Handing over your company to your kids may sound like a good idea, but in many cases it’s not. Here’s why you may want to consider another option.
After decades of sweat and stress, many business owners would love to pass the family business on to loved ones. But having a spouse or kids take over shouldn’t always be part of the succession plan, says Michael Louie, a partner with D&H Group, a Vancouver-based accounting firm. When one of his clients passed away, his wife took over, but she knew nothing of the business, nor did their teenage children. The company’s head salesperson opened a shop down the street, stole all the clients and the company folded after 18 months.
According to the Family Firm Institute, only about 30 percent of family businesses successfully get passed on to the second generation, and just 12 percent thrive into the third.
There are many other stories like that one. According to the Family Firm Institute, only about 30 percent of family businesses successfully get passed on to the second generation, and just 12 percent thrive into the third. With stats like these, it might be better to sell a business instead. However, that’s often easier said than done. “Selling is not a four-letter word, but in the family business sector, it’s the equivalent,” says Andrew Pigott, who runs Oakville’s Succession Bridge, a firm that helps entrepreneurs navigate the succession planning process. “It can be construed as throwing in the towel.”
Who should sell?
“It’s a common misconception that, when there are children of a family that owns a business, they are entitled to take over just because they have the right last name,” says Louie. What if you run a construction business and the kids have never picked up a hammer and are off at university? Maybe your nephew helps out in the office, but clearly isn’t cut out for more than a junior role. If your industry is undergoing change and the business needs considerable investment or upgrades to stay current, the next generation may not want to inherit the risk, he says.
Consider a compromise
You don’t have to sell the entire company, says Louie. Consider selling part of it to an outsider or an experienced employee, and keep the kids as silent partners. You could also keep the business entirely under family ownership while professionals run it day-to-day, but the kids would still need business acumen to stay on top of big-picture decisions. Pigott knows of one company that didn’t sell, but instead hired a CEO who ended up staying on for 10 years while the kids grew up and received training until they were ready to take over.
Communication is key
If a full or partial sale seems the best way forward, start by communicating your plans with the family and listening to their responses. “Too often these things aren’t discussed openly,” says Pigott. Expect some emotion: Money and the family’s identity as business owners are on the table.
Then, to prep for a sale, start extricating yourself. “If you want to sell for the highest profit, make yourself as redundant as possible as soon as possible,” says Pigott. Download tasks to others, write things down – who gets a discount, your approach to filing – and create systems that others can follow. Bring in outside advisors to help streamline financial systems, make sure the brand identity is razor-sharp and then seek buyers and put together a deal.
Secure the legacy
One reason why business owners like passing down the family business is that it creates a legacy for future generations. If they can run the business successfully, they will, in theory, have enough money for years to come. On the other hand, deciding not to give the kids the company doesn’t mean you don’t want them to be financially secure – you just have to use the proceeds from the sale wisely.
Make sure to plan early so that the money you do make sets you up for a good retirement and helps the next generation with their needs and wants, says Pigott. Whatever you do, get expert help and tell family members what’s going on. You want life after the family business to be both harmonious and regret-free.