Should you pass your business down to the next generation? When you have family working in your business, it is a wonderful thought that your family can carry on what you have put so much energy, sweat, tears and love into. But statistics show that only one-third of all family businesses are successfully transferred to the next generation and only 13% are successfully transferred to the third generation.
Why is this?
Many family business consultants say the primary reason for the low survival rate is the failure to develop and effectively plan for the transfer of ownership and management of the family business.
Here are some of the reasons that so many of these well-intentioned transfers fail.
- The next generation may not have the same drive and commitment the founder had when he or she built if from scratch. If the business has been successful, they may have had a very different life style than the founder did when the business was started. You’ve seen examples of this in businesses, haven’t you?
- They may not even want to run the business. They may feel it is expected of them but not what they really want to do. Can you see how unspoken expectations can cause resentment within the family?
- They may not be capable of running the business. Have they been trained in the skills necessary to run the business? Do they have the leadership and management skills to deal successfully with an ever-changing business climate?
Another big challenge is trying to balance fairness in employing many children or even grandchildren in a family business with various skill levels, compensation levels and ownership levels. The jealousy and in fighting can absolutely grind the company’s progress to a halt.
The business owner must make some difficult decisions when he or she decides it is time for them to retire. Good things to think about are, why did you create this business? Was it to keep the business in the family for generations or was it to provide for your family for generations? If the desire and the capability of the children are not evident and the company is large enough, it may be the right decision to first get outside board members actively involved as step one.
Step two would be to hire professional management to run the business. A second alternative is to sell the company while you are still running it and it can command its highest value. If you have children that want to remain in the business for the immediate future, incorporate that into the sale agreement with employment contracts.
Another way to think of it is, while you are running the business, the best ROI is to keep the bulk of your net worth invested in the company. If you are no longer running the company what is the best risk reward profile for your net worth? Would your heirs be better off if the business was sold and the value converted to financial assets?
If you decide to maintain the business and pass it on, you must prepare the next generation for the challenges they will face, not the ones that you faced. Teach them a system for viewing the business as a product to be worked on, to be perfected. It is the business systems that need attention as much or more than the product or service you sell. Teach the next generation how to work “on” the business, not just “in” the business and you will have a better chance that the business you built, the business you love, will endure.
If you would like to brainstorm options, I’m happy to do that. I took over a family business from my father and still run it to this day. However, it’s set-up so I work on the business and not in it, so I can spend my time helping business owners like you.