Harold and Irene thought they would happily live out the remainder of their lives much as they had lived the first 40 years of married life—Harold working in the family business and Irene taking care of the home and family, which includes thriving grandchildren, ages one to fifteen, two grown sons, and two daughters-in-law. Their sons were working in the family business, which Harold had purchased from his dad 35 years earlier. The business had provided a nice life for all three families, and Harold and Irene had looked forward to the day that their sons would purchase the business from them so the couple could retire just like Harold’s mom and dad. In fact, they were hoping this would occur in the next five years when they would reach 65.

70% of Family Business Do Not Experience a Successful Transfer from the First Generation to the Second Generation

Harold and Irene represented a multi-generational family business, but family businesses that successfully transfer from one generation to the next are not as common or as easy to accomplish as one might think. In fact, only 30 percent of family businesses accomplish a successful transfer from the first generation to the second and only 3 percent make it to the third. Just like Harold and Irene, most families just assume their business will simply pass from one generation to the next and continue without any planning or forethought. 

Unfortunately, this was not going to be the case for Harold and Irene. Harold had been feeling a little under the weather, and Irene urged him to go the doctor. The report was not good. Harold had stage three prostate cancer and needed to start treatment immediately.

Irene started going to the business to help her sons out while taking care of her husband who was having a terrible reaction to treatments and was unable to work. Both sons tried to pick up the extra workload from their dad at work, but it was very difficult. Harold was the only person professionally licensed as a plumber in the company, and the sons could not sign off on any of the jobs for the company. They would visit with him after hours when he was feeling up to it and go over the jobs so he could approve them, but it was becoming more difficult. Irene had never spent much time at the office and had left the business to her husband and sons to run.

When the vendors heard Harold was ill, they became very concerned and were reluctant to keep extending credit to Harold’s business under their normal terms. The general contractors in town who were the company’s largest customers were also concerned since Harold usually oversaw the crews and held the professional plumbing license. They knew the sons well and felt they were well qualified but did not have the same capabilities as their dad. Harold had never given them the responsibility of running the company; that was a burden he felt was his alone. He didn’t want his wife or sons to bear that responsibility. But none of them was in a position or had the authority to make the important decisions without him, and right now he was not able to.

Businesses Need A Chief, and That Chief Needs A Backup 

Irene began to get concerned as cash flow in the business was getting very worrisome, and the employees were starting to rumor that the business could be in trouble if Harold did not return to work soon. Irene decided to put a second mortgage on their home to get some additional working capital in the business and keep things afloat until Harold recovered and finished treatments.

You may have guessed the rest of this story: Harold passed away within twelve months, the business closed, Irene had to sell their home to pay off the mortgages and moved in with family, and their sons went to work for their previous competitors at a fraction of their previous salary. This was a tragically different ending than Harold and Irene had envisioned. Even Harold’s life insurance proceeds were lost since the beneficiary was the company and the money went to satisfy creditors.

Sadly, this was a disastrous ending that could have been avoided. Harold had intended to protect his wife and sons from the burden of running the business, but what he actually did was create a business that was solely dependent on him, which led to its eventual demise. If he had properly planned, this tragic outcome could have been avoided by the following:

  • Reduce the business dependence on him by empowering and allowing his sons to run the business.
  • Put in place the necessary personal and business contingencies, such as having his sons also licensed in the business and a durable power of attorney assigned to provide for someone to take care of the day-to-day operations, such as signing checks, during his incapacitation.
  • Established a succession plan that would have enabled the critical contractor business relationships with his sons.
  • Planned a comprehensive transition that would have ensured his goals and objective of transferring the business to his sons.
  • Created a holistic, integrated transition plan that could have provided the insurance beneficiary be changed in time to provide the death benefit proceeds go to Irene so she did not have to sell their home.

Although You Can't Control Everything, Control The Factors That You Can

While the implementation of the bullet points above would have made a dramatic difference in the outcome of Harold and Irene’s situation, a complete comprehensive plan could have provided them much more than avoiding this fateful outcome. It could have assured them that the business would provide them enough funds to retire in comfort and that their sons would have a business they could one day sell or turn over to their children and fund their own retirement. Every business situation is different and has its own complexities. While Harold and Irene would have benefited from the changes noted above, there were many others issues that should have been addressed to achieve the best possible outcome. Business owners generally aren’t aware of the different items that need to be corrected or addressed to ensure their goals are met during their life and after.

This unfortunate situation exemplifies why it is so critical to have a plan in place no matter when you believe you want to transition away from your business. Events happen without warning and can dramatically change an assumed outcome. Even if you don’t plan on transitioning away from your business for years, having a comprehensive, holistic plan in place gives you the peace of mind knowing that your business, your future, and your family’s future are secure.


Ready to Become a Member?

Apply for one of our memberships today to gain access to all the resources you need to secure your deal of a lifetime!

Apply Now