sold that, basically, "Here's the best numbers. This is the best plan."
You have to take into consideration beyond the math. You have to take into consideration what will the business owner feel like five years, 10 years, 20 years down the road.
MARK: It's not always about the numbers. I think that's a great place to stop. Austin Jarvis is a director in the Wealth Management Group of the Schwab Center for Financial Research. Austin, thanks for being here today.
AUSTIN: Thanks, Mark.
MARK: By the time this episode drops, people will already be thinking about holiday presents. One of my favorite presents was given to me by my wife. It was a set of sticky notes, and on each one was printed the saying "Procrastination. Hard work often pays off after time, but laziness always pays off now."
That's just a funny way of saying that we prefer immediate benefits over future gains. That's fine of course. The problem is when we get overly fixated on short-term gains, and we continually ignore important long-term benefits that pay off in the future. It's as if we excessively discount those future benefits.
Of course, while we all procrastinate, most of us aren't prisoners of it. Yet there's another phenomenon going on that can lead to the same thing. And that's when we lose sight of what really matters.
President Dwight Eisenhower addressed this when he was quoted as saying, "What is important is seldom urgent, and what is urgent is seldom important."[8]
Dr. Stephen Covey, author of The Seven Habits of Highly Effective People, created a nice framework about it.8 We react to the urgent task. If it's important, the framework labels it a crisis. Not important, it's just an interruption. Important tasks that are not urgent are goals and planning. Distractions are what the framework calls the not-urgent, not-important tasks.
As discussed, running a small business is incredibly labor intensive and time consuming. Time is precious, and there's a to-do list a mile long, and it never seems to get shorter. It's important to see how ticking off the more urgent but not important tasks can take time away from more important longer-term tasks like five-year plans.
For all you small-business owners listening, I hope you found this episode helpful. If you'd like to find out more about succession planning, there's a treasure trove of information on Schwab.com. Here are a few of the items, and will link to everything in the show notes.
There's Austin's excellent succession planning article called "Business Succession: 3 Ways to Transfer Your Business." There's a Small-Business Solutions section on Schwab.com that has a wealth of resources. If you can't get enough of the TV show Succession, we have you covered. There's an article called "Five Takeaways from TV's Succession." And for customized advice about your specific situation, a Schwab Wealth Advisor can connect you with a trust and estate specialist who can help with your business succession strategy.
If you'd like to hear more from me, you can follow me on my LinkedIn page or at X @MarkRiepe, M-A-R-K-R-I-E-P-E. And if you like the show, a rating or review on Apple Podcasts would be much appreciated. We always like new listeners, and if you know someone who might like the show, please tell them about it and how they can follow us for free in their favorite podcasting app.
For important disclosures, see the show notes and schwab.com/FinancialDecoder.
[1]Television Academy Emmys, Succession Awards & Nominations, emmys.com, http://www.emmys.com/shows/succession
[2] Bureau of Labor Statistics, U.S. Department of Labor, The Economics Daily, "34.7 Percent of Business Establishments Born in 2013 Were Still Operating in 2023" at https://www.bls.gov/opub/ted/2024/34-7-percent-of-business-establishments-born-in-2013-were-still-operating-in-2023.htm (visited September 27, 2024)
[3] "Why Do We Place Disproportionately High Value on Things We helped to Create?" The Decision Lab, accessed October 1, 2024, https://thedecisionlab.com/biases/ikea-effect.
[4] "The Endowment Effect," The Decision Lab, accessed October 1, 2024, https://thedecisionlab.com/reference-guide/economics/the-endowment-effect.
[5] Kahneman, Daniel, Jack L. Knetsch, and Richard H. Thaler, "Experimental Tests of the Endowment Effect and the Coase Theorem," Journal of Political Economy 98, no. 6 (1990): 13256-48. http://www.jstor.org/stable/2937761.
[6]https://www.schwab.com/learn/story/love-mug-youre-with-with-guests-joel-platt-sally-sadoff-richard-thaler
[7] Sharot, Tali, "The Optimism Bias," Current Biology, vol. 21, issue 23, December 6, 2011, https://www.sciencedirect.com/science/article/pii/S0960982211011912.
[8] "The Urgent Important Matrix: What It Is & How to Use It!" The Coaching Tools Company.com, accessed October 1, 2024, https://www.thecoachingtoolscompany.com/coaching-tools-101-what-is-the-urgent-important-matrix/.