We regularly meet business owners at our M&A conferences who lament that they have been assuming for years that their children would eventually take over the family business—only to eventually learn, for a variety of reasons, that the kids would not be doing so. This dilemma (which we encounter all too often) points out how vital it is for family owned businesses to have open and honest conversations about what will happen with the company when the founder eventually retires.
Unfortunately, too many business owners put these discussions off far too long. Subconsciously, many entrepreneurs know that either the children are not prepared to succeed them or they have no interest in doing so. Sadly, too many don’t want to admit this because the family owned business is more than simply a company; it is a way of life.
Some issues to consider
Based on our experiences with family owned businesses, here are some items you should consider as you begin thinking about the succession of your business.
- Never assume that your children will be as gifted as you are in running your company. Entrepreneurial skills are unfortunately too often not inherited by offspring. The gifts and skills you have may not be found in your children. You need to make an honest assessment of this early in your exit planning.
- Never assume your kids will want to run the business. The enjoyment of life is all about passion. If your children are not passionate about wanting to succeed you, and are doing so out of a sense of obligation, then your business will most likely not prosper once you pass the reins on.
- Never assume that your long-term employees will be pleased with your children taking over. Quite often these folks are more qualified and gifted in the management of your business than your children may be. The dynamics of employees vs. family members in succession planning cannot be taken too lightly.
- Never assume that the future payments you are planning to receive from the business to fund your retirement will automatically be there. As you well know, businesses experience ups and downs and earnings are not always guaranteed. This is especially true if you turn the company over to a family member who is not fully prepared to be the CEO in your place.
All of these factors are critical to consider as you begin to think about leaving your business to family members. If you have not spent years grooming your children to take your place, if they don’t have the temperament and skills necessary, and if they don’t have a burning desire to run your company, you could be heading for trouble.
We regularly work with elderly clients who have been forced to come out of retirement and re-engage in the daily management of their old companies due to the fact that the family member(s) that were given the reins were unable to duplicate the success of the original owner. Since most family members do not have the capital necessary to make an outright purchase of the parent’s business, most successions are based on years of contingent payments. If the business falls on hard times due to poor management, the only option available for many retired entrepreneurs is to step back in, simply to ensure that they have enough income for their retirement.
Don’t fall into this trap. The financial reality is that an outright sale of the company may provide you and your family with a better long-term financial foundation than passing the business to your children. Countless times we have facilitated interfamily discussions where it becomes clear that the family member who would need to run the company upon the founder’s retirement is more interested in selling than staying. This is especially true if you have given stock in your company to your children over the years. In many cases, the offspring point out that to them, having a portion of the sale price in cash is more attractive than the thought of the daily grind of running the company for years to come. Obviously, you want to determine this long before you decide to pass the business on rather than sell it.
Ensuring the continuity of your company
Lots of business owners we meet with talk to us about their desire to leave a legacy behind for the family. A legacy can take many forms obviously. Beyond just the financial legacy, many talk about the desire to see their company and its employees prosper over the longer term. Upon honest and heartfelt reflection, more and more business owners are realizing that the best way to ensure and protect the long-term health of their companies is via an outright sale to a deeper pocket entity, rather than saddling the company with significant debt via an interfamily transfer.
Any time you involve family members in a discussion about the succession of your business, emotions get involved. No matter what, we are all human beings and business is not just business, especially for family run entities. This is why it is vital to have an ongoing dialogue with all family members that would be affected about the long term disposition of your business. And, in some cases, if you have a trusted advisor who is not a family member, it can help to have a third party mediate the discussions since they are not emotionally involved.
Most importantly, do not make the mistake so many entrepreneurs do and put off having these family discussions until external circumstances force you to do so. At that point, your options will be far more limited and your timing may not be optimal at all.